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Old Posted Aug 31, 2007, 6:38 PM
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Office condos catching on in Portland

Office condominiums show signs of catching on
Portland Business Journal - August 31, 2007
by J. David Santen Jr.
Special to the Business Journal

Despite a rocky start, office condominium projects appear to be gaining some traction in the Portland market.

And the key to success? Cue the old saw:

"It's always location, location, location," says Craig Sweitzer, principal, Urban Works Real Estate, who represents the Jefferson Station commercial condominium project at Southwest First Avenue and Jefferson Street. "If you're located well, people want to be in that area."

The condo concept allows smaller businesses the chance to own rather than lease, with variations ranging from shared floors and elevators to individual tax lots and parking spaces.

Sweitzer, who owns office space at Jefferson Station, says that the project worked because of a good floor plan that was easy to subdivide into marketable parcels. The project took about a year with mechanical systems and other upgrades for the 1909 structure. Of the five office condo units created on the second, third and penthouse floors, only one remains unsold.

"Most small to midsized business owners can't afford to put $2 or $3 million down on a historic building. But they can afford $700,000 or $800,000 to purchase half or an entire floor," Sweitzer says.

The chance to build equity, tap relatively low interest rates and receive the tax benefits of property ownership make purchasing a logical choice for stable, established firms in the professional services industries. An added incentive is that rising rents have created a landlord's market for leased space.

Ernie Knodel, development vice president for Larkspur, Calif.-based Venture Corp., refers to his company's Venture Commerce Centers as "products." With over 40 of the office condo centers in several Western states, the assembly line concept might not be far off.

Potential buyers for the site under construction in Hillsboro's Tanasbourne Corporate Center are owners of established small businesses, with fewer than 20 employees, that don't anticipate rapid growth, Knodel said. Owners may have previously commuted to an urban center, but now are looking for sites within three miles of home. Such business can include architecture firms, medical offices, high-tech companies and research and development operations.

"It's an opportunity to own commercial real estate," Knodel explained.

Businesses that may only need 1,500 square feet can rarely find a building of that size.

Instead, purchasers of Venture Corp. units buy in to one of five buildings. Many of the units contain two stories of Class A office space in the front area, and flex space with 21-foot ceilings in the rear that can be used for warehousing, light industrial or other applications. Units range from 1,219 to 3,326 square feet, each with parking and its own postal address.

The 78,000-square-foot Tanasbourne development broke ground in late spring; five of the 36 condos are now in escrow.

Venture Corp. has another commercial condo project combined with retail, now under way in West Linn.

Local companies have also taken the office condo concept to the suburbs. Edge Development's Millikan Pointe, at Southwest Millikan Way and Murray Boulevard in Beaverton, offers ownership of individual tax lots rather than "air inside four walls," as Macadam Forbes principal and broker Greg Burpee describes it. The city of Beaverton allows for these "fee simple" subdivisions, though not all municipalities do.

"We caught a good sweet spot -- 2,300 to 2,600 square feet," Burpee said.

Building shells, each housing one or two units, are selling for around $280 per square foot, which includes an improvement allowance of $30 per square foot.

Burpee said the bulk of the buildings are in escrow without foundations poured. Future owners range from a financial adviser and a chiropractor, to engineering firms and a trade association. The project is expected to be completed by spring 2008.

Edge Development wants to replicate the model in others areas, Burpee said. Potential cities include Wilsonville, Tualatin and Vancouver.

Ground-up suburban developments have a few obvious advantages over the central business district -- lower costs, more flexibility in design, shorter commutes and available parking -- which translate into a wider pool of potential buyers.

"In a conversion, you take a facility designed for one purpose, divide it into multiple ownership -- it's not designed in terms of flexible areas," says Venture Corp.'s Knodel.

But for many, downtown is the only place to be, further limiting purchase options. Jim Winkler's DeSoto Project, the former home of Daisy Kingdom at Northwest Eighth Avenue and Davis Street on the North Park Blocks, now houses a handful of established art galleries that find themselves situated on the cusp of the Pearl District, an ownership foothold in an area that has seen significant change (and appreciation) over the past decade.

And while galleries comprise half that project, the two remaining floors of office space (25,000 square feet) sold as well, to LRS Architects, which also designed much of the DeSoto space.

"What I like about the [commercial condo] concept in neighborhoods is that if you own, you're no longer at risk of having to leave the neighborhood due to rising rents," Winkler said.

He's now in the schematic design phase of Killingsworth Station, a mixed-use redevelopment on North Interstate Avenue and Killingsworth Street. His firm, Winkler Development Corp., is working with the Portland Development Commission on a site that will include housing and commercial condominium elements. Winkler would like that to include an emphasis on neighborhood businesses and "wealth creation."

Some other office condo projects in downtown Portland haven't sold so quickly.

The Five Hundred 5th, a historic seven-story building at 500 S.W. Fifth Ave. on the downtown transit mall that once housed Caplan Sports, continues to edge toward occupancy.

Bruce Wood, president of Foundation Real Estate Development Co., which is completing the renovation, says that five of the floors are now spoken for. The 5,000-square-foot office condos are listed at around $300 per square foot.

The entire building, meanwhile, is listed by Colliers International for sale at $4 million.

The five-story Madison Office Condominiums, at 1140 S.W. 11th Ave., is part of the Museum Place multiblock redevelopment in downtown Portland's West End. Developed by Sockeye Development LLC, the development arm of project management firm Shiels Obletz Johnson, floors two through five are designated office space. Months after completion, the first four floors sit empty. Shiels Obletz Johnson occupies floor five. The firm did not respond to interview requests.

Jay Clemens, head of marketing communications firm Turtledove Clemens, considered buying at Madison Place, but said the personality didn't feel right.

Clemens began looking to purchase office space downtown two years ago, when the first office condos started attracting attention. Until this year, Turtledove Clemens had leased space downtown for more than 60 years. He settled on Jefferson Station.

"You walk in the door and every answer is there -- hundreds of windows, all glass, we're right on the [Waterfront] Park with 45-foot ceilings, a permanent, unobstructed view of the river, freeway access ... "

The space also came with a 20-ton crane built into the ceiling, a relic of Jefferson Station's heritage as an old electric substation for the streetcar system in the early 20th-century (the crane would remove burned-out generators).

Clemens said the financial burden of buying a commercial condo unit feels manageable.

"It's about a five-year break-even proposition," he said, estimating that, as an owner, his 10-year facility expenses will net out at 20 percent less than leasing.

portland@bizjournals.com | 503-274-8733
http://portland.bizjournals.com/port...ml?t=printable
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