Real estate sectors see solid year ahead
by Kennedy Smith
01/09/2007
Commercial real estate professionals should be “cautiously optimistic” about the year to come in all sectors – office, industrial, retail and investment – according to year-end reports from Grubb & Ellis and Colliers International, two commercial real estate firms with branches in Portland.
“We’re going to have another strong year,” said Tom Lawill, head of the Portland branch of Colliers International. “I don’t see anything on the immediate horizon that will affect us negatively.”
Office space
In the central business district, office space is tight, with vacancy rates hovering around 6 percent for Class A space. Both 2005 and 2006 saw demand outpace available space in the CBD, giving landlords the upper hand, with rental rates averaging about $21 per square foot by the end of last year. It should remain a landlord’s market in the immediate future, according to Grubb & Ellis.
“Portland does not have a myriad of huge downtown office tenants, but those that exist are facing a dilemma,” said Patricia Raitch, communications and research director at the Portland office of Grubb & Ellis. “Renewal options are limited because of growth encumbrances, and there are few existing options for relocation.”
The good news is that larger tenants who can’t find what they want may consider new construction this year – even in the central business district. “Those large tenants can wield enough leverage to kick-start a major project and may be able to put their own touches on a new trophy building downtown,” she said. “The question remains who will be the first to secure an anchor tenant and put shovel to ground.”
There are currently three office buildings in development downtown: One Waterfront Place, 100 Columbia, and First and Main. “If a major tenant stepped up and began negotiating for a pre-lease, they could have a say in some of the design aspects of the property,” Raitch explained.
Another project in the Pearl District at Northwest Ninth Avenue and Lovejoy Street will offer about 70,000 square feet of retail space when the mixed-use project is completed later this year.
If all else fails, there’s always Kruse Way. Like it has been for the last few years, Kruse Way, off of Interstate 5 in Lake Oswego, is the poster child for a strong office rental submarket. Tenants who can’t find space in the CBD “always have opportunities out in the Sunset Corridor,” Colliers’ Lawill said. “The Tigard Triangle (near Interstate 5 from the southbound Haines Road exit) is as good as ever also; it still has drawing power.”
Ross Moore, senior vice president and director of market and economic research for Colliers, predicts office rents will increase anywhere from 12 percent to 15 percent in 2007 due to spikes in additional expenses such as insurance, maintenance and property taxes.
Industrial
“There are a few yellow lights on the horizon” for industrial space, Raitch said.
The housing market, which is finally slowing from a boom in the last couple of years, could spell trouble for industrial investors, especially as marble and tile companies, countertop distributors, window manufacturers and other home product makers abandon some space.
Best bets for 2007, she said, are Airport Way and the Northeast Columbia Corridor, which should both enjoy higher rental rates and low vacancy rates in the year to come.
Retail
The slowing housing market will also affect retailers in 2007 as consumer spending growth moderates. The International Council of Shopping Centers last week reported combined November and December same-store sales at U.S. chain stores rose 2.8 percent, which trailed last year’s 3.6 percent gain.
However, wage gains and new jobs should somewhat neutralize this, Colliers’ Moore said. The state’s unemployment rate stands at 5.3 percent, down from 5.8 percent a year ago, according to the Oregon Employment Department. Nationwide, unemployment over the last year has dropped from 5 percent to 4.5 percent.
Lifestyle retailers will likely bear the brunt of the slowdown in spending, he said, but not enough to cause any tenant closures.
“The biggest success stories in the coming year are bound to be high-end retailers and those with strong brand image, as well as apparel retailers, who should have a solid year,” he said. “Overall, owners of retail real estate can expect another solid year, similar to 2006.”
Investments
It was an interesting year for investments in the Portland area in 2006, with major properties like the U.S. Bancorp Tower, One Main Place and Columbia Business Center changing ownership. Investors will keep their eye on the area in 2007, Raitch said.
“Overpricing in tier-one markets continues to push investors to review offerings in second-tier markets, benefiting sellers in Portland,” she said.
Both Grubb & Ellis and Colliers see green building as a major staple in the real estate industry in years to come. They predict that new office development will be built to the U.S. Green Building Council’s Leadership in Energy and Environmental Design standards.
Eyeing Vancouver
With a tight CBD and increased rents in the industrial sector in the Portland area, tenants may start eyeing Vancouver as a viable option.
In fact, Lawill said, “there’s more of a psychological drive to be either on the east side or west side of the Willamette River than there is to relocate to Vancouver,” meaning there’s less of a stigma for Portland companies to move to Washington than there is for a company to consider relocating from the eastside to the westside.
“Vancouver is phenomenal,” Lawill said. “There’s a good market and strong demand, and with 70,000 cars a day that come and go across the river the psychological reasons for relocating to Vancouver are quickly disappearing.”
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