What’s next for Park Avenue West?
POSTED: Monday, June 21, 2010 at 02:06 PM PT
BY: Nick Bjork
Construction stalled on the Park Avenue West tower in April 2009 when financial markets began to tighten. But a few real estate professionals around Portland believe the project is still well positioned to be completed and delivered to the market successfully.
Since construction on the Park Avenue West tower ground to a halt last year when the financial markets tightened up, the project has become perhaps Portland’s most visible symbol of recession: a fenced-up, 40-foot-deep hole in the ground with rusting rebar sticking out. But the project’s half-started status could end up helping it, according to some local real estate professionals.
“A lot of people paint this hole in the ground as a great tragedy. But the costs accrued on the project so far aren’t lost; they are sunk into the project,” said Gerard Mildner, associate professor of real estate finance at Portland State University.
Tom Moyer, owner of TMT Development, decided to start construction on Park Avenue West on a speculative basis, with no tenants or financing lined up. It wasn’t the first time he had taken such an approach to constructing a building in Portland. In 1997, he used his own money to start building the Fox Tower, relying on word of mouth to attract both financing and tenants. By the time the 27-story building opened in 2000, 93 percent of it was leased.
The Park Avenue West project, however, was plagued by bad timing and tightening financial markets. Law firm Stoel Rives pre-leased 11 floors, but that wasn’t enough to convince lenders to extend a loan for the project. As a result, Moyer stopped construction on Park Avenue West.
But Mildner thinks the project can still be successful, based on the makeup of the office market in Portland’s Central Business District.
“You would think First & Main being delivered would be a nail in the coffin for the Park Avenue West project,” he said of the First & Main building that recently finished construction. Several federal agencies moved from the Edith Green–Wendell Wyatt Federal Building - which is being renovated - to First & Main.
“(First & Main) doesn’t free up any space because most of it was absorbed quickly with long-term leases from various federal agencies,” Mildner said.
Mildner suspects the costs of keeping the Park Avenue West project stalled are actually low, relative to the overall cost. Other than fees associated with rental fencing and crane management, no other substantial costs are likely involved, he said.
Considering that foundation work has already started and that the permitting process has already been navigated, both the developer and the city have incentive to get this project moving again, Mildner added.
Based on state building codes, a municipality can pull the permits on a stalled project after six months if the developer doesn’t pay to have a full inspection performed on the project in that time period, said Ross Caron, spokesperson for the Bureau of Development Services. But the municipality also has the discretion to extend that time period.
“In the case of Park Avenue West, where the problem was a financing issue, BDS is willing to extend that time period as long as the developer is keeping the site safe and secure,” he said. “Both the developer and the city have an incentive to see this project through.”
The Portland Development Commission has an incentive, from an economic development standpoint, to see the project restart. But the city also has an interest in it from a financial standpoint, with the $1.3 million in property taxes that the tower is projected to bring in on an annual basis.
“The problem with Park Avenue West from our standpoint is that there is no money available to help them out,” said Shawn Uhlman, spokesperson for the PDC. The last year the project could borrow money against the South Park Blocks Urban Renewal Area was 2008.
Cities across the country are trying to come up with practical solutions for using property where construction projects are stalled. The Seattle Department of Planning and Development earlier this month announced legislation that would give developers a break on property taxes for allowing their unbuilt properties to be used as parking lots, or to house food carts or retail kiosks. Vancouver, B.C., is giving tax breaks to idle project lots turned into community gardens, dog parks or green spaces while waiting out current market conditions. But Portland hasn’t had enough halted construction projects to warrant looking into such solutions, Uhlman said.
Mildner doesn’t think the Park Avenue West site would be suitable for an alternate temporary use. And that’s not necessarily a bad thing, he said.
“The fact that we have a motivated property owner with these sunken costs isn’t the worst thing in the world,” Mildner said. “And I suspect the added costs of having the crane there and keeping the site secure is pretty trivial compared to shutting the entire thing down and losing the sunken costs.”
The stalled status of Park Avenue West could actually end up benefiting the project, according to Brian Owendoff, managing director of CB Richard Ellis‘ Portland office.
If the project were to move forward soon, it would have a significant lead on any other similar projects, and have an edge in attracting tenants. Speed of delivery is a huge advantage, Owendoff said.
And considering that the foundation has been constructed for the specific project, there is no financially feasible way to build anything else, Mildner added.
In the meantime, Vanessa Sturgeon, president of TMT Development, is providing few specifics about the future of the project.
“There are some costs adding up, so we will have to make a decision with what we want to do,” Sturgeon said. “But it’s going to take us a little more time to make that decision.”