Real Estate Close-Up: Portland

Real Estate Close-Up: PortlandBy J.W. ELPHINSTONE, AP Business Writer J.w. Elphinstone, Ap Business Writer Fri Feb 13, 2:33 pm ET

If occupancy rates are high, it's a landlord's market, right?
Not in Portland, Ore., where property owners, fearful of the uncertain economy, are sweetening deals even though vacancies are well below national averages.
Some landlords are knocking off a chunk on rents just to keep tenants in place for the next five years. Others are calling tenants two years before lease expirations to persuade them to stay.
What raises eyebrows is that supply and demand in Portland's commercial real estate market isn't out of whack. New construction was mostly kept under control during the boom and demand has stayed steady.
If landlords are getting anxious in Portland, imagine the discounts property owners are giving in the hardest-hit markets like Las Vegas, Miami or the Inland Empire in California.
"Looking at Portland, it's a national trend. It's nothing unique to the city," said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.
So what gives?
"It's all about butts in the seats and if you don't have butts in the seats, you don't have demand," said David Squire, an executive vice president at Grubb & Ellis Co. "So landlords are shorting rental rates."
Already, the national recession has left a mark. The Northwest city shed 18,000 jobs last year and it's expected to lose about that many this year, said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services. Portland's unemployment rate clocked in at 8.1 percent in December, and some major employers, including Intel and Nike, have announced massive layoffs this year.
All this is sending shivers through office landlords in Portland. They are giving up many of the gains they made in the past few years on rents just to keep their buildings full, Squire said. Since the end of 2004, asking rents jumped more than 14 percent for the best quality offices, Grubb & Ellis data showed. Now, landlords are discounting up to 15 percent, and sometimes more, on rents.
That normally wouldn't make sense in an office market with a 12 percent vacancy rate, well below the national average of 15 percent. The rate is even lower for the best quality buildings in the downtown at 6 percent. And the next wave of construction won't be delivered to the market until late 2010, so inventory is in check.
"The worst-case scenario should be flat rents," Squire said. "But landlords are jumping the gun. They're saying a tenant is better than no tenant at all."
Owners of shopping malls and strip centers are feeling similarly jittery. They have kissed a number of retailers goodbye because of bankruptcies. Wick's Furniture, Linens 'n' Things, Circuit City and Mervyn's all shuttered stores in Portland, said Marc Strabic, a senior associate at CB Richard Ellis Inc.
As a result, retail developers have tabled a host of projects for the next year or two. The only development on the immediate horizon is Progress Ridge Town Center, a grocery-anchored center in nearby Beaverton, Ore. It's expected to open at the end of 2009.
"Existing product is getting absorbed because the new projects were never built," Strabic said.
That has helped keep the retail vacancy rate low at about 6 percent, compared with the national average of 8.7 percent, Nadji said. He expects the rate to increase to 7 percent by the end of the year.
The city's policy of restricting sprawl limits retail zoning and makes it hard for big box retailers to find space, Strabic said. Even if retailers close stores, like Macy's, they often leave the Pacific Northwest ones open.
Meanwhile, the industrial market started losing momentum the second half of last year. Many manufacturers, the same ones that fueled growth just a year and a half ago, are downsizing their space needs, said Stuart Skaug, a senior associate at CB Richard Ellis.
But the vacancy rate is still hanging tough at 8.6 percent versus the average national vacancy of 10.1 percent. However, that rate is expected to climb to about 10 percent, Nadji said, because the industrial sector is wading through a hefty amount of new supply. Since 2006, about 8.2 million square feet of industrial space has come online, a construction pace Nadji calls "robust."
This has industrial landlords scrambling to lock in tenants for the long term. They're renewing leases early and giving a month's free rent or reductions in rent.
"It's not an easy pill to swallow," Skaug said, "but if it means you have a tenant in place for another five to 10 years, that's the best they can do."
Aside from the downtown where condos sprouted like weeds during the housing boom, Portland's apartment market is healthy with a 5 percent vacancy rate, Nadji said. The national vacancy rate for apartments stood at 6.7 percent at the end of the year.
But job losses will likely eat into rent growth this year and vacancy will inch up as renters double and triple up to save on rent. But the deterioration in the apartment market won't be as bad as in the office or retail markets, which will feel the worst of the recession.
"It's not going to be nearly as bad as many markets around the country," Nadji said, "but Portland won't be able to skirt the downturn."
Copyright © 2009 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten or redistributed without the prior written authority of The Associated Press.
Copyright © 2009 Yahoo! Inc. All rights reserved.