Bar is Raised by Real Estate Seekers

New industry clusters in Silicon Forest demand green office spaces

Jeff Borlaug, Vice President, NAI NBS

In the beginning, there was Intel.

In the 1970s, the world’s largest semiconductor company chose Hillsboro as the site for its first plant outside California. Spin-off companies from locally-owned Tektronix shared the area, known as the Sunset Corridor after Highway 26. In the 1980s came Japanese-owned manufacturing companies. They, in turn, begat suppliers and customers of these leading companies, attracting industry clusters in software, communication devices, internet providers and manufacturing.

The Silicon Forest became known as the land of opportunity as the dot-com bubble inflated in the late 1990s, but the proverbial flood came with the dot-com burst of 2001. In regard to vacancies, the Sunset Corridor is still on the road to recovery. But the founding fathers of the area have left their stamp – an imprint of innovation, technology, and social consciousness. As such, Hillsboro is ripe to become the next hub for sustainable development in the Portland metropolitan area.

At present, only the Central Business and Pearl Districts have rental rates high enough to justify new construction that meets Leadership in Energy Efficiency Design standards. Kruse Way will be the next to deliver sustainable office space with Kruse Oaks III, estimated to arrive in 2009. Developers hope to obtain a LEED Gold rating, which will fetch rates more than $33 per square foot.

Next up? The Sunset Corridor. Vacancy rates plummeted from 28 percent in the second quarter of 2007 to 17 percent by the first quarter of 2008. As vacancy continues to drop over the next two to five years, developers will begin to build on speculation. Build-to-suit space could happen even sooner, particularly with interest from an out-of-market or new company. Economic motivators have been put in place on federal, state, and local levels.

Sustainable construction is the natural progression for development along the Sunset Corridor due not only to the profile of its past tenants, but also because of the tenants to come.

If more traditional tenants, such as law firms, lease large blocks of sustainable space in the Pearl (witness Ater Wynne’s 27,681-square-foot lease at The Lovejoy last quarter), then the Sunset Corridor’s tech- and energy-heavy gang will definitely present a demand for LEED certification. Oregon currently has the country’s biggest market for solar-powered industry with six solar equipment manufacturing companies already calling Oregon home. There’s no shortage of interest from wind- and wave-powered energy companies as well, while the state’s software industry is now the eighth largest in the nation in terms of total jobs. There is no question that all of these users will demand a sustainable working environment.

Congress is expected to renew the Federal Investment Tax Credit of 30 percent in early 2009, and Oregon’s Business Energy Tax Credit covers up to 50 percent of the cost of an alternative energy project. The Energy Trust of Oregon also offers cash incentives, and Hillsboro’s Enterprise Zones are stimulating alternative energy and other business. Entrepreneurs in alternative energy have no shortage of incentives to take advantage of.

A study by the economic development group Greenlight Greater Portland found that venture capital dollars invested in alternative energy grew 260 percent nationally over the past five years. This number hit home when a recent photovoltaic trade show in Germany had European suppliers and manufacturers clamoring for information from Oregon representatives – the only U.S. state to make an appearance.

A high-profile inhabitant of the Silicon Forest is SolarWorld, the German photovoltaics facility that renovated the former Komatsu silicon plant with a $40 million investment in 2006. The company currently employs 100, will employ 350 by the end of the year, and aims to employ 2,000 at full tilt. The company’s investment in Hillsboro was spotlighted by Site Selection Magazine’s May 2008 issue as a top-10 site-selection deal in North America based on factors including investment, creativity in negotiations, incentives and speed to market. SolarWorld could be the Intel of the next generation, attracting crowds of cottage industry tenants.

Even Beaverton-loyal company Nike made its first foray into Hillsboro with a 75,000-square-foot office lease earlier this year.

One of the attractions to Hillsboro is that it offers some of the most affordable rental rates for office, flex and industrial users. Rates are more appealing than the Corridor’s suburban counterparts.

If those large blocks of space are not enough, one- to 50-acre sites may encourage a user to exercise a build-to-suit option. Biotech company Genentech did just that by purchasing 75 acres and building its first “finish-and-fill” facility in Hillsboro for a state-of-the-art warehouse and distribution center. For new development, the Sunset Corridor has some of the most affordable and accessible land on the west side of the Willamette River relative to other submarkets with comparable demographics and critical mass. Lower land prices balance out the higher up-front cost of sustainable construction.

Furthermore, the City of Hillsboro Economic Development Department offers a three- to five-year property tax exemption on any new development in its Enterprise Zones, which grew by 1,000 acres in early May. The exemption comes with a few requirements, one being a minimum $1 million investment to build in the north industrial area, but only a $250,000 minimum if the development is located in the central or south industrial areas. The Hillsboro Chamber of Commerce prioritizes business development with cooperative city government departments and a “one stop” permitting process, a Department staffer confirmed.

Insiders say further enterprise zone expansions could be on the horizon.

Bottom line: the “location, location, location” mantra of real estate seekers has been replaced by a “location, economics, social responsibility” trinity of requirements. As the future unfolds, it may actually prove that sustainable participation attracts better employees.

Savvy business owners and decision makers already know that social responsibility has its benefits: long-term occupancy, lower energy costs, effective recruiting, healthier employees and low attrition. The crossroads of sustainability and productivity yield a greater return on investment; plus it’s simply the right thing to do.