Portland Apartment Vacancy Rising, According to NAI NBS 2Q09 Report

Overview

Multifamily vacancy continued creeping upward to 5.03% during Second Quarter. Vacancy a year ago was 3.46%, for comparison. Vacancy in SE Portland increased considerably to 7.37%, and SW Portland vacancy also saw a large jump to 5.70%. Vacancy in both the Gresham/Troutdale and Lake Oswego/ West Linn submarkets decreased, remaining below 4%. Rents stayed essentially flat, hovering around where they were last quarter.

Market Trends

Apartment vacancy is on the rise, and our report, which polls select apartment complexes, may be slow to reflect this trend. The increase in vacancy isn’t due to residents moving away from Portland; even with the second highest unemployment rate in the nation, the area’s population is still growing at a healthy rate. Rather, tenants are doubling up, moving in with family, or moving to single-family rental homes. Landlords are now competing for the fewer active tenants by dropping rents and offering other incentives.

Downtown multifamily construction was booming in 2007 and 2008, with a large number of new units entering the market at the same time. As a result, 2,200 new units delivered from mid 2008 to March 2009. These new arrivals will take time to absorb and cause pressure on the entire market. But since very few new projects are in the pipeline, many of these units should be absorbed by 2011 evening out supply and demand.

The balance of the market has seen very light construction activity over the past two years. The lack of suburban building is allowing the small number of new units to be absorbed quickly. We expect to see a strong rebound to the suburban multifamily market when tenants start circulating. Though unemployment in Oregon is at an all-time high, Moody’s Economy.com predicts that Oregon will help lead the country out of the recession, with the state’s job market beginning to recover in late 2009, so leasing activity should increase and rental rates trend higher as unemployment decreases.

Transaction volume for apartment complexes remained very slow during Second Quarter. Cap rates are currently unpredictable and difficult to calculate, partially because of the volatility in interest rates and the lack of transaction data. But there is still some activity and financing available, especially through lenders like Fannie Mae and Freddie Mac.

NAI NBS Second Quarter Retail Report: Vacancy Rises, But Some Bright Spots

Overview

Retail vacancy rose slightly to 7.1% during Second Quarter, with 240,321 sf of newly vacant space. Central City vacancy increased by a percentage point to 9.2%, with a large portion of this area’s negative 30,000 sf of absorption in the Close-In NW area. The suburban submarkets saw significant absorption, both positive and negative, in larger spaces. Vacancy in the 122nd/Gresham submarket rose nearly a percentage point to 8.4%, partly due to Joe’s Sports & Outdoors vacating 55,120 sf at Gresham Town Fair. But, the good news is that Grocery Outlet opened a 20,020 sf store at Sandy Marketplace on Highway 26 in this submarket in May.

Southwest retail vacancy rose nearly one percentage point to 7.5% with 88,722 sf newly vacant, due in large part to the more than 20,000 sf Zupan’s at Appleway Corner closing, and the departure of Linens-N-Things from Cascade Plaza Shopping Center. Retail vacancy in Vancouver also increased to 8.7%, with 91,000 sf newly available at Vancouver Plaza.

Noteworthy News

Some recent indicators, such as May consumer confidence that reached a 9-month high, are suggesting that the retail slump may end soon. But national and local retailers alike continue to struggle. Joe’s Sports & Outdoors liquidated in early April after filing for bankruptcy. The closure of stores like Joe’s and other big-box retailers is injecting an excess of large retail spaces into the market, and not many big-box retailers are looking to expand and fill them. So retail brokers are getting creative in trying to fill this vacant space, including marketing to non traditional tenants like thrift stores, service retailers or call centers, and trying to attract tenants who are surviving the recession better than others, like discount retailers.

Retail tenants aren’t the only ones feeling the recession. General Growth Properties, which operates Pioneer Place and Clackamas Town Center and some community shopping centers in the Portland metro area, filed for bankruptcy in April. GGP, the second largest mall owner in the country, is expected to keep all of its malls open, but may sell some properties.

Construction of new retail properties has slowed considerably in recent months, but some projects are still in the works. During Second Quarter 2008, just one year ago, Vancouver alone had nearly 300,000 sf under construction, while today it has only 16,080 sf at Lacamas Square. Portland’s Eastside retail submarket has the largest amount of retail currently under construction at 193,919 sf, largely due to the 140,625 sf Cascade Station Target, which is expected to deliver this November.

Portland Industrial Vacancy Rises in Second Quarter, NAI NBS Report Shows

Overview

Industrial vacancy increased nearly a percentage point during Second Quarter to 13.87%, with 515,518 sf coming back on the market. Vacancy in North/Northeast increased substantially to 17.51%. Although there was one major lease, Ernest Packaging took 62,150 sf at PDX Corporate Center South. Vacancy in Vancouver also increased substantially, to 12.30%. Several tenants left Columbia Business Center. Vacancy in Southeast decreased by a percentage point to 10.17%, largely due to Leverage 2 Productions leasing 62,765 sf in two buildings at Clackamas Commons Phase II.

Flex vacancy rose to 15.11%, with a loss of 159,633 sf, and much of the movement in small spaces. The Southwest 217 submarket saw vacancy increase nearly three percentage points to 17.49%, with more than 20,000 sf becoming available at both Creekside Corporate Park and Nimbus Corporate Center. However, Kleinfelder West leased 13,319 sf at Nimbus Oaks – Building C.

Market Trends

Metro, the area’s regional government, released a preliminary urban growth report this quarter suggesting that the Portland Metropolitan Area will require up to 82 million sf of industrial space by 2030, though it also expects manufacturing jobs to continue to decline.

Industrial projects under construction have decreased significantly in recent months, but work continues on one long-awaited project: the FedEx Ground facility in Troutdale. The three building, 415,000 sf facility is expected to be finished in July 2010 and should create 650 new jobs.

Jobs are also being created by adding lanes on nearby South Frontage Road and some additional road projects to prepare for the increase in truck traffic in that area. Transaction volume has slowed considerably, and many industrial sales today are in the $1 million to $5 million range. But Second Quarter had one large, standout transaction: SEH purchased the Vancouver Hewlett-Packard campus for $55 million. SEH, which makes silicon wafers, employs more than 800 people in Vancouver and will use the 4-building, 694,000 sf campus to expand. HP will lease back part of the complex for at least three years. In the works since late 2008, and area leaders hope the sale/expansion will create local jobs.

The full report is available on our Web site.

NAI NBS Second Quarter Office Report: Central City Vacancy Staying Stable, Suburban and Vancouver Vacancy Rising

Central City office vacancy stayed essentially stable from First quarter at 10.33%, with positive absorption of 47,803 sf. Class A space in the Central Business District remained tight at 6.25% vacancy, with considerable movement in spaces under 10,000 sf. No new available space will deliver in the CBD until Shorenstein’s First & Main finishes construction in March 2010. In early April, TMT Development halted work on Park Avenue West, a 315,000 sf Class A tower scheduled to open in 2011 with anchor tenant Stoel Rives, because financing dried up. The company plans to take out the top 10 stories of condominiums from the plans and is targeting to begin construction again in early 2010. We are continuing to see tenants interested in moving to the urban core from the suburbs – for instance, SAIF moved into 34,000 sf at Crown Plaza at 1500 SW First Ave in April. Tenants are also often seeking to renew leases rather than relocate, and ADP announced that it would stay in 115,180 sf at ADP Plaza for seven more years.

Suburban office vacancy increased nearly two percentage points to 19.06%, with negative absorption of 183,415 sf. Southern 217 vacancy increased almost four percentage points to 25.12%, with considerable space available at Triangle Corporate Park – Building 3 with the departure of EthicsPoint. Part of the increase in Southern 217 and the Sunset Corridor area may be attributed to the failure of financial firms – many are or were located in these areas. Kruse Way sustained a noteworthy increase in vacancy of almost nine percentage points to 21.08%. Absorption in this submarket was a negative 80,857 sf, largely due to two entire floors available at Kruse Woods V. In general, an increasing amount of sublease space is becoming available, and rental rates are dropping, with landlords working to attract tenants through free rent and other concessions.

Vancouver vacancy increased about one and a half percentage points to 17.71% with negative absorption of 81,699 sf, largely in small spaces. Vancouvercenter gained a few smaller tenants, including Purple Language Services and Advantel. Tenants are increasingly interested in renewals and are seeking renewals well before their current leases expire to take advantage of the current market conditions.

The full report is available on our Web site.