NAI NBS First Quarter Economic Report

National Highlights

President Barack Obama took immediate economic policy action after his inauguration in January. A $787 billion stimulus package, passed in mid-February, includes tax cuts for most Americans, increased unemployment benefits, and funds for infrastructure projects, education and health care. In addition, a $75 billion mortgage assistance program aims to help up to 9 million Americans refinance their homes or avoid foreclosure.

The government is also taking steps to mend the nation’s financial system. Treasury Secretary Timothy F. Geithner revealed some details of a financial system reform, which would provide the government with more power to intervene in non-bank financial institutions. The major stock markets gained 500 points with the news of this plan on March 23, whereas in late February and early March the markets had fallen to lows not seen since 1997.

National unemployment numbers continued to be discouraging. Unemployment rose to 8.1% in February, the highest it’s been since 1983. Major employers across many sectors, from Nissan to Caterpillar to Home Depot to Sprint Nextel, slashed thousands of jobs.

But after months of disheartening news, a few economic indicators showed positive signs this quarter. Sales of existing homes grew 5.1% in February, according to the National Association of Realtors, and 30-year mortgage rates have fallen to 4.85%, the lowest level since 1971. Orders for durable goods also increased 3.4% in February, according to the Commerce Department, which was better than expected. And consumer spending rose 1% in January and .2% in February after months of considerable declines.

Local Highlights

State unemployment rose to 10.8% in February, with 9.6% unemployment in the Portland Metropolitan Area. Two major Portland-area employers, Oregon Health & Science University and Intel, each laid off up to 1,000 people this quarter. However, Intel announced that it will invest $1.5 billion at Intel Oregon during 2009-2010. Oregon will also benefit from stimulus measures. Go Oregon!, a state stimulus package, will provide $175 million for infrastructure projects, and federal stimulus funds include $76 million for public transportation and $334 million for road and bridge repairs.

Portland’s bid for a Major League Soccer team was the talk of the town this quarter. The Timbers gained approval to move up to the majors in 2011 with the franchise fee paid by owner Merritt Paulson. If funding can be acquired, the Timbers will play at an upgraded PGE Park, and the minor league Beavers baseball team will move to a new stadium in the Rose Quarter. City leaders and stakeholders are also working on renewing the Rose Quarter and surrounding area as a year-round destination for entertainment and dining, not just sporting events.

Multifamily Market Still Healthy, But Product Sales Down

Overview

Multifamily vacancy crept up a bit to 4.96% in the First Quarter 2009. For comparison, the overall vacancy rate a year ago was 3.80%. The Clackamas/Oregon City/Milwaukie submarket had the highest vacancy at 6.00%, nearly two percentage points up from last quarter. Vancouver’s vacancy decreased more than a percentage point, however, to 4.81%. Southwest Portland had the lowest vacancy at 4.28%.

Average rental rates in all apartment types rose slightly, between $2 and $5, during First Quarter. The Downtown Portland and Wilsonville submarkets saw significant price increases in certain apartment types. The price of a 2 BR/2 BA unit downtown increased by $26 to $1,800, and a 3 BR/2 BA in Wilsonville rose by $18 to $868. The overall average to rent an apartment in Vancouver was $679, the lowest of all submarkets.

Market Trends

The current economic stress is evident in the multifamily market. Vacancy rates are increasing in suburban markets, including Vancouver and free rent incentives are now common, driving down effective rental rates. We expect to see this trend for the balance of 2009.

Many experts today view multifamily as the most stable product type and the one least affected by the uncertainties in this downturn, though the uncertainty has affected sales activity. Product sales were down dramatically in 2008, and we expect this to continue throughout 2009. It’s difficult to determine where values will settle, but going forward, they will be determined based more on tried and true methods like cash-oncash returns, driven by real numbers and interest rates, rather than specific pro forma models. Cap rates will be calculated more conservatively with much more scrutiny on underwriting, in-place income, historic performance, cost of capital and market stability.

The federal stimulus package got off to a bit of a bumpy start and its impact is still unknown, but it is encouraging to see economic stimulus action being taken, and investors may have some reason to be optimistic. Smaller, local banks will benefit from the stimulus, allowing them to clear the overhang of single family development inventory by extending lower interest rate loans. Low mortgage rates, along with the $8,000 tax credit for first-time home buyers, are stimulating the balance of the single family market and sales are picking up for homes under $350,000. On the multifamily side, Fannie Mae still has the lowest rates, but these rates come with more scrutiny on the borrower and property.

The full report is available on our Web site.

Vacancy Increases in Tough Retail Market, But Retailers Adapting

Overview

Vacancy in the Portland Metropolitan Area retail market increased during First Quarter to an overall 6.5%, with a negative absorption of 264,390 sf. Every submarket except two showed increases in vacancy of at least half a percentage point. Central City stayed relatively stable from last quarter at 8.2%, with a few thousand feet of negative absorption and considerable movement in small spaces.

The Eastside retail market was 5.6% vacant with a negative 40,226 absorption, largely due to Circuit City closing its 42,555 sf store at the Jantzen Beach Supercenter. Southwest Retail had the highest negative absorption at 82,341, with substantial space available at Canyon Place Shopping Center in Beaverton and Washington Green Shopping Center in Tigard near Washington Square. Vancouver vacancy increased more than a percentage point to 7.9%, with considerable negative absorption in spaces under 10,000 sf.

Noteworthy News

National retail sales last quarter were better than expected, with a 1.8% gain in January and only a 0.1% drop in February. Though these numbers were an improvement over months of declines, they don’t necessarily signal a turnaround, and many retailers are taking serious measures to cut costs. One trend is tenants, including large, national chains, renegotiating leases. Pier 1 has begun talks with landlords to reduce rents and says it will close up to 80 stores if it can’t cut enough costs, while retailers like Gap and Finish Line are attempting to cut down on store square footage.

Retailers around the country are using creative strategies to adapt to the new retailing environment. Promotions and special sales can reel in frugal consumers, and one restaurant in the area is going a step further than traditional sales or specials. The Blue Sage Café, with locations in Lake Oswego and West Linn, ran a special promotion for a few weeks (which may be extended) that allows restaurant-goers to choose how much they want to pay for an entrée.

Another tactic is to cut back hours or days of operations. Westfield Vancouver Shopping Center, for instance, is opening half an hour later and closing half an hour earlier on weekdays. Kitchen Kaboodle, locally owned with five locations in the metro area, is completely closing its stores three days a week.

Bankruptcy filings have become more common in this recession, and local retailers aren’t immune. Joe’s Sports & Outdoor, previously G.I. Joe’s and based in Wilsonville, filed for Chapter 11 bankruptcy in early March and explored its reorganization options, including seeking a buyer for the company.

The full report is available on our Web site.

PDX Industrial Vacancy Increases, But Some Positive Signs

Overview

Industrial market vacancy increased less than a percentage point to 12.95%, with a negative absorption of 159,471 sf. Vacancy in Southwest I-5 increased about 5 percentage points to 11.22%, partially because 278,920 sf at the new Commerce Park came online. Absorption in Southwest I-5 was a negative 195,907 sf, due in part to 49,900 sf vacant at Nelson Business Center, previously occupied by DHL, and 130,000 sf vacant space at Lakeview Business Center. North/Northeast vacancy decreased to 16.19%, with one tenant leasing 151,050 sf at Rivergate Corporate Center III and OIA Global Logistics expanding by 60,102 sf at Bybee Lake Logistics Center.

Flex market vacancy increased slightly to 13.63%, with a negative 47,392 sf absorbed. Vacancy in North/Northeast decreased nearly 6 percentage points to 9.76%, with CentiMark Corporation leasing 8,831 sf at Columbia Gorge Corporate Center, and other smaller spaces leased up. Vancouver flex vacancy increased to 12.93%, with nearly 16,000 sf newly vacant at Columbia Tech Center.

Market Trends

First quarter 2009 saw a multitude of strategies for dealing with the economic recession in the industrial market. The increased vacancy and negative absorption indicate that tenants are downsizing and right-sizing, putting considerable space back on the market. Other users of industrial space took a wait-and-see approach, holding steady while putting off making long-term decisions.

We are seeing some companies investing in facilities in the area, while others are even expanding and planning for growth. Just weeks after Intel said it will close its Fab 20 plant in Hillsboro later this fall, leaving about 1,000 people jobless, the company announced that it’s investing $1.5 billion into improving two other plants in Hillsboro. The Port of Vancouver bought 110 acres on NW Lower River Road to expand its current facilities. SolarWorld, which opened its nearly 500,000 sf solar manufacturing facility in Hillsboro last October, will build a new 210,000 sf building on the campus to be finished in November. Oregon provides tax incentives for solar companies, meaning more of them are putting down roots here and requiring industrial space.

The full report is available on our Web site.

First Quarter Portland Office Report Shows Rising Vacancy

Central City office vacancy rose to 10.46%, with negative absorption of 162,069 sf. The Central Business District had 10.61% vacancy, with a tight market for Class A space. Northwest’s vacancy rose to 12.85% overall, largely due to the 68,538 sf Machine Works building sitting entirely vacant. Although, this area also saw considerable leasing activity. Law firm, Ater Wynne leased 36,276 sf at The Lovejoy, which came online this quarter. Northwest Evaluation Association announced it will move from its current Lake Oswego offices to occupy the entire 104,000 sf Port of Portland Building in 2011.

Suburban vacancy increased to 17.32%. One consequence of the economic climate is sublease space is becoming more prevalent, and when taking that into account, the vacancy rate is 19.56%, with -122,161 sf absorbed. Vacancy in Lake Oswego/West Linn increased to 15.81%. Southern 217 also saw a significant rise in vacancy, partially because new buildings were added. All 96,870 sf at Triangle Pointe (formerly the Farmer’s Insurance Building), which got a new owner in late 2008, is currently vacant and the building is being remodeled. Kruse Way vacancy fell by about 1.5 percentage points, and EthicsPoint leased 22,654 sf at 6000 Meadows.

Vancouver vacancy fell more than a percentage point to 16.11%, with 62,242 sf absorbed. More than half of that absorption was in Class A space, with some sizeable leases. Seton Catholic High School took 13,938 sf at Sunrise Professional Plaza and Office Ally leased 10,993 sf at McGillivray Place. Vacancy in Class B space was 22.75%, but Vancouver Square saw significant absorption with the American Red Cross leasing 9,480 sf and the U.S. Veterans Affairs Department taking 8,280 sf, both in Building 3.

The full report is available on our Web site.

Borlaug Named to Portland Business Journal's "40 Under 40"

NAI NBS' Jeff Borlaug has been selected as a Portland Business Journal "40 Under 40" award recipient. A reception last night at the Armory honored Jeff and the other award recipients, and a special section featuring all of them appears in today's paper.

"40 Under 40" recognizes young professionals who are notable for career achievement and community involvement. Since joining the company in 2000, Jeff has built an impressive client list and become one of the top sales and leasing agents for office and flex space in the city. He was NAI NBS' Number One Top Producer in 2008, and was also promoted to Vice President/Director of Brokerage.

Find out more about Jeff in the PBJ profile.