Report: The Rebound Begins a Year From Now

PORTLAND-Vacancy rates continued to increase, absorption stayed negative and construction activity remained virtually nonexistent during the first half of 2002, according to a mid-year report from Insignia/ ESG. The trend is expected to continue during the next nine to 12 months, states the report, but renewed growth is predicted to arrive in the spring of 2003, after which the region will enjoy a steady rebound through the second half of 2003.In the CBD office market, activity was slow during the first two quarters of 2002, according to the report, as supply continued to outpace demand. This prompted office vacancy rates to increase in every submarket across all classes. As a result, net absorption figures remained negative and rental rates were flat, actually dropping in most submarkets.

For the sixth consecutive quarter, overall net absorption was negative in 2Q2002 to the tune of 90,698 sf, bringing the year-to-date total to negative 164,262 sf. As a result, the direct vacancy rate climbed from 8.1% at the beginning of the year to 11.8% at the end of the quarter, while the direct class A vacancy rate increased 5.1 percentage points to 10.9%, according to the report. When sublease space is factored in the vacancy rate jumped from 10.3% to 15.0% over the same period.

The jump in direct class A rates is directly attributable to 1201 Lloyd Boulevard and “Block 2″ of The Brewery Blocks, both of which were completed during the first half of the year, adding more than 387,000 sf of class A office space to the CBD office market that is currently 6% leased.

Another 1.4 million sf remains on hold for the Downtown area, including Block 38 (400,000 sf), 100 Columbia (315,000 sf), Two Main Place (300,000 sf) and One Waterfront Place (235,000 sf). Each of the projects would likely need at least 50% of the space preleased to obtain a construction loan, and that’s a near impossible task these days. Potential tenants, looking to stand pat on occupancy costs during the economic storm, are finding the sweetest deals with their existing landlords.