EOP Steps Into Downtown Office Race

As proposed, EOP is looking to develop a 15-story, 350,000-sf building that would have 22,000-sf floor plates, balconies on the fourth and 14th floors, 20,000-sf of street-level retail and 275 to 300 underground parking spaces. EOP has selected Gerding/Edlen Development Company, GBD Architects and Hoffman Construction as the local development team, and Joe Vaughan of NAI Norris, Beggs & Simpson as the third-party leasing agent.

EOP acquired the land for the project in March, paying a record $190 per sf for the operations parking lot located one block from the waterfront between Southwest Madison and Main streets and First and Second avenues. The seller, Urban Growth Properties Trust, acquired the site in 2000 and had obtained approval for a similar-sized tower called Two Main in partnership with Trammell Crow Co., but the approvals lapsed after no tenants were landed for the project.

Office broker Tom Usher of Cushman & Wakefield tells GlobeSt.com that the office vacancy rate for class A space in Downtown now stands at 8.5%. Assuming 150,000 sf of annual net absorption in the Downtown class A market, Usher says the average Downtown class A vacancy rate would be in the 5% range in 2008, which means there would likely be no full-floor supply and possibly enough demand to support EOP's likely pricing requirements. Currently, there are only a handful of full-floor options in Downtown class A buildings, he says.

The big question is who their anchor tenant could be. There are very few anchor-sized tenants already in the Downtown market (those leasing between 75,000 sf and 100,000 sf). As a result, EOP would also take two or three 40,000- to 50,000-sf tenants to get its project started, and may ultimately have to take tenants from its existing Downtown buildings, which are Umpqua Bank Plaza, Congress Center and One Pacific Square. As well, it might also be able to attract tenants from Kruse Way in Lake Oswego, where it has a 75%-plus market share.

Local industry experts tell GlobeSt.com that in all likelihood, three years from now there will be a building on the site, if for no other reason than the financial prowess of the EOP-Gerding/Edlen team. Their cost of funds and staying power are as low and as high, respectively, as anyone, they say. As a result, the team will be able to move forward with the project without the 40% to 50% preleasing that might be required by a traditional construction lender, and could probably afford to offer prospective tenants more concessions than its competitors, as Gerding/Edlen reportedly did to fill up its Brewery Blocks development.

As far as competition goes, although EOP's site is considered by many to be the best in terms of location, there are three other Downtown office towers proposed, two of which are ahead of EOP in the approval process. As a result, those other projects are in a position to redirect potential tenants from EOP, which still must navigate the city's oftentimes lengthy project approval process.

The ones already with approvals in place are One Waterfront Place, a 230,000-sf building proposed for 1201 NW Naito Parkway by Winkler Development and Bill Naito Corp., and 100 Columbia, a 314,372-sf building proposed for 100 SW Columbia by Louis Dreyfus Group. Winkler's project, which will have above-ground parking, will take only 15 months to construct, compared to 22 months for EOP's project, not including an estimated nine-moth approval process. The Louis Dreyfus project has had design review approval, but may have to retrace its steps before moving forward. The third competing tower, Block 38 at SW 2nd and Stark, a 441,000-sf tower proposed by Schnitzer Northwest, is on pace with or behind EOP in the approval process.

Having said all that, local sources add that there are a lot of potential tenants who have leases that will roll in the 2008-2009 timeframe, so if EOP can land two or three 40,000-sf tenants early, it may like its chances at landing a couple more while the building is under construction or shortly after it is complete. Moreover, between Gerding Edlen and EOP, many of those potential tenants already call one of them their landlord.

Finally, although preleasing sounds like a long-shot today, six months from now, when the building is closer to being only 24 months out, Vaughan will have talked to all the likely tenant candidates and the market will have tightened even further, leaving no large blocks of space readily available. By that time, tenants may be more willing to seriously consider tying up space for their expansion needs. As well, a couple of law firms may merge and be in need of new space to fulfill their space requirement, or the Portland region may gain another large corporate headquarters, such as when Kindercare came to town several years ago.