Office Market Report: No 'Whew' Until Early '02

PORTLAND, OR-Demand dried up and sublease office space ballooned by more than 42% in the second quarter to over 910,028 sf, causing a negative net absorption of 76,361 sf and pushing the overall vacancy rate to 9.8%, the highest its been since the infamous early 90′s.

That’s the situation according to a report by the local office of Grubb & Ellis, which predicts the situation will worsen, “as we have yet to absorb the full impact of corporate downsizing.”. On the upside, the report finds analysts expecting the Fed rate cuts and the prospect of the Bush tax cut will create conditions for a return to growth in the early part of 2002.

And, although owners have begun to offer concessions and rental rates are showing some movement, the report finds overall average asking rates relatively strong, as few owners have dropped their rates dramatically.

In Portland’s CBD, negative net absorption was a whopping 177,852 sf, pushing the overall vacancy rate more than 1% to 6.7%. Class A space specifically registered a negative net absorption of 193,609 sf, lifting vacancies 2.5% to 6%. The situation is in large part due to Louisiana Pacific having completed its move to the Fox Tower, which opens up another 70,000 sf in the US Bancorp Tower.

The highlight of the quarter is Clark County, where positive net absorption of 85,735 sf forced overall vacancies down 2% to 12.7%. The class A vacancy rate fell over 3% to 17%. The numbers are in large part due to the Bonneville Power Administration leasing more than 100,000 sf of class A office space in five corporate buildings.

The lowlight is the Westside. Of the total sublease space available in the metro area today, nearly half is in the Sunset Corridor, which posted a staggering 22.8 % class A vacancy, up 9% from last quarter. The Washington Square/Kruse Way market saw a 4% increase, ending the quarter at 10.7% vacancy.

Of perhaps even greater concern, concludes the report, is the 333,419 sf of new construction expected to deliver over the remainder of the year, of which only 90,000 sf has been preleased. “Given the rather high improbability of increased demand over the second half of this year, sublease space and new construction alone could give the vacancy rate another significant increase.”