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PORTLAND-Higher unemployment, less new construction, higher vacancy rates, lower effective rents, tenant improvements and concessions continue to characterize the local office sector, although there have been some recent signs of a mild turnaround in progress.

The latest Office Research Report from Marcus & Millichap reveals that the slump in business expansion, particularly in the high-tech sector, that has been ongoing for at least the past two years is continuing to greatly affect the lower demand for office space. This slump in expansion, combined with declining employment (the unemployment rate is about 8%), has resulted in a significant amount of sublease space hitting the market and causing an upsurge in vacancies.

While employment peaked in 2001, the area has lost 35,000 jobs since then. Industrial and office employment took the biggest hits, but the government sector is hanging in. Office employment is not expected to hit its next peak until 2004, while industrial employment is expected to take five years to rebound to previous levels.

Evidence of a turnaround is limited, at this point, mostly to the downtown core where the vacancy rate is flattening out, according to Terry Wilson, research manager for the firm’s Portland office. “We haven’t seen a panic in this market yet like other markets have seen. We’ve had a downturn before in this market and owners are willing to wait it out. They have enough equity in their buildings to hold on and weather the storm,” he says.

Other factors highlighted include: Developers are on pace to deliver 600,000-sf of new space to the market by the end of 2003, down from the 893,000-sf delivered in 2002. Average vacancy is up to 17.5% for the first quarter of the year from 16.7% at the end of 2002, with class A vacancy at more than 18% and class B and C at 16%. Effective rents are down 6.4% for the first quarter on a year-to-year basis. Prices were relatively stable during the first quarter, but owners are expected to sell underperforming properties. Class A buildings with 90% occupancy or above are selling quickly, while building that are only 70% occupied are sitting on the market.

“We haven’t really seen distressed product on the market by sellers who have to sell,” says Mike Kapnick, a senior agent in the Portland office. “As far as marketing times for buildings, they have increased significantly, and if the owner has a building that is less than 90% occupied, they are either waiting to lease up the building or selling at a discount.”

Sales activity is almost exclusively limited to private investors, with low-vacancy properties in the $500,000 to $3-million price range particularly attractive to buyers. Still, Kapnick believes the market’s office fundamentals are stronger than in the past two years.

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