PORTLAND, OR-The CBD office market here fared well during the first three months of the year while the rest of the region remained relatively unchanged, according to a first quarter report from the local office of Grubb & Ellis.

The 17.3-million-sf Portland CBD office market registered 120,000 sf of net absorption, pushing overall CBD office vacancy down 100 basis points to 10.3% while the class A CBD vacancy rate fell 60 basis points to 7.6%. In response, the asking rental rate jumped $0.50 per sf to just over $23 per sf per year, according to the report.

If the rental rate growth continues on that pace, the annual growth rate would be 6% and by the end of the year the asking CBD rental rate would be about $24.50. Patricia Raicht, the regional research director for G&E, tells GlobeSt.com she expects that to happen.

“The CBD rental rate increases will be felt more significantly by those seeking larger blocks of space, as there are only three class A availabilities larger than 20,000 sf,” she says. “Tenants seeking fewer than 10,000 sf will still have some room to negotiate.”

Meanwhile, south of the city in the 5.4-million-sf Kruse Way/Washington Square submarket, where vacancy has been in the single digits for a few quarters, there is no room for negotiation, no matter what the size of the space. Vacancy actually jumped slightly in that submarket during the first quarter to 8.6%, but Equity Office Properties Trust, by far the dominant landlord there, is holding firm on rates, which are pushing $30 per sf, full service, on the newest class A product.

“Building owners there are offering very little to zero free rent and only $10-$15 in TIs,” Raicht says. “That is significantly less than you would have gotten a year ago.”

Out in the tech-heavy 3.7-million-sf Sunset Corridor office market, where there remains a lot of inventory to absorb, overall vacancy fell 20 basis points to 22.9% on about 65,000 sf of net absorption. The average class A asking rental rate there is $21.39 per sf.

Vacancy in the 1.3-million-sf Eastside market jumped significantly due to more than 115,000 sf of negative net absorption, almost all of which can be attributed to new availability at Fred Meyer’s former headquarters on Southeast 22nd Avenue. As a result, vacancy in the tiny market jumped from 14.9% to 23.7%, according to the report.

One trend Raicht is seeing is an increase in office condo development as business owners try to capitalize on low interest rates. Several new projects are under way with offerings from 1,500 to 25,000 sf and pricing from $225 to $360 per sf. The projects include new construction and conversions in Downtown as well as the Sunset Corridor, Kruse Way and Tigard areas.

“It is still too early to tell how much this surge in condo ownership will impact the office leasing market,” she says, “but it is sure to have an impact as developers take hard-to-lease buildings off the market to retrofit them and tenants leave the leasing market behind to take advantage of current interest rates and buy their own office space.”

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