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Posts Tagged ‘rental rates’

Oregon ranks #1 among the states when it comes to the portion of the GDP which can be attributed to manufacturing. Oregon’s manufacturing, specifically durable goods, continues to be a strong contributor to our economy. Durable good manufacturing is very cyclical and jobs are directly tied to overall output. This will bode well for Oregon’s employment as production continues to accelerate.  A trend of expanding and bringing manufacturing back into the states, “reshoring”, has recently been seen in Portland by the likes of Oracle and Shimadzu.

OR GDP is 29% manufacturing

OR GDP is 29% manufacturing

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Ok, so it’s no Ferrari-like speeds for the commercial real estate market recovery, but the first signs of some promising momentum comes on the distressed properties track.

For the past 2+ years distressed property offerings have sat pretty much untouched while buyers tried to determine the best time to re-enter the market (ie. when values hit bottom and stabilized).  It looks like 2010 is it.  In the First Quarter,184 transactions closed compared to 102 in the First Quarter of 2009, a nearly 45% increase year over.  2010’s number is more in line with transaction volume during the first quarters of 2008 (187) and 2007 (189). A good indicator that buyers with cash have decided the timing is right to pursue deals.

While the activity level among distressed properties is a good sign, it must be noted that  assets in good standing are not moving without considerable discounts. Take, for instance, the recent sale of One Main Place in Portland. This Class A office tower had 97% occupancy and a strong tenant roster. It was purchased in 2006 for $69 million and recently sold for $59 million. 

OFFICE AND INDUSTRIAL PRICES – CLOSING THE GAP

Distressed office prices have been trending down from their 2007 peak.  But lately the price gap has narrowed with top prices declining and bottom prices slightly increasing. Since late Third Quarter 2009, distressed office properties have sold for anywhere from $70 to $140/SF.  During the same time period, nondistressed office properties sold for between $110 and $200/SF.

Three years ago, distressed industrial properties were trading anywhere from $20 to $80/SF.  In late 2008 and early 2009 there was a brief rally in industrial prices, but today the price bottom is back around $20/SF.  The top of the price scale is around $40/SF, narrowing the gap between high and low by $40/SF.  Nondistressed flex and industrial properties have been selling for between $40 and $85/SF.

THE ACTIVE BUYER POOL TENDS TO BE LOCAL/REGIONAL

The mix of buyers of distressed office properties during the recession years breaks down as follows:

  • Regional developer/owners – 26%
  • National developer/owners –  17% 
  • Individuals – 14%
  • Corporations – 14%14% 
  • Investment managers – 11%

Over the last six months, investment managers have decreased their share to less than 5%, while banks and government entities have increased their share of purchases. No doubt a portion of the  government increase comes from assumption of numerous corporations with considerable real estate holdings.

The mix of buyers of distressed flex and industrial properties since 2007 breaks down as follows:

  • Regional developer/owners- 23%
  • Corporations – 20%
  • National developer/owners – 16%
  • Investment managers – 11%
  • Individuals – 11%

Over the last six months, corporations have become the most active buyers accounting for 3 out of every 10 purchases. Regional developer/owners follow closely at 28% while investment managers’ share has fallen to 8%. Individuals now account for less than 4%.

source: CoStar

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 TechDex (apps|provider|hardware|var)

Westside

Epicor – Pacific Corp Center | 6650 SW Redwood Lane | 3,517 SF renewal

MediaDex (traditional|digital|research)

Central Business District

East2West – 4815 SW Macadam Ave | 5,100 SF

GeneralBizDex (consulting|finance|insurance|legal|other)

Central Business District

Benefit Partners – Bank of America | 121 SW Morrison | 2,450 SF

H5 Ventures – Macadam Center | 5125 SW Macadam Ave | 3,089 SF

Westside

Oak Tree Insurance – Kruse Woods II | 5335 Meadows Rd | 4,200 SF

Vancouver

Sacagawea Inc – Columbia Tech Center | 1301 SE Tech Center Dr | 10,692 SF

GovDex (government agencies)

Vancouver

Washington State Auditors – EastRidge Biz Park | 9611 NE 117th | 2,868 SF

NonProfDex (charitable|education|trade assoc)

Vancouver

Northwest Reading Clinic – EastRidge Biz Park | 12000 NE 95th | 502 SF

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NonProfDex (charitable|education|trade assoc)

Eastside

Oregon Education Assoc. – MMC Building | 333 SW 223rd, Gresham | 3,445 SF

TechDex (apps|provider|hardware|var)

Westside

AuctionPay – Tigard Triangle Corp Ctr | 13221 SW 68th | 14,580 SF renewal

MediaDex (traditional|digital|research)

Central Business District

Bradshaw International – 4800 SW Macadam | 2,794 SF

GeneralBizDex (consulting|finance|insurance|legal|other)

Central Business District

Strategic Investment Group – River Forum I | 4380 SW Macadam | 2,143 SF

Trammell Crow Residential – One Pacific Sq | 220 NW Second | 3,525 SF

NorthStar Consultants – Riverside | 5100 SW Macadam | 7,625 SF renewal

Salt Grotto LLC – Lovejoy Square | 908 NW 14th Ave | 1,900 SF

SustainDex (environmental|sustainable|clean/bio tech)

Westside

Plas2Fuel Corp – Wall Street Industrial Park | 7904 Hunziker | 22,307 SF

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Tenants may have the opportunity to take advantage of lower rental rates through a process termed “Blend and Extend”. What this means is that tenants with two years or less left on a lease can secure lower rent today in exchange for extending their lease for an additional three to five years. Tenants achieve an immediate savings to their bottom line and the landlord maintains a tenant for the long term. Some landlords are reluctant to do this, betting the market will improve over the next couple of years.

Example Transaction

Tenant occupies 10,000 SF and is three years into a five year lease. Fair market value at the end of the third year is $22.00/SF.  Tenant agrees to add three years on to their lease term in exchange for an immediate rent reduction.

CURRENT LEASE

  Rent/SF   Monthly   Annual    
Year 1 $24.00   $20,000.00   $240,000.00    
Year 2 $24.72   $20,600.00   $247,200.00    
Year 3 $25.46   $21,218.00   $254,616.00    
Year 4 $26.23   $21,854.54   $262,254.48    
Year 5 $27.01   $22,510.18   $270,122.11   $532,376.59

NEW LEASE

  Rent/SF   Monthly   Annual    
Year 1 $22.00   $18,333.33   $220,000.00    
Year 2 $22.66   $18,883.33   $226,600.00   $446,600.00
Year 3 $23.34   $19,449.83   $233,398.00    
Year 4 $24.04   $20,033.33   $240,399.94    
Year 5 $24.76   $20,634.33   $247,611.94    

$85,776+ savings in the first two years

The Tenant saves 16% in rent over the next two years and their overall rent is reduced over the next five years due to the discount in the market rent. The landlord benefits from no further out-of-pocket tenant improvements, potential lost rent if the tenant moves, and additional real estate fees paid out to find a new tenant.

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Our Second Quarter Report for the Vancouver submarket is out and the news is less than uplifting. All of the Vancouver submarkets are now in double digit territory for vacancy rate. Rental rates are still on a steady decline while tenant improvement allowances are becoming more challenging to pencil out for landlords. Lease terms are shorter, 2-3 years, with most tenants exercising renewal options as they remain in a “wait and see” mode.

Office Vacancy Rates

Office Vacancy Rates

With the recent announcement of Nautilus giving back nearly 400,000 square feet of space, the increase in available space in the Cascade Park submarket is nearly doubled from the previous quarter. The likely tenant candidate is a large company, from outside of the region, seeking a campus-like setting and tax breaks. This will not be an easy challenge to tackle in the current economic climate.

Office Rental Rates

Office Rental Rates

Investment Opportunities
New on the market, Evergreen Plaza (611 W Evergreen) is one of the few opportunities available with a stronger tenant mix ( State and County agencies). The current asking price on this 64,975 SF property is $6,090,000  with projected returns of:

Year 1 Return:  13%
Projected 15 Year Cash Flow:  $16 million
Projected 15 Year Tax Savings:  $6 million
IRR:  13%

The Columbian remains tied up in legal discussions and fairly inactive from a new tenant perspective due to the uncertainty of ownership.

For a copy of the complete report, email me with Vancouver Snapshot in the subject header.

kristin.hammond(at)pacific-re dot com

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Office Leasing : Advantage Tenant

Recent reports are saying the same thing: the office market is fast becoming a tenant’s market. Nationwide, the vacancy rate rose steadily through 2008 with a spike toward the end of the year. This increase in vacancy is applying downward pressure on rental rates, decreasing occupancy costs, and increasing the amount of inducements being offered by landlords (ie. free rent or larger tenant improvement allowances).

Now is also a good time for tenants to review their existing leases to see if there is the ability to lower expenses through an early renewal. Keep in mind, tenants willing to sign a longer term lease (say 5+ years in this climate) are the ones who have any real play with this option. Short-term leases do not have leverge with landlords.

Commercial Property Values Still Tumbling

According to Moody’s/REAL Commercial Property Price Indices, in 2008, commercial real estate prices dropped 15%, nearing 2005 levels. In December, the prices fell 2.2% from November levels – a significant drop. Commercial properties are now down more than 16% from their peak in October 2007 and are projected to decline further over the near-term. The good news (there is some) is credit markets are improving (see my earlier post about TED).

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