Bulletin E-Edition:
more photosMore offices empty as demand goes soft
Construction glut could take years to work through
By Jeff McDonald / The Bulletin
Published: November 13. 2008 4:00AM PSTThe vacancy rate in Bend’s office market more than doubled from third quarter 2007 to third quarter 2008, to 17.1 percent — an amount of space that would take more than four years to lease at the current rental pace, according to a local survey.
The vacancy rate is the highest in at least 15 years, said Darren Powderly, a Bend-based broker for Compass Commercial Real Estate Services, which releases a quarterly survey of retail, office and industrial vacancy rates in Bend and industrial vacancy rates in Redmond.
The third-quarter vacancy rate amounted to 377,535 square feet of space available, according to Compass.
Locally, the spike in demand for office space that occurred during the boom years between 2004 and 2006 resulted in a glut of new office buildings that appeared on the market this year — just as demand levels waned with the economic downturn, Powderly said.
Compass began measuring commercial vacancy rates locally in 1993, Powderly said.
“We’re seeing a perfect storm of three things,” Powderly said. “There is a glut of new construction completed this year that was conceived from 2004 to 2006. There is a lack of available credit to finance growing companies. And there is a decrease in demand for office space due to companies going out of business and layoffs. We’re going to need some pretty serious job growth to absorb all this (office) space.”
Bend’s office market vacancy rose from 13.5 percent in the second quarter, while its industrial market vacancy dipped slightly from 12.1 percent in the second quarter to 12 percent in the third quarter, according to the data.
Vacancy in the city’s retail sector grew from 6.8 percent in the second quarter to 9.7 percent in the third quarter.
In Redmond, the addition of three new industrial buildings to the survey, including the 190,000-square-foot Redmond mill site on Antler Avenue, formerly home of Crown Pacific LP, helped the industrial vacancy rate rise from 23.1 percent in the second quarter to 31.2 percent in the third quarter, according to Compass.
Without the Redmond mill site, the city’s industrial vacancy rate would have been 26.4 percent, Powderly said.
The upside
The good news is very little building is planned for 2009, so vacancy rates are expected to flatten in Redmond and Bend, Powderly said.
“There’s very little reason to build anymore because there is excess capacity with every product type,” he said.
Additionally, higher vacancy rates will result in lower rents and incentives for many Bend and Redmond businesses, Powderly said.
The high office and industrial vacancy rates are an opportunity for some and a challenge for others.
“It is not a good situation for the investor, but for us, when companies are looking for a new community to relocate, 85 percent are looking for existing space,” said Roger Lee, executive director of Economic Development for Central Oregon, which works to recruit new businesses to the region and retain existing ones. “We are at a part of the business cycle where we (may) not reach a low point until 2010. But at the same time, we still have a whole variety of companies doing well.”
EDCO is actively recruiting companies from at least seven industries, including software and alternative energy, that could ultimately fill the glut of vacant office space, Lee said.
G5 Search Marketing, which sells a software platform that helps companies improve their visibility in Internet Web searches, is one company that could benefit from the office space supply. The company is looking for more space because it’s poised to have its strongest gross sales quarter since opening in 2004, and has doubled its number of employees this year, to 30, said CEO Dan Hobin.
“We have been trying to buy (a building) unsuccessfully for a while, and we’re waiting for sellers to get more realistic,” Hobin said. “We do need more space. Prices are coming down, and it is probably going to get worse before it gets better.”
Market risks
Owners are more willing to negotiate than they were in the boom times but still need lease terms to make financial sense, said Jordy Skovborg, managing member of JCIP Simpson LLC, which developed a building on Simpson Avenue in Bend.
Skovborg developed the 11,000-square-foot office building, at 1160 Simpson Ave., for a company that had financial problems and backed out of the lease, he said. A year later, the building stands empty and might stay that way during the economic downturn, he said.
“When you go into a real estate investment, you have to weigh the risks versus the reward and have to be prepared for this sort of thing to happen,” Skovborg said. “There are no guarantees of success.”
There are numerous approaches to entice new tenants, Skovborg said, including offering reduced rent in the short term that can be made up in the end.
“In the end, it has got to be a win-win,” he said.
Another building owner, Walt Ramage, the president of the development company that built Brookswood Meadow Plaza in southwest Bend, also isn’t worried about high vacancy rates.
The 50,000-square-foot building, which will be completed and ready for occupancy in December, has one signed tenant so far. Chanhassen, Minn.-based Snap Fitness, a franchiser of compact, 24/7 fitness centers in Canada and the United States, signed a lease for a 4,000-square-foot space in October, said Ramage, who also is a broker for the DuBois Wicklund Group, based in Bend.
Other prospective tenants include a neighborhood grocery store, dentists and laundromats, Ramage said. Interest has picked up in the past five weeks as businesses are looking to position themselves for when the market recovers and because the shopping center is one of the few commercially zoned properties in the area, he said.
“We’re taking steps right now to make that center successful by putting the right tenants in there,” Ramage said. “Now’s the time for businesses opening a second location to put themselves in the right position for when it starts to upswing again, because it is going to upswing.”
Jeff McDonald can be reached at 541-383-0323 or at jmcdonald@bendbulletin.com.
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