David Fisher / The Bulletin

David Evans and Associates has had an engineering office in downtown Bend for 20 years, but this year, something had to give.

The office has swelled to 30 people over the years as the demand for construction services has grown, engineer and office manager Jim Carnahan said.

Finally this year, with lease rates threatening to spike in their existing space and with their need for more space pressing against the walls, the office managers made a decision.

Despite the hassles of packing desks and hauling furniture, of disconnecting and reconnecting computers, of printing new business cards and letterhead, of letting clients know where they have gone, and despite the sheer expense of lost work time, of frazzled nerves and disrupted concentration, the company has committed itself to move into bigger quarters in the Morgan Stanley Building in the Old Mill District, probably sometime in March.

Despite all the hassles, and despite the $2.15-per-square-foot cost of the new 10,000-square-foot space, the move promises to be worth it, Carnahan said.

”It comes down,” he said, ”to a business decision.”

The engineers aren't the only ones looking for new space in Bend this year.

Office space vacancies dropped to 7 percent by the end of the third quarter last year, according to Compass Commercial Services' quarterly survey of more than 1.76 million square feet of local office space.

That's down from 15 percent two years ago, according to Compass' analysis.

The tightening availability of space is having two major effects: Lease rates are rising for the first time in four years, particularly on the most desirable, newest spaces. And more buildings are coming out of the ground.

Eight major projects alone, all either under construction or expected to begin construction soon, promise to add a little more than 201,000 square feet of prime office space to the city's supply.

Some of that space will be absorbed by the building owners.

Wells Fargo Bank plans to occupy about half of the 20,000-square-foot structure it's building on Bond Street in the Old Mill District, Compass Commercial Broker Darren Powderly said.

Certified Financial Services, a mortgage company, plans to occupy all but about 6,000 square feet of the building it is breaking ground on along Simpson Avenue, a company spokeswoman said. And 11,000 square feet of JCIP-Simpson LLC's three-building project at the corner of Simpson and Columbia Avenue is already spoken for, managing partner Jordan Skovberg said.

That still leaves nearly 175,000 square feet of office space that will soon come available in a market that absorbed a total of 99,620 square feet in all of 2005, according to Compass' numbers.

Nevertheless, Powderly said he sees no signs of an office glut coming.

The reason: Despite a dramatic slowdown in the local housing construction industry from the hyperheated levels of 2005, the demand for expanding commercial office space has continued to grow in Bend, Powderly said, driven at least in part by expanding engineering offices, mortgage brokerages, development companies, and other real estate and construction-related businesses.

There's also demand from other sectors, including high tech and financial services.

”Thankfully, I think it's a pretty broad-based expansion cycle we've been experiencing in the last few years,” Powderly said.

Numbers

Whatever the source of the demand for space, the numbers tend to show it is there.

Citywide, more than 120,000 square feet of office space was absorbed in the first three quarters of 2006, according to Compass' report - about 20,000 square feet, or 20 percent, more than was absorbed in all of 2005.

The demand has been most intense on the west side, where vacancy rates plunged to 4.5 percent through the third quarter last year. Downtown vacancies stood at 8.7 percent, and vacancies in the U.S. Highway 97/Third Street corridor, where tenants tended to abandon older spaces in favor of newer buildings, actually climbed a bit in the quarter to 11.1 percent.

Lease rates are reflecting the demand. Brokers are asking up to $2.40 a square foot in some of the premium buildings that are still under construction, Lowes Commercial Properties broker Steve Larsen said, and existing, newer premium space - if it can be found - is going for up to $2 a foot.

Older spaces are still leasing in the $1.50 to $1.80 range, Powderly said, but he and Larsen both expect the gap in lease rates between older and newer spaces to shrink over the next year or two as tenant leases expire, allowing landlords to press for higher rents at today's prices.

Demand is part of the pressure behind rising lease rates, Powderly noted, but it's only part of the equation. Land prices and construction prices also have risen significantly in the last few years, putting pressure on landlords to demand higher lease rates to cover their costs.

The tightening market is partly a function of history.

A spurt of building that came on line between 2000 and 2002 flooded the city in space just as the stock market crashed and the economy skidded, Powderly said. That put a weight on lease rates and a damper on new construction.

Now, however, the economy has chewed through much of the spare space, and the market appears to be experiencing a fair amount of pent-up demand in the form of businesses that are putting up with cramped space while they ponder the decision to shop for more.

Meanwhile, building new office space can take as much as two years from the initial planning stages through final construction, Skovberg said, which means that tenants who need to move today may have a bit of a wait before new space begins to flow onto the market in large quantities.

When they do move, tenants can expect to get hit with the effects of rising construction costs, as well as rising lease rates. The typical cost of customizing a space for the move-in day can be $60 to $65 per square foot ”for far from luxurious, but nice” quarters, Powderly said, and landlords are generally unwilling to cover much more than about two-thirds of the bill.

Some will cover even less, if the market continues to hand them negotiating power.

”We're advising our clients who are in the market even six months from now to renegotiate their leases now, if they can, or sign new leases and move rather than waiting for the next couple of years,” Powderly said. ”Because we fully expect lease rates, across the board, to hit that $2 mark over the next couple of months.”

Which is basically what happened to the engineers at David Evans and Associates.

With all costs included, the firm's lease on its existing downtown space across Wall Street from City Hall would have jumped to $2.75 per square foot if the firm had decided to stay, Carnahan said - 60 cents per foot less than their new, larger space will cost.

And then there's the pressure to expand - a need that Carnahan doesn't see subsiding, despite the slackening in the local housing market.

”Frankly, we haven't seen any real slowdown,” Carnahan said. ”It's more like we hear about a slowdown, but we're all busy.”

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