Class A Absorption On The Upswing
27 Jul, 2005, Portland, OR
Options in CBD are Diminishing
Leasing activity for the first six months of 2005 has outpaced the activity for the same periods in 2003 and 2004. At this pace, leasing activity should approach the 1.5 msf level achieved in 2003. And while net absorption in the CBD was not in the positive column, the overall vacancy rate for Class A space in the CBD improved for the fifth straight quarter, falling to 8.8% down from 12.6% a year ago.
Better locations and favorable rents continue to drive occupancy gains in Class A product, often at the expense of Class B and C product. Several large transactions contributed to this trend, closing within weeks of one another, (CH2M Hill, Knowledge Learning Corp, Sulzer Pumps) and brought several downtown buildings to a vacancy rate of less than 10%.
According to commercial real estate firm Cushman & Wakefield, Inc., of the 26 Class A buildings in the CBD, fourteen are near capacity (90% or greater). Lloyd Center Tower ODS Tower, One Pacific Square, 200 Market Place, and Parkside Center have recovered to a nearly100% occupancy rate after dropping as low as 85% in 2004.
"There is a diminishing supply of good, quality Class A space in the Portland CBD,"says Tom Usher, Senior Director with Cushman & Wakefield. "US Bancorp Tower and Pacific First Center have top floors available but premiere space like that is rapidly disappearing compared to 18 months ago."
C&W Research predicts that if the current level of activity continues through the end of the year, Class A absorption will peak around 400,000 square feet for 2005. The historic annual average for Class A net absorption has a 10-year average of 163,000 square feet.
Additionally, large blocks of contiguous space in the CBD are nearly gone, forcing many large tenants to renew leases instead of relocate. Brewery Block 2 has the largest contiguous space on the market in the CBD at 29,454 of available square feet.
"With this kind of activity in the market we would not be surprised to see a spike in rents for specific segments in the Class A markets, primarily in properties with full floor availabilities," says Mike Williams, Senior Research Associate at C&W. "In the Pacific Northwest, we have already seen this happen in the Bellevue CBD, where rental rates have spiked by as much as $8 dollars in some buildings over the past six months."
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