Cash oregon quick

Pity poor Portland. After suffering through a recession that lasted through much of the 1980s and weathering the effects of overbuilding, Portland real estate was poised for a bull market.

Then, along comes the monstrous National Credit Crunch, like Godzilla tromping through the Ginza, to stomp on the hopes of developers and investigators.

Unlike some of the country, Oregon and the Northwest have escaped the grip of recession. Portland, in particular, is in good shape. The economy and job growth is trong. Rents are rising. Vacancy is falling. The problem is, hardly anyone is building or buying commercial real estate.

The next downtown office tower won't break ground for at least a year, if then. Suburban office construction is at a near standstill. Apartment developers who created a near record building boom in the late 1980s are scarce. It's pretty much the same story across the board.

But brokers and developers are confident that it will be a short-lived phenomenon. "The Northwest and Portland have been identified as the bright spots in the country," says Graham Colton, vice president in charge of CB Commercial Real Estate Group's Portland office. "We have extremely low vacancy and little or no new construction because of the national credit situation. That spells oportunity for investors because of rising rents and demand."

For example, in Eugene, the state's second largest population center, demand is strong -- office and industrial vacancy rates are below 5% -- but little is being built, says John Brown, a principal with Duncan, morgan & Brown, a Eugene appraisal firm.

Despite the obvious demand, lenders are "overly cautious" and getting construction financing has been "obscenely difficult," says Portland developer Greg Specht. Bankers "will be forced to pull their heads out of the sands and loan money to proven borrowers," Specht says. "There's very little product coming on line. Demand has stabilized and it's not decreasing. Vacancy is dropping and effective rents are firming."

"It's a strange time," agrees Wallace Harding, president of Harding Fletcher Co., a correspondent for several major life insurance companies. "We've literally got tons of money," Harding says, but the cash has a lot of strings attached.

Major shifts in the industry will result in "stronger but fewer" players in Portland's commercial real estate game, says Thomas Usher, Cushman & Wakefield's Portland branch manager. "We're seeing changes on all fronts."

Proof of that abounds. Since last summer virtually every major Portland developer, including Hillman Properties Northwest, The Koll Co. and Trammell Crow Co., has cut staff, killed projects in the planning stages and sold some assets.

One developer that is on the move is California-based Birtcher. Thanks to a joint venture with a U.S. subsidiary of Japan's Mitsui & Co., Birtcher has some strong financial backing. In March, the company's Portland-based Northwest division bought 230 acres of land and several commercial buildings in the Seattle area from Union Pacific Realty. Birtcher also announced plans to acquire more land in downtown Seattle and near Tacoma from the Union Pacific Corp. subsidiary.

In Portland, Birtcher is assisting State Farm Insurance with development of the Oregon Graduate Center high-tech park.

In growin numbers, investors have picked up on Portland. Sales of apartment, industrial, retail and office properties increased in number of sales and dollar volume annually since 1987, according to a Grubb & Ellis Co. survey. Land sales mirrored the trend but showed a slight decline in 1990.

Strong tenant demand, rising rents, limited supply and the availability of loans at lower interest rates "equals the best real estate opportunity in a decade," says James Grew, a CB Commercial sales consultant. "Portland is definitely on the national buyers' map. Pension funds worked our market in record numbers. Individuals, especially from California and Hawaii, using tax-deferred exchanges, bought the majority of million-dollar-plus properties."

Capitalization rates have edged up from between 8.5% and 9% last year to between 9% and 9.5% today, says Robert Baumann, president of Granite Equities Inc., a Portland investment brokerage. Cap rates on leveraged investments are running 10%, he says. Industrial properties have been hottest while investors have shown little interest in downtown office buildings. He predicts that in the next 12 months apartments will emerge as the best value.

Apartment building is off

In the late 1980s, the apartment market was hot as developers poured into Portland and built at a near-record pace to take advantage of low vacancy and soaring rents. Sales also took off, surging from 3,000 units in 1987 to 9,000 units last year. But tight credit has cooled sales and killed construction.

"Demand is there for more, but lenders are still numb," says N. Kirk Taylor, a CB Commercial associate vice president. Taylor predicts that 2,500 new apartment units will get started in 1991, compared with 6,700 last year.

Others are less optimistic. "New construction is dead," says Michael Millette of McGregor, Millette & Associates, an apartment brokerage. Fewer than 2,000 units may get built this year, he says.

Over the past 18 months, vacancy climbed from 3% to 7% and landlords are now offering incentives to lure renters. The increase reflects the nearly 6,600 units built last year. Apartment projects completed since 1986 report a 14.4% vacancy rate, a significant jump from the 9.8% reported last fall.

"Investors are going to be more cautious," Millette says. "It's more of a buyer's market." Cap rates are 9% and slightly higher for new higher-quality apartments and closer to 10% for the standard "bread-and-butter" project, he says.

Retail holds steady

The overall vacancy rate climbed from 6.5% to 7% in 1990 with the absorption of 1 million sq. ft. Rents range from $13 to $20 per sq. ft. in larger shopping centers to $8 to $13 per sq. ft. in small strip centers.

Vacancy will remain steady around 6% and rents will bump up as a result of the construction slowdown. Look for an increase of around $2 per sq. ft. for space now leasing in the $13 range, brokers say.

While Christmas sales were down across the nation, Portland proved to be a strong market, says Robert Dunn, a CB Commercial senior sales consultant. In 1991, Dunn says, four new shopping centers totaling 600,000 sq. ft. will be built, three of them on the city's west side. That's 800,000 sq. ft. less than was built in 1990. Rents will remain flat and could decrease at less desirable locations. Land prices will rise because of limited supply.

Retail is the Eugene market's weak spot.

"For the time being, we're probably overretailed," says Don Amacher of Amacher & Co., a Eugene brokerage. Strip centers are suffering the worst with vacancies of 10% to 20%.

Office is landlord's market

Downtown landlords are in the driver's seat for the first time in a decade, thanks to minimal new construction and falling vacancy rates. Tenant concessions decreased and rents in Class-A office towers were up 10% to a high of $24 per sq. ft. The picture was pretty much the same in the suburbs, where new construction was only 330,000 sq. ft. -- about half the annual average over the past 10 years.

This year will see no new downtown office construction and only two buildings totaling 240,000 sq. ft. in the suburbs. Class-A vacancy rates will fall to 9% downtown and plummet to 4% in the suburbs. Rents will keep climbing citywide, while land prices decline because of tight financing.

Last year, net absorption downtown was just over 343,000 sq. ft. -- a 27% decrease from 1989's total, says Joseph Vaughn of Cushman & Wakefield. This year net absorption should hit 400,000 sq. ft. -- half of that in Class-A buildings. Some larger tenants opted to renew leases rather than move, and economic incentives, such as free rent and remodeling expenses, have dried up, Vaughn says.

That is one reason Portland's newest office tower, 1000 Broadway, a Hillman Properties Northwest project, was only 10% leased just weeks before its opening this summer.

Two other new buildings are faring better. The 380,000 sq. ft. One Oak Plaza will open this summer nearly 100% full. Two federal agencies signed long-term leases for most of the space. The Rouse Co.'s 284,000 sq. ft. Pioneer Tower, which opened in early 1990, is about half leased.

While downtown Portland construction is slow, downtown Vancouver is experiencing something of a boom.

The $15 million, 245,000 sq. ft. First Interstate Tower will open in September and the 88,000 sq. ft. Main Place building will be completed in July and is already 60% preleased. They are the first Class-A buildings to rise in downtown Vancouver since the early 1980s.