Office presence grows in suburbs

Thursday, January 26, 2006
DYLAN RIVERA
The Oregonian

When Portland-area companies added office space last year, nine times out of 10 the space they added was in suburbs rather than downtown.

Central Portland captured 10 percent of the net growth in office space leased in the region, a pace at which it would take more than 12 years to reach what researchers generally consider to be "full" occupancy, according to figures released this week by Colliers International.

Employers leased 1.3 million square feet of net new office space in Washington, Clackamas and Clark county buildings in 2005, compared with slightly more than 150,000 square feet in Portland's core.

"It's basically not growing" downtown, said Gordon King, a veteran broker with Colliers. "The growth is in the suburbs, and it's spilling into downtown."

The suburbanization of job growth has been especially contentious in recent years, as Portland and Multnomah County have added taxes that some say have contributed to business flight to the suburbs. The trend also runs counter to the region's efforts to limit sprawl.

Portland-area developers, brokers and researchers say several factors -- including the trend toward campus-style office environments and high-tech companies' demand for flexible low-rise space -- are hurting downtown's competitiveness, on top of the traditional differences such as taxes and land development costs.

When King entered the field in the early 1980s, he said, downtown and central Portland accounted for about 60 percent of the office space in the metro area and normally captured about half the growth in leased space, known as "net absorption" in industry parlance.

Today, central Portland accounts for about 44 percent of the area's office space yet absorbed less than 25 percent of the net growth in leases over the past three years.

"I don't think it's healthy for the business center of the biggest city in the state to be growing at one-eighth the rate the suburbs are growing," King said. "It's just not healthy and it merits debate on what kind of community you want downtown."

The Portland Development Commission, the city's economic development arm, is actively promoting downtown as a retail and office destination, as well as a housing market, said Bruce Warner, executive director.

Warner, who started the job Aug. 1, said he's not familiar with the absorption figures, but said he wants to learn more about the issue.

"We need to have diversity in terms of growth and development that we have downtown," Warner said. "If we have things that stand in the way of that, we need to find out what they are and plan solutions."

To be sure, downtown's office vacancy rate has fallen to about 12 percent since posting highs of about 16 percent in 2002. And measured by vacancy, downtown office owners are faring better than those in the Sunset Corridor, where developers far overbuilt in the late '90s high-tech boom and now face 25 percent vacancy.

The availability of space can also make absorption figures look low in markets that are strong, said Mike Williams, senior research associate for the Portland office of the Cushman & Wakefield brokerage. For example, Lake Oswego's Kruse Way recovered from the recession faster than Portland's central business district and enjoys lower vacancy rates and higher rents.

"Net absorption isn't going to be very good in Kruse Way next year and the reason is that you don't have a lot of space to lease," Williams said.

Portland doesn't appear to be lagging because of any lack of space. In many ways, it's battling the same issues as other downtown areas across the country.

"The same general trends are occurring in Seattle as well," said Pat Callahan, Equity Office's regional manager for Portland and Seattle. The Bellevue area east of Seattle has performed far better than downtown in recent years.

Downtowns across the country are suffering from a loss of major tenants. Consolidation of the banking industry has shrunk the number of banks and cut their presence in downtowns, Callahan said. Computers have allowed law and other service firms to squeeze far more revenue per employee than they have in the past, reducing the need for new employees and more office space. And growing clusters of high-tech and other companies in suburban areas have created new competition.

"The trend you're seeing out in Portland is more exaggerated than you're seeing in other downtown markets," Callahan said. "The challenge we have as a community is to figure out why that's occurred."

A variety of factors could account for the low share of the region's growth occurring downtown, he continued. The city's business income tax is probably a factor, but Callahan also cited the loss of corporate headquarters for companies such as Louisiana-Pacific, Willamette Industries and Fred Meyer. In addition to their own employment, those corporate bases tend to generate demand for other downtown services, from law to accounting to catering.

The business community should commission a study on the suburbanization trend, Callahan suggested. Brokers and analysts from different parts of the region see pieces of the puzzle, but nobody has put all the pieces together in a single place.

In the meantime, the condo boom downtown and in the Pearl District could help provide the kind of high-end housing that corporate decision-makers look for close to work, Callahan said. A north-south light-rail extension through downtown will help, as will renovations to the transit mall.

"A lot of cities' downtowns are in really bad shape, and Portland's is not one of them," Callahan said. "There are a lot of great things happening, so it's about realizing potential."