In another positive economic sign this week, wholesale inventories surged by 1.6 percent in October, pointing to some forward-looking optimism on the part of businesses. The growth in inventories will provide a boost to fourth quarter GDP.

Lastly, Grubb & Ellis expects vacancy rates across all property types to decline in 2012. Details will be forthcoming in our 2012 Forecast report, which will be released on January 3rd.

Robert Bach – SVP, Chief Economist – Grubb & Ellis

More surprisingly, the companion household survey revealed that the unemployment rate slipped dramatically from 9.0 to 8.6 percent last month, its lowest level since March 2009. The sharp decline was caused by two factors: the number of employed increased by 278,000 – a good thing – while the labor force shrank by 315,000 as people gave up looking – not so good. The household survey includes self-employed and so does a better job of detecting the early stages of a recovery, but the sample size is smaller so the margin of error is higher. 

A couple of other studies suggest that small businesses, which were hit hard by the recession, may be starting to hire again. The National Federation of Independent Business reported a slight increase in the average number of workers per firm, the first gain in nearly half a year. Moreover, a net 7 percent of small business owners plan to create new jobs over the next three months, the highest reading in 38 months.

On Wednesday ADP reported that the labor market added a better-than-expected 206,000 jobs last month. Significantly, small businesses (fewer than 49 employees) added 110,000 of those jobs. Although the ADP report, which is based on the company’s proprietary client data, often does not mirror the monthly BLS numbers, the two correlate closely over time. 

Robert Bach SVP – Chief Economist – Grubb & Ellis

• Unemployment claims for the week ending November 5th dropped to 390,000, the lowest level since April 2nd. The four-week moving average of 400,000 was the lowest level since April 16th. Jobless claims in the range of 300,000 to 400,000 signal a growing labor market and falling unemployment.
• Job openings at the end of September totaled 3,354,000, an increase of 225,000 from August. Since the trough in July 2009 just as the recession was ending, openings have increased by 1.2 million although they remain below the 4.4 million level when the recession began in December 2007.

The U.S. economy has been firming up just as the euro zone countries are entering a recession brought on by the sovereign debt crisis. The Telegraph recently ran an article titled “World Power Swings Back to America” suggesting that the U.S. will be in better shape than either Europe or China over the next few years thanks to large supplies of natural gas and a strong recovery in manufacturing.

Robert Bach – SVP, Chief Economist – Grubb & Ellis

Gross domestic product, the broadest measure of goods and services produced in the U.S., grew at an annualized rate of 2.5 percent in the third quarter, allaying fears of an imminent recession. Investment in business equipment and software surged ahead at a 17.4 percent clip followed closely by non-residential structures at 13.3 percent. Personal consumption expenditures, which accounts for 70 percent of GDP, grew by 2.4 percent, its best showing since the fourth quarter of last year. If consumers stay in the game, the economy should be okay. Growth is still not strong enough to bring down the 9.1 percent unemployment rate; GDP of 3 percent or better is needed for that. But the economy is defying low levels of consumer and business confidence triggered by last summer’s debt ceiling debate in the U.S. and political dithering in Europe.

Speaking of Europe, officials there reached a broad accord on Thursday to retool the rescue package for Greece and other indebted euro zone countries. Greek bondholders will take a 50 percent haircut in the value of their holdings, which will bring down Greece’s debt burden from about 150 percent of the nation’s GDP to 120 percent by 2020 – still above the danger zone threshold of 90 percent. The €440 billion bailout fund known as the European Financial Stability Facility will be leveraged with funds from private investors, and it will be used to partially guarantee new bond issues from struggling governments in order to keep their borrowing costs manageable. In addition, European banks will be required to boost their capital ratios to help insure against losses from their sovereign debt holdings. Details remain murky, and some analysts wonder whether the plan can calm the financial markets for more than a few days, but it is the most serious step yet by European officials to get ahead of their sovereign debt crisis.

Robert Bach – SVP, Chief Economist – Grubb & Ellis

Portland’s industrial market put in a solid performance registering 575,000 square feet of net absorption, marking the strongest performance in five quarters and pushing overall vacancy down to 8.4 percent. The return of traditional demand from warehouse/distribution users accounted for over 800,000 square feet, while the R&D/ flex market continued to struggle with contracting tenants and user consolidations. The warehouse/distribution sector saw vacancy drop 110 basis points, while the R&D/ flex sector lost just as much ground as the warehouse sector gained, registering a 110-basis-point increase in vacancy.

No buildings were delivered to the market but the construction pipeline saw a surprising boost in activity. While more than 95 percent of the 2.9 million square feet under construction remains build-to-suit and owner-built projects, Pacific Northwest Properties broke ground on a four-building speculative incubator park offering spaces from 1,500 to 32,000 square feet. This project demonstrates an interesting phenomenon; although rents have a long way to go before development can be justified, there are small pockets of demand specific to geographic areas and product types.

Asking rental rates for warehouse/distribution space have stabilized with minor fluctuations from quarter to quarter. R&D/flex rents however, are still searching for the bottom, ending the quarter down $0.03 to a level not seen in almost 10 years.

Investment sales activity continues to be very light and those few sales that have taken place generally reflected cap rates in the 8 to 9 percent range with investors continuing to be very risk averse.

Forecast

• Overall Portland industrial market conditions will improve with any certainty in the regional economic picture. As wholesalers boost inventories, and the containerized imports and exports moving through the Port of Portland continues to recover, with both measures up over 7 percent year-to-date, some measure of confidence should return to the market and lead users to act on their long-delayed plans for the future. The area already has 2.8 million square feet of build-to-suit and owner-built space in the construction pipeline and expected to deliver over the next two years. These numbers bode well for Portland’s industrial market to register strong net absorption in 2012.
• Still struggling however, is the R&D/flex sector, and in particular Class A flex space which remains an extremely soft market. Overall vacancy in the R&D/flex sector currently stands at 10.9 percent with Class A flex vacancy at 17.3 percent. Asking rents for R&D/flex spaces have dropped to 10-year lows with average asking rates now standing at $0.66 per square foot triple net. With over 70 percent of the inventory of Class A flex space in the Sunset Corridor the area will continue to struggle for the next several years.
• There is a very limited supply of institutional-quality distribution space of 200,000-plus square feet; this should lead to rent increases for this product type, build-to-suit, and some speculative construction. However, speculative development for a broader scope of product types remains in the distant future.
• Industrial investment sales activity continues to be very light, particularly with regard to larger transactions. 2011 has seen slightly lower sales volume than 2010; however, the pace of the most recent two quarters suggests a slight increase in dollar volume and near 50 percent increase in number of transactions. Almost 75 percent of industrial building sales in 2011 have been to users versus investors. The handful of investment sales has generally reflected cap rates in the 8 to 9 percent range. There actually is significant investor demand for quality leased industrial real estate, but little is available for sale and investors continue to be very risk averse or require high reward for taking risk.

Access our full report here.

• Fortune Data Centers plans Hillsboro facility as data centers continue migration into Oregon – The Oregonian
• Hillsboro data center surge – Portland Business Journal

Here you can read about the following new data centers that are planned in the Sunset Corridor:

1. Fortune Data Centers – 240,000 SF – wholesale data center planned at the former E-Tech Facility
2. Digital Realty Trust – 55,000 SF – building data center for NetApp
3. Adobe Systems – building data center for their own use
4. Umpqua Bank – 41,000 SF – data center built for their own use

To read a bit more about some of the fundamentals behind why the area is attracting so much attention from data center users and developers, check out Grubb & Ellis’ National Data Center Practice Group Blog’s two recent articles -

• Data Center Activity Reins on the Northwest
• Lower Operating Costs Drive Interest in the Northwest

Despite the constant barrage of negative economic news and increased talk of a possible double-dip, the Portland economy is showing signs of modest improvement and the office sector is reflecting these changes. Portland’s unemployment rate experienced the largest percentage decrease of the top 49 metropolitan areas in the country, down 150 basis points year-over-year, with August unemployment registering 9.1 percent. The metro area gained 10,200 jobs during the past 12 months, an increase of 1.1 percent. There were particularly solid gains in software, up 3.1 percent, and professional and technical services, up 5 percent, with the largest losses coming from the federal government, down 6.5 percent.

The office market continues to show modest improvement, registering 229,000 square feet of net absorption in the third quarter, pushing overall vacancy down to 14.1 percent. This marks the lowest overall vacancy level since the third quarter of 2009 and the area is on track to have respectable net absorption for 2011. Market improvement was felt in both the CBD and suburbs, with downtown accounting for 40 percent of the area’s net new demand, dropping vacancy to 9.3 percent. The suburban markets are finally starting to see the return of tenant demand, but demand is cautious and the suburbs have significantly elevated vacancy and considerable vacant space to work through.

Class A rental rates have stabilized in almost all submarkets. CBD asking rates bumped up $0.52 per square foot, to end the quarter at $25.99 full service. This represents an annualized increase of 8 percent. Landlords in the CBD are beginning to see multiple tenants vying for the same prime spaces, something the market has not seen in quite some time. CBD Class B asking rates remain stable, but there are instances where some creative, highly desirable Class B/historic spaces are seeing rates higher than some less desirable Class A buildings and spaces.

A 62,000-square-foot building delivered to the market this quarter which is 60 percent pre-leased to the federal government. The balance of the office projects in the construction pipeline, which total 393,000 square feet, remain primarily build-to-suit projects and will add just 47,000 vacant square feet to the market.

Forecast

• As anticipated, redevelopment activity in the CBD has picked up. With CBD Class A vacancy hovering in the mid-six percent range, developers and investors are looking to under-utilized Class B and historic buildings for re-positioning to meet growing demand from creative users downtown. One such building, Broadway Commons, changed hands during the third quarter and renovations are already underway. The building, formerly known as The Commerce Building and located at 225 S.W. Broadway Ave. was purchased by a group of local investors for $4 million. The new owners have already begun a full building renovation and leases have been secured for the third and fourth floors, taking the building’s occupancy from 25 to 60 percent. While the top two floors remain available for lease, activity has been brisk with multiple users vying for the space. As demonstrated by the experiences at Broadway Commons, tenants in the CBD will see increased competition for the best spaces, whether Class A, B or historic, and may be surprised to find that they have been bumped from their first choice by another user.
• While the CBD continues to shift in favor of the landlord, there are some challenging Class A spaces that remain vacant. Landlords will need to get more creative to lease these long-vacant, less-desirable CBD Class A spaces and in some cases, rents will be lower than some of the more desirable creative and Class B spaces.
• Although tenant demand is improving modestly in the suburban areas, most suburban submarkets will be in for a long, slow recovery with over 5.5 million square feet of vacant space to work through. The residential real estate market measures inventory and market health in terms of “Inventory in Months” which is calculated by dividing the active listings at the end of the month in question by the number of closed sales for that month. If we took this same approach with the commercial office market and divide the total vacant square feet at the end of this quarter by the total net absorption for this quarter, Portland’s suburban office market has over 26 quarters of inventory to work through to achieve a vacancy rate of 6 percent, often considered market equlibrium. Quite a sobering thought.
• Much like other active markets, Portland’s investment market for institutional-grade property has cooled after some record-breaking transactions in the early part of the year. The Ashforth Pacific portfolio, which was comprised of six office buildings totaling 600,000 square feet on more than 16 acres, sold with a price of $92 million to American Assets. MachineWorks building, totaling 114,000 square feet sold to BlackRock in early July for $40 million, or $355 per square foot. Several other CBD office buildings that were in various stages of sale have been pulled off the market for different reasons leaving very little institutional-grade product available at this time.

Access our full report here 

First, the September jobs report released this morning by the Bureau of Labor Statistics came in better than expected with payrolls expanding by 103,000 last month while July and August totals were revised higher by a combined 99,000. Government shed 34,000 jobs last month, and private sector employers added 137,000 led by professional and business services (+48,000), education and health services (+45,000) and information (+34,000), although the latter sector was inflated by the return of 45,000 striking Verizon workers to the labor force. Also worth noting: retailers added 13,600 jobs, suggesting they have an optimistic outlook for consumer spending. Other details: the unemployment rate was unchanged at 9.1 percent, average weekly hours rose 0.1 percent and average hourly earnings were up 4 cents. While the September report is good news compared with last month’s preliminary report that zero jobs were created in August, the labor market is still not growing fast enough to begin absorbing the nation’s long-term unemployed.

Secondly, the numbers for commercial real estate have been looking better than warranted by recent economic data. In our second quarter “Office Market Trends” report, we asked: “Was the surprising second quarter absorption a delayed response to the stronger economy earlier in the year, or could it be that businesses, especially large and profitable ones, are more willing to take on multi-year space commitments than the recent economic data would suggest?” Our preliminary third-quarter office data supports this thesis. Absorption last quarter totaled 13.6 million square feet, better than Q2 and in line with a normal office market recovery, and the vacancy rate fell by a healthy 40 basis points to 16.9 percent. (Our final numbers will be out next week.) We are seeing a similar trend in the industrial market (click here), and B of A Merrill Lynch analysts noted that same-store sales in their universe of retail REITs are stronger than the economic news would suggest (click here). Last month’s growth in jobs, hours worked and earnings should provide some support for consumer spending going into the holiday season.

Lastly, take a look at “Happy Talk,” economist Jeff Thredgold’s semi-annual report on the positive trends in the economy and society. You will come away with a renewed sense of why some recent polls have it wrong: your kids will be better off than you. (Thanks to Bill Jenkins at Thermo Fisher Scientific for passing this along.) Jeff also wrote “On the One Hand…”, the indispensable joke book for economists, containing gems such as: “An economist is someone who didn’t have enough personality to become an accountant.” Sad, but true.

Robert Bach – SVP, Chief Economist – Grubb & Ellis

The new owners have renamed the six-story, 48,159-square-foot building Broadway Commons.  Leases have been secured for the third and fourth floors, increasing occupancy to 60 percent from 25 percent.  The top two floors remain available for lease.  

“We have the chance to bring this great historic asset back to life with a sustainable renovation and provide creative office space for our own companies and other users in the downtown area,” said Brandon Anderson.  “We strongly believe in the long-term value of Portland’s downtown office market and this was an opportunity that was just too good to pass up.”

The building is undergoing a full building renovation and will pursue a LEED for Existing Buildings certification.  The upgrades in process for the building include: a fully renovated main floor lobby, a full façade modernization and new elevator cabs, restrooms with showers on all office floors, high efficiency lighting, storefront system and electrical service.  The renovation will also include a state-of-the-art gym, large common conference room and a 75-stall secured bike parking facility.

“The building is getting a new life thanks to these local investors taking occupancy of the property and investing significant capital into building improvements and upgrades,” said Eric Haskins, vice president with Grubb & Ellis and one of the three brokers that represented the new owners in their purchase of the building.  David Hill, senior vice president and Jake Lancaster, associate vice president also represented the owners.  Eric, in conjunction with Jake Lancaster will continue to represent the new ownership in leasing the property. 

Located at the intersection of Southwest Broadway and Southwest Oak streets, Broadway Commons is in the heart of the Central Business District and is one block from the MAX line and Portland’s award-winning mass transit system.  With 8,300-square-foot floor plates, the building is ideally suited for the typical Portland tenant and will offer space for $22 per square foot, full service with full improvement packages included.

UPDATE – see recent articles about this, and other buildings, getting a new lease on life in Portland’s CBD – DJC Article

For additional information on the building, visit the property web site at: www.broadway-commons.com

Morrison Child & Family Services will consolidate several administrative offices into its new building on N.E. Sandy Boulevard as well as operate several service programs from this location.  The company currently serves approximately 5,000 children and families annually with a staff of 420 employees and an annual operating budget of $22 million.

“This new facility will allow us to streamline our administrative functions and help us further our mission to provide effective and responsive services for children and youth coping with adversity and trauma,” said Tia Gray Stecher, chief executive officer at Morrison Child & Family Services.

Jake Lancaster, associate vice president, Office Group, and David Hill, senior vice president, Investment Services, represented Morrison Child & Family Services in the transaction.  Bill Burton of Kidder Mathews represented the seller.