Daily Journal of Commerce

Thursday, May 27, 2010 at 04:02 PM PT
BY: Nick Bjork

Industry professionals have seen lease rates drop by almost 25 percent over the past two years, falling from $18-$21 a square foot to $13-$15. But most agree that rates have plateaued and will start rising slowly as fewer stores go out of business and more stores expand.

Emily Matza, associate vice president at GVA Kidder Mathews in Portland, said there are two factors driving the deals for these large retail spaces. One is low lease rates, and the other is the high price of land within the urban growth boundary, she said.

“Cheap rent is the bottom line for these national retailers,” she said. “If they can lock down a 10-year lease in the low teens, all the benefits of building new are tossed out the window.”

J.J. Unger, an agent with the Portland offices of NAI Norris, Beggs & Simpson, said that while rent has dropped significantly, landlords haven’t been significantly concession-heavy.

“Concession packages were great a year ago because landlords wanted to keep rental rates high for investors,” he said. “But as the market has brought down rent, landlords have stopped handing out tenant improvement dollars and lowered the amount of free rent.

“We were doing deals a year ago where landlords were giving one year of free rent on a five-year deal. Those days are gone.”

For those spaces that haven’t been leased yet, landlords are creatively dividing the spaces. This is the case in Clackamas, where the ex-Circuit City building is being split into two spaces. Approximately 20,000 square feet of the building will become an auto parts store, while the rest of the building will be renovated into another space.

Both brokers expect the rest of the large retail spaces to be leased over the next six to nine months. There are rumblings that Dollar Tree, Nordstrom Rack, Auto Zone, Cheesecake Factory and the reincarnation of Joe’s all are looking at possible locations around the metro area.

“It’s still a tenant’s market, but not for long,” Unger said. “These national retailers with a little bit of cash are looking to out-position their competitors and tap into the Portland market, so I expect all of these spaces to be gone soon.”

While these spaces, and good deals, may not last, new construction for big retailers in the Portland-metro area may be at least a year away.

“There are so many hurdles to jump through when building these stores in Portland, so executives sometimes shy away from coming to Portland,” Matza said. “But Portland is also really under-built, so once the rest of these spaces go, some new construction could follow.”

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