Is Portland's Building Boom
Worth the Downtown Clog?

Just as the Portland, Ore., area's commercial real-estate market is recovering from the tech bust, some wonder if a flurry of construction could temporarily be too much of a good thing for the City of Roses.

Workers have begun relocating utilities, and construction is expected to begin early next year on a $557.4 million expansion of the region's light-rail system. The $1.4 billion so-called Big Pipe project is aimed at better handling storm-water runoff from the area's rains. Redevelopment of the former Meier & Frank department store building to include a hotel on the upper levels is adding to downtown's congestion.

In Portland, with its reputation for livability, residents aren't used to inconveniences that many urban areas consider routine. Disruptions and torn-up roads could prompt shoppers and ultimately businesses to opt for suburban alternatives, says Eric Fruits, a senior economist with ECONorthwest, an economic consulting company. "Downtown's more vibrant than a lot of other places, but I just get this feeling that it's walking on a razor's edge," Mr. Fruits says.

The city is working to keep workers, visitors and residents coming downtown. A three-year marketing campaign, funded in part with $1.3 million from the city, kicked off this month. It touts downtown's offerings with radio and television ads asking, "We're Live Downtown. Why Aren't You?"

Apart from concern about the downtown disruptions, the Portland metro area has rebounded after losing about 34,200 jobs from 2000 through 2003. Employment increased 2.3% in September from the year-earlier month, outpacing the national level of 1.4%, according to the Bureau of Labor Statistics. The professional and business-services sector drove much of the growth, adds Property & Portfolio Research Inc., a real-estate research firm based in Boston.

All sectors of the Portland area's commercial real-estate market have benefited from the job growth. Retail and warehouse vacancy levels have fully recovered from the recent downturn, while apartment vacancies are declining, though still higher than the 5% range seen in 2001. The area's relatively affordable home prices siphon off some demand from potential renters, PPR says. Third-quarter median home prices in the Portland area, home to about 2.1 million people, were $285,000, well below the $349,000 level in the Western U.S., according to the National Association of Realtors.

Office vacancies recently have shown the most dramatic improvement, although average metrowide rental rates are still below the $20 per-square-foot range reached in 2000 and 2001, PPR says. The affluent Kruse Way/Lake Oswego submarket, with its concentration of banking and mortgage companies south of downtown, is the healthiest in the metro area. Portland's central business district is also seeing vacancy rates improve and rents rise, prompting some developers to dust off plans for new buildings.

One proposed project is a 300,000-square-foot office building that the Louis Dreyfus Property Group is planning to build near the KOIN Center in downtown Portland, according to Jeffrey Sussman, president of the property group. Louis Dreyfus previously considered building an office building on the same site before the downturn.

The structure will need to be about 30% preleased to move forward, says Mr. Sussman, who doesn't believe infrastructure projects will damp demand. Instead, he's betting some high-end tenants will be willing to pay his $35 per-square-foot asking rent. "We think there are a number of tenants with a desire to stay put in Portland who are going to move up a notch," says Mr. Sussman.

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