Oregon; from wood chips to computer chips, industrial market is booming

For the first time since the Oregon Employment Department began keeping records after the turn of the century, the wood products industry is no longer the state's top industrial employer. High tech has overtaken it as clean room bunny suits supplant flannel shirts and cork boots as standard blue collar work attire.

With billions of dollars in new investment announced over the last year in the booming semiconductor industry, high tech will solidify its position. Unemployment is below 4% in urban areas, and personal income is growing. But there is also a cautionary side to the success story.

"The good news is these kinds of projects have a tremendous economic ripple effect in the community both in terms of increased personal income levels and job creation elsewhere," says Doug Smith, industry development officer with the Oregon Economic Development office.

"The bad news is that we have a pretty slim inventory of large parcels left in urban areas like Portland and Salem that can support projects of this kind."

That pressure is already being felt throughout the Willamette Valley, a key 120-mile north-south corridor from Portland south to Salem, Corvallis and Eugene. Roughly 80% of the state's population resides there. Fully half of Oregon's population is in Portland metro alone.

Demand for industrial parcels has been intense. "Last year was the biggest year I've ever had and I've been specializing in industrial for 26 years here," says Charles Cota, a senior director with Cushman & Wakefield in Portland.

The crunch is leading to upward pressure all prices, grumbling about the effects of Portland's tightly controlled land use planning and lots of investment dollars chasing fewer and fewer projects.

The so-called Urban Growth Boundary (UGB) is blamed for much of the scarcity in the Portland metro market. The UGB is an artificial border set up by planners in an attempt to contain urban sprawl by forcing more densely packed commercial and residential land use.

"The advantage of working in the UGB is that investors and lenders can get their arms around the market's future pretty readily because the only further development will be in-fill," says Graham Colton, senior vice president and managing officer of CB Commercial in Portland.

The UGB has had the unintended effect of pushing farmers working property inside the boundary. "Because of the lack of land inside the UGB, planners are taking some properties off farm deferral and earmarking them as industrial or residential," says C&W's Cota.

Prices are up everywhere

Land zoned for residential use is running as high as $50,000 an acre, making it difficult to impossible for builders to put up houses that sell for less than $250,000. That is sobering news for a market where the median housing price is currently around $145,000.

Prices and the lack of big parcels have slowed apartment development. Most properties changing hands recently have been products of the mid- 1980s building boom. One exception is the recent $15 million sale of the 156-unit Essex House in downtown Portland. Only two of the units are vacant. The three-year-old building was sold by Louis Dreyfus Property Group to Metropolitan Life Insurance Co.

Large retail developments have become so cherished that some older malls are tearing things down and starting over. About 75% of the shops at Jantzen Beach Center, a vintage 1972 mall with about 734,000 sq. ft. of stores, will be tom down and rebuilt to accommodate more large anchors such as Home Depot, Circuit City and Linens & Things.

With retail vacancies at a 13-year low of 4.2% in Portland, prices are climbing. A new shopping center in the sought-after Tigard Triangle is commanding $12 a sq. ft, for land. Even at that price, Costco, Cub Foods and PetSmart have been lured in, though it proved too steep for cost-conscious Wal-Mart.

Elsewhere, 15- to 20-acre parcels are going for $9 a sq. ft., and grocery anchors are paying up to $14 a sq. ft. for their build-to-suits.

Though more than 1.5 million sq. ft. of industrial space was built in the metro area last year, that, too, is moving like ice cream on the Fourth of july. "As soon as word got around about those projects, they were absorbed overnight," says CB Commercial's Colton.

Colton speculates that about 80,000 to 90,000 sq. ft. of new development will occur in the coming year. "There's more than enough demand, but the land just isn't available," he says. "Anything else going up will have to be new phases of existing projects for people like Hillman Properties, Speiker Partners and PacTrust."

That's good news for landlords, who can now command around $2.50 a sq. ft., up nearly $1 from rates three to four years ago.

Office rates are also on the upswing. Suburban vacancies are at 6.8%, down more than 3% over the previous year. Hot areas such as prestigious Kruse Way are under 1%. Class-A rents have climbed 10% since last year, often to more than $18.

With downtown office rates at only $18 to $20 a sq. ft., surplus space has declined 3.6% since last year. The downtown vacancy rate is currently at about 9.6%. The Lloyd District, almost a second downtown on the east side of Portland, has vacancies at 8.7%.

The Lloyd District is the site of what will likely prove to be the year's largest sales transaction. Seattle developer Henry Ashforth Jr. is purchasing from utility giant PacifiCorp the 16-story Port of Portland Building, the four-building lowrise Oregon Square complex, a 50% share of the 20-story Lloyd Center Tower and six acres currently used for parking that are zoned for office towers.

Yet despite the climbing rents and absorption rates, only one new high rise is going up - the 103,000 sq. ft. Pacific Gas Transmission downtown headquarters on the banks of the Willamette River.

The problem, say developers, is that downtown rents need to climb to the $23 to $24 range for a new office tower to pencil out. At the current rate of 5% to 7% annual increases, that is still two or three years away. In the meantime, big tenants that could anchor new buildings have been forced to renew existing leases.

The chip industry has been pushing the envelope when it comes to the demand for industrial property.

Intel Corp., Integrated Device Technologies Inc., Fujitsu Microelectronics and Siltec Silicon have all announced new plants or expansions of existing plants from Portland to Salem.

As a result of the property crunch, companies have been pushing into smaller communities.

Small and mid-size industrial development has been especially active recently in the community of Woodburn, just north of Salem. Long a farming community, Woodburn is close enough to both Salem and the southwestern suburbs of Portland to offer a diverse labor pool.

Japanese chip maker Sumitomo Sitix is considering Newberg, another rural community in the North Willamette Valley, for a $400 million plant.

Columbia County, a largely rural area about one hour west of Portland, has been trying to draw new development since the closure of the Trojan Nuclear power plant two years ago.

Though new jobs are sorely needed to replace the 1,200 positions that left when Trojan was shuttered, not everyone is ready to welcome new development with open arms.

"People are conscious that we need a shot in the arm from new investment here, but at the same time we want to retain our local character," says George Cress, economic development director for Columbia County. "Becoming another Portland suburb is not high on some people's list."

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