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The values of Portland’s office and industrial real estate markets are continuing to crumble, as vacancy rates climb and investment sales vanish amid the economic downturn.

The industrial vacancy rate has increased from about 8.7 percent a year ago to 12.1 percent now, including more than one percent in the first quarter of this year, according to a report.

鈥淔or industrial properties, the investment side of things has completely dried up,鈥� said Tyler Sheils, a broker for , who blamed the slowdown on frozen credit markets, a lack of cash and companies’ patience to wait for economic recovery.

Jack McConnell, a senior vice president for Norris, Beggs & Simpson, sees more landlords willing to cut deals, but fewer companies willing to take them.

鈥淚t’s essential now for landlords to have a tight pro forma,鈥� McConnell said. 鈥淚t’s getting more difficult for landlords to stay on budget.鈥�

One bright spot in industrial real estate for the first quarter of 2009 is Columbia Corridor, Sheils said.

鈥淚f you go up and down the Columbia Corridor you’ll see industrial-grade landlords 鈥� your Pro Logis, your Trammell Crow. All those big boys, from a landlord’s perspective, understand the market’s dynamics,鈥� he said. And they are offering concessions such as free rent, he added. 鈥淣ow they’ve moved from their market rates, meaning they’ve come off their market rates.鈥�

There is a caveat for the corridor, depending on whether the space is for lease or for sale, said Corky Collier, director of the .

鈥淩ight now, it’s a leasers’ market,鈥� he said. 鈥淵ou can dictate your terms 鈥� at least in the short term.鈥�

Because of that, he envisioned a scenario in which a building’s owner, perhaps looking to downsize or feeling concerned about the direction of the economy, may sell its building and then lease it from the new owner.

鈥淚t’s a different idea, and pretty specific, but a lot of brokers out here are getting really creative,鈥� Collier said.

Some of that creativity will inevitably be channeled to the office market as well, brokers say.
The central city office market is continuing to slump: Vacancy has risen to 10.6 percent from 9.25 percent last quarter, according to end-of-quarter reports. Class A office space, however, is still hard to secure. To relieve the pressure, brokers are awaiting the completion of new Class A projects, such as First & Main and Park Avenue West.

Northwest Portland’s office market fared worse. Its vacancy rose to 12.9 percent. Brokers blame the continued downturn on the 69,000-square-foot Machine Works building, which doesn’t yet have an office tenant.

Sean Turley, a broker with Norris, Beggs and Simpson, said Machine Works could remain un-leased for the remainder of the year.

鈥淚f companies are reluctant to move,鈥� he said, 鈥渢hen it’s unlikely they’d want to move into an empty building right now.鈥�

McConnell said the same logic presently applies to the industrial market. A successfully leased building can find investors even in down markets. In today’s market, though, an empty building remains a hard sell.

But, Turley said, that’s why creativity is needed.

鈥淭he way the market is headed it can’t be business as usual,鈥� he said.