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Why is the Portland office market attractive to outside investors?

• 9.4 percent office vacancy in the Central Business District
  While Portland’s suburban office submarkets have been battered by the economy, the downtown core has vacancy comparable to cores in Washington, D.C., New York City and San Francisco.
• 7.1 percent Class A office vacancy in the Central Business District.
  Even with an asking price $6 per square foot higher than Class B space, the best product in town is still the most desired.
• Presently, only 195,458 square feet of office space are under construction in the Central Business District.
  A tight urban growth boundary, strict zoning codes and a lack of traditional financing are inhibiting development of new projects.
• 17.8 percent office vacancy in the suburban submarkets.
  When the economy first went sour a few years ago, many Portland businesses moved from suburban office buildings to downtown towers because of declining lease rates.

In 2010 the Portland multifamily real estate market bucked the national trend and attracted out-of-town institutional investors.

2011 could yield similar results for Portland’s office market.

, a real estate investment trust, this week entered into an agreement with to purchase the First & Main building in downtown. The 16-story, 364,735-square-foot office tower, completed last year, sold for $129 million, or $353.68 per square foot – a record for Portland office space. The building, certified Leadership in Energy and Environmental Design platinum, sold in less than two months for a price well more than the $100 million figure floating around when it hit the market.

“This is yet more evidence that the Portland real estate market is attractive to outside investors,” said Dr. Gerard Mildner, director of Portland State University’s Center for Real Estate. “The new owners don’t have to worry about the market being overbuilt, and the building is leased up with what I assume are low-maintenance tenants, so I can see why the building would get a lot of interest.”

The office portion of the building is completely leased up by multiple federal agencies and one nonprofit organization. Lease negotiations are under way for the 20,000 square feet of ground-floor retail space.

Last year, – a 188-unit apartment complex on North Mississippi Avenue – sold for $38.75 million to of Texas, an institutional investor that saw benefits in the Portland market.

According to Jeff Borlaug, executive vice president and director of brokerage with the Portland office of NAI Norris, Beggs & Simpson, the sale of First & Main – much like the sale of Tupelo Alley – is the result of pent-up demand for trophy products outperforming the competition. Investors have held onto money for the last few years waiting for investments with solid returns, and both office and multifamily products can provide that, he said.

“We have a sub-10 percent office vacancy rate in Portland, which is an anomaly,” Borlaug said. “That is going to attract people to Portland, and once they are looking, a building like First & Main is a pretty easy sell.”

Portland, in fact, has one of the lowest office vacancy rates in the country. Depending on the report, the Central Business District vacancy rate ranges from 9.4 percent to 11.8 percent, and the city ranks in the top five markets nationally. For Class A product, like First & Main, the vacancy rate drops to 7.1 percent.

Mildner expects owners of other quality office buildings to jump into the market and at least test the level of interest. This happened in the multifamily market after the sale of Tupelo Alley, when the Ladd Tower, and all were sold to institutional investors.

“People for years have been talking about the cash on the sidelines, so once a deal gets done and signs start to point to the economy improving, investors will be eager to invest,” he said.

Once a few of the large, high-quality buildings begin to move, Borlaug expects construction to start on new office towers. , a 19-story office building in Northeast Portland, is being pitched by the , and a 12-story project in Northwest Portland is being pitched by developers Bob Naito and Jim Winkler.

But Borlaug believes 26-story Park Avenue West, which stalled in April 2009 because of a lack of financing, will be the next office tower to go up.

“First & Main is catalytic and it will pave the way for one of these other projects to get out of the ground,” Borlaug said. “The building was fortunate with the leases it got, but there is no doubt that it has opened the doors for other projects and I think Park Avenue West is next up to bat.”

Rumors have swirled for the last two months that , the firm developing Park Avenue West, has found the necessary tenants and financing to move forward with the project, but nothing has been set in stone. Vanessa Sturgeon, president of TMT Development, said there is nothing new to report on the project since the sale of First & Main.