THE KNOWLEDgE REPORTPortland

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Navigating Uncertain Waters

overvieWThe optimistic yet cautious proclamations of sustained economic recovery that welcomed U.S. commercial real estate markets into the second quarter of 2011 continue to be subdued by continued uncertainty. Recent economic and unemployment data effectively illustrate this point: 1) The price of oil fell below $100 per barrel by the end of June, though gas prices are 30 percent higher than one year ago. 2) Credit availability, while more abundant now than at any time over the past two years, is still more limited than prior to the recession 3) Though recent ADP jobs data shows that U.S. private sector jobs outperformed predictions and rose by 157,000 in June, unemployment claims are still at an elevated 418,000 as the second quarter came to a close. These points, combined with a sluggish 1.8 percent revised first quarter gDP growth rate and a lingering federal deficit crisis, raise obvious questions over the nature and duration of a sustained economic recovery.

It is against this national backdrop, however, that the positive momentum of the Portland office market, though slow and inconsistent, continues to draw a favorable contrast. Absorption has been positive for five consecutive quarters while asking rates are beginning to flatten and a lack of speculative construction inches vacancy rates downwards. Compared to the 1.24 million square feet of lost occupancy incurred during the five hardest hit quarters beginning in the first quarter of 2009, the most recent five quarters have welcomed 1.1 million square feet of net occupied space. Along with the .8 percent drop in the Metro unemployment rate to 8.8 percent in June, tightening space availabilities in the central submarkets, and consistent leasing activity market wide, the market appears to have stabilized. As forecasted at the end of the first quarter of 2011, we continue to anticipate that the Portland office market will continue to show improvement throughout the end of 2011 and moving into 2012.

market indicators*

uPdatenew supply, absorption and vacancy rates

2010 2011

Q1

Q2

vacancy

net aBsorPtion

construction

rental rate

Q2 2011 | office

*Market Indicators show trend of previous four quarters.

Accelerating success.

leasinG & aBsorPtionWhile smaller lease transactions dominated the market during the second quarter of 2011, several notable deals were signed that further support the five-quarter trend of positive absorption that has continued unabated since the second quarter of 2010. eBay penned a 28,000-square-foot lease at the Fifth Avenue Building in the Central Business District (CBD). This lease, a by-product of eBay’s acquisition of Portland-based software development firm Critical Path, will help absorb nearly half of the approximately 60,000-square-feet of space vacated by the Portland Energy Conservation, Inc. when it moved to the First & Main building this spring. Additionally, StairMaster leased 26,349-square-feet at the 4400 Building in the Vancouver Mall Submarket with the assistance of the City of Vancouver, State of Washington, and the Columbia River Economic Development Council (CREDC).

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0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

(600,000)

(400,000)

(200,000)

0

200,000

400,000

600,000

800,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011

RBA Delivered Total Net Absorption Total Vacant %

leasinG & aBsorPtion (cont.) Market wide, 66,984-square-feet of positive net absorption was recorded during the second quarter of 2011. This represents a precipitous decrease from the positive 498,892-square-feet reported during the first quarter of 2011, and the positive 154,119-square-feet recorded during the second quarter of 2010. This marginally positive net absorption represented mixed performances from the metro submarkets. Clark County continues to perform well across all property types with 112,203-square-feet of positive absorption for the quarter. The I-5 South submarket, however, perennially punished since the financial meltdown in late 2008, had 121,909-square-feet of negative absorption. All of the net loss in the I-5 South submarket is attributable to the 140,850-square-feet of negative absorption in the class A product group. This is the largest single loss in occupancy in I-5 South Class A space within the past 10 years.

Additionally, two leasing statistics lend credence to predictions of continued improvement of the office market throughout the remainder of 2011. First, despite the average deal size remaining at its smallest since early 2009, transaction volume continues to be a robust 917,168-square-feet market wide. Probable causes for the smaller deal sizes reported in the first quarter office market report remain unchanged: 1) large space availabilities are limited within central submarkets 2) tenants continue to downsize to reduce operational costs and 3) smaller businesses continue to enter the marketplace looking to take advantage of favorable lease rates and deals as credit and economic conditions improve. Second, as a supplement to the steadily decreasing vacancy rates of the past five quarters, the ratio of non-vacant/available

space to total available space has been steadily decreasing. This positive indicator suggests a slowing of negative absorption in the near-term even as leasing activity remains strong. Despite the turmoil and uncertainty surrounding the mid-year economic forecast, these data points provide an element of confidence that market conditions will continue to tighten moving into 2012.

vacancyPortland’s office vacancy during the second quarter of 2011 was 12.3 percent, a decrease of 20 basis points from the fourth quarter of 2010, and 140 basis points from the second quarter of last year. Continuing the byline of the previous five quarters, the overall vacancy rate continued its downward march. Stalled speculative office development and consistent activity from the private sector will continue lowering the vacancy rate towards single digits throughout the remainder of 2011 and into 2012.

9.3 million square feet of inventory is currently vacant within the Portland market. The highest vacancy rates continue to reside within the Westside and I-5 South submarkets at 16.4 percent and 20 percent, respectively. However, while vacancy rates in the Westside submarkets have declined a substantive 2 percentage points in the previous five quarters, the I-5 South submarkets jumped 1.5 percent since the first quarter of 2011. Overall, Class A product vacancy within the Central City continues to approach pre-recession lows at 6.8 percent, while Suburban Class A vacancy rates have increased 70 basis points to 14.9 percent since last quarter.

Asking rent for Class A properties averaged $23.83 per square foot.

uPdate: siGniFicant leases & sales

lease activity

Project suBmarket tenant size sF siGn date transaction tyPe

Fifth Avenue Building CBD eBay 28,024 04/04/2011 Move-In

The 4400 Building Vancouver Mall Stairmaster 26,349 05/01/2011 Move-In

Bank of America Center CBD First American Title 18,843 05/02/2011 Move-In

KOIN Center CBD Skanska USA 17,200 05/03/2011 Sublet/Move-In

Amberglen Business Ctr Sunset Corridor greater giving 14,520 05/03/2011 Move-In

sales activity

Project city sales date sales Price Price/sF transaction tyPe

Bridgeport Crossing I Tigard 06/17/2011 $2,937,984 $146.90 Investment

88 NW Davis Street Portland 05/27/2011 $1,985,000 $50.90 Investment

Hoyt Street Building Portland 06/09/2011 $1,800,000 $91.73 Investment

Porter glisan Portland 04/28/2011 $1,600,000 $80.00 Investment

37 SW Woods St Portland 04/14/2011 $1,069,700 $127.35 Investment

[continued on Page 4]

NORTHWEST

SOUTHWEST SOUTHEAST

NORTHEAST

NORTH

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the knowledge report | Q2 2011 | office | portland

existing Properties direct vacancy sublease vacancy total vacancy net absorptionsF

new supplysF

u/c & Proposed

sFavg. rent

market sector Bldgs inventory sF % sF % sF Q2-11 Q2-10 current Quarter ytd current

Quarter ytd u/c. sF

annual rate

cBd

a 41 11,686,002 728,224 6.2% 95,035 0.8% 823,259 7.0% 12.2% 18,183 150,557 - - 62,200 $24.89

B 123 9,101,265 933,246 10.3% 35,356 0.4% 968,602 10.6% 10.4% (40,437) (102,846) - - 133,260 $19.70

c 128 3,942,795 492,741 12.5% 9,481 0.2% 502,222 12.7% 12.3% 164 (367) - - - $17.62

total 292 24,730,062 2,154,211 8.7% 139,872 0.6% 2,294,083 9.3% 11.6% (22,090) 47,344 - - 195,460 $21.42

cBd Perimeter

a 10 2,647,088 134,325 5.1% 20,978 0.8% 155,303 5.9% 3.8% 8,802 (9,129) - - - $22.35

B 83 4,067,009 453,780 11.2% 4,317 0.1% 458,097 11.3% 13.2% (17,787) 10,030 - - - $18.74

c 94 2,570,554 186,422 7.3% - - 186,422 7.3% 7.4% (2,399) (20,283) - - - $13.86

total 187 9,284,651 774,527 8.3% 25,295 0.3% 799,822 8.6% 8.9% (11,384) (19,382) - - - $18.68

Westside

a 36 3,222,160 645,875 20.0% 5,094 0.2% 650,969 20.2% 23.4% 53,895 54,396 - - - $21.93

B 211 8,671,543 1,409,051 16.2% 134,216 1.5% 1,543,267 17.8% 20.0% 26,187 81,589 - - - $16.78

c 83 1,871,808 195,279 10.4% 13,663 0.7% 208,942 11.2% 16.7% (1,066) 129,978 - - - $12.98

total 330 13,765,511 2,250,205 16.3% 152,973 1.1% 2,403,178 17.5% 20.5% 79,016 275,963 - - - $17.67

i-5 south

a 34 3,199,731 881,953 27.6% 9,464 0.3% 891,417 27.9% 27.7% (140,850) 53,357 - - 26,000 $24.84

B 136 4,241,682 667,721 15.7% 16,974 0.4% 684,695 16.1% 13.5% 13,272 (36,515) - - - $18.69

c 47 859,186 84,478 9.8% - - 84,478 9.8% 10.0% 5,669 8,502 - - - $14.52

total 217 8,300,599 1,634,152 19.7% 26,438 0.3% 1,660,590 20.0% 18.6% (121,909) 25,344 - - 26000 $21.72

eastside

a 13 951,683 267,808 28.1% - - 267,808 28.1% 23.5% (3,516) (6,581) - - 135,000 $23.63

B 162 6,409,650 490,556 7.7% 15,202 0.2% 505,758 7.9% 7.6% 33,312 (17,960) - - 50,000 $17.25

c 166 3,704,742 212,885 5.7% - 0.0% 212,885 5.7% 5.4% 1,352 11,673 - - - $13.38

total 341 11,066,075 971,249 8.8% 15,202 0.1% 986,451 8.9% 8.2% 31,148 (12,868) - - 185,000 $18.13

clark county

a 29 2,658,672 291,399 11.0% 14,630 0.6% 306,029 11.5% 14.2% 2,861 (813) - - 293,920 $22.52

B 149 4,420,926 683,516 15.5% 26,645 0.6% 710,161 16.1% 20.0% 104,701 226,732 - 62,900 - $18.28

c 59 1,655,452 136,581 8.3% 2,319 0.1% 138,900 8.4% 9.1% 4,641 23,558 - - - $17.34

total 237 8,735,050 1,111,496 12.7% 43,594 0.5% 1,155,090 13.2% 16.1% 112,203 249,477 - 62,900 293,920 $19.35

Grand total 1,604 75,881,948 8,895,840 11.7% 403,374 0.5% 9,299,214 12.3% 13.7% 66,984 565,878 - 62,900 700,380 $19.70

Quarterly comParison and totals

Q2 2011 1,604 75,811,948 8,895,840 11.7% 403,374 0.5% 9,299,214 12.3% 13.7% 66,984 565,876 0 62,900 700,380 $19.70

Q1 2011 1,604 75,811,948 8,905,748 11.7% 460,450 0.6% 9,366,198 12.4% na 498,892 498,892 62,900 62,900 517,120 $19.73

Q4 2010 1,602 75,749,048 9,288,909 12.3% 513,281 0.7% 9,802,190 12.9% na 364,657 572,815 0 616,935 286,100 $19.81

Q3 2010 1,602 75,749,048 9,624,804 12.7% 542,043 0.7% 10,166,847 13.4% na 184,946 208,158 0 616,935 151,100 $19.74

Q2 2010 1,602 75,749,048 9,793,207 12.9% 558,586 0.7% 10,351,793 13.7% na 154,119 23,212 602,935 616,935 151,100 $19.83

collierS international ValUation & adViSorY SerViceScolliers valuation & advisory services began as palmer Groth and pietka in 1978 in the pacific northwest. We changed our name from firstService pGp Valuation to colliers international Valuation & advisory Serives in 2011.

We provide national coverage with local expertise. our depth of knowledge, experience and committment to quality allow our clients to make well informed decisions regarding commercial real estate.

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Portland:

David KotanskyManaging Director, Portland601 SW Second Ave. Suite 1950Portland, OR 97204tel +1 503 223 3123FaX +1 503 227 2447

research contact:

Sam WeathersResearch Analyst601 SW Second Ave. Suite 1950Portland, OR 97204tel +1 503 223 3123FaX +1 503 227 2447

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rental ratesThe average asking rate for all building classes in the Portland market was $19.70 per square foot. This represents a marginal decrease since the first quarter of 2011 and a slowing of the decline in asking rates from their peak of $20.37 per square foot in the third quarter of 2009. Asking rates for Class A properties averaged $23.83 per square foot, a $0.14 increase from one year ago and a $0.17 increase from the end of 2010. Rates for Class B and C properties are $18.12 and 15.39 per square foot respectively. Class B properties have experienced a steady seven-quarter decline from and $19.24 during the third quarter of 2009. Class C rates, however, have remained stable since the beginning of 2011.

Several notable asking rate characteristics stand out within the individual submarket groups. First, among the Central City and Suburban submarkets, second quarter asking rates have taken divergent paths across building classes. While Central City Class A rates have declined in relation to Class B and C properties, the opposite is true for the Suburban submarkets. This variation in the rent premium for Class A properties across the two competing submarket groups is one of several likely facilitators of the positive absorption (or ‘flight to quality’) for Class A properties in the Central City submarkets and negative absorption in the Suburban markets.

Additionally, despite substantial variation across individual submarket groups, asking rates appear to be approaching a period of stabilization. Forecasts of market wide rate increases will likely not be realized until 2012 as economic conditions improve and excess supply continues to be absorbed. According to Property and Portfolio Research (PPR), a commercial real estate data analysis provider, the forecasted rental rate growth from 2012 to the first quarter of 2015 will be approximately 23 percent. Rates will remain unchanged in the meantime, with tenant-improvement allowances, concessions, and modified rental rates continuing to prevail in areas with high vacancy. Stronger performing submarkets such as the CBD will see tenant allowances stabilize as supply constricts enough to favor landlords in the coming year.

constructionAs mid-year approaches, one of the common themes carried from the first quarter of 2011 is the pervasive lack of major speculative development throughout the Portland market. While construction has continued on the 62,000-square-foot Overton Building and the 172,000-square-foot Meier & Frank Depot Building in the Pearl District, only a handful of other projects, the largest of which are owner/user facilities, are currently under construction. Fisher Investments is building a 293,920-square-foot facility in Camas which the

company will fully occupy. Also under construction is the 135,000-square-foot FBI Building in the Airport Way submarket which is currently slated for a March 2012 delivery.

While the lack of speculative development continues to benefit the office market recovery, stalled proposals in submarkets with increasingly limited large blocks of space may see renewed plausibility in the coming quarters. As lease rates increase, credit relaxes, and uncertainty surrounding driving economic forces takes a positive turn, proposed projects such as downtown’s 359,923-square-foot Park Avenue West building and the Pearl District’s 238,038-square foot LEED pre-certified One Waterfront Place may see realization.

sales activitySales activity during the second quarter of 2011 was highlighted by a lack of notable investment sales. Thirteen transactions over $500,000 were recorded during the second quarter, accounting for a total of $18.1 million in transaction volume. Unlike the previous quarter in which the only sale over $10 million accounted for 79 percent of the total quarterly transaction volume, the second quarter of 2011 had no investment or owner/user deals transacted over three million dollars. At 12 percent of the average rolling five-year sale price of $6.2 million, the second quarter average sale price of $754,000 reflects 1) a carry-over of the sluggish sales activity from the first quarter of 2011, 2) continued reticence among lenders to provide credit, and 3) trepidation among investors concerning the immediate recovery of the office investment market.

Despite this fact, several notable transactions occured within the second quarter of 2011. The 39,000-square foot office building located at 88 NW Davis St. in Old Town-Chinatown was sold for $1.99 million by the Portland Development Commission as a future redevelopment. The Oregon College of Oriental Medicine will occupy this space when completed. Additionally, Bridgeport Crossing I, located at 7420 SW Bridgeport Rd. in Tigard, sold for $2.9 million dollars in late June.

What does all oF this meanThe second quarter of 2011 poses a question that embodies the underlying theme of this year’s mid-term market report: How will continually worrisome economic data and the possibility of a stalled recovery affect the real estate decisions of investors, tenants, and landlords through the remainder of 2011 and into 2012? If the balance of positive economic fundamentals - job growth, credit availability, and tempered inflation - remain steady, we expect the continued recovery of the office market to be sustained over the coming 18 to 24 months.

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