Building owners face string of vacancies

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Retail space for lease in the Bear Creek Plaza shopping center waits for an occupant. Across Medford, for-rent signs are popping up on commercial property and rental rates are going down.Jim Craven

November 17, 2009

By Greg Stiles

Mail Tribune

As he drove through downtown Medford this past weekend, Duane Hill saw signs of trouble that were hard to miss.

"There was a 'Space for rent' sign just about every block," observed Hill, the former owner of KRWQ radio who now lives in Sunriver, near Bend.

For Hill, it was a reminder of his own status as the owner of a half-rented, three-story office building in northeast Medford near Costco.

"Lots of space and no prospects," said Hill, summing up the picture for many Rogue Valley commercial building owners.

Thanks to the expansion of Rogue Community College and other government operations, downtown Medford has not seen dropoffs of the level experienced in the 1980s. One property manager said the vacancy rate there is at only about a third of the depth it sank to in those days.

But across the city, private businesses, large and small, have reduced staffs and space. With smaller staffs, some shop owners and professionals have relocated to smaller — and often newer — sites when their leases expired. Some have reduced the space they're renting within their present buildings and others have retreated from commercial districts altogether and operate out of their homes.

One thing for certain happens when storefronts and office spaces are empty.

"Rates have consistently declined and vacancy is going up," said Tom Fischer, one of the owners of Coldwell Banker Commercial NW Real Estate.

It doesn't stop with retail and office space. Manufacturing has fallen off as well, creating vacancies at the industrial level.

"Without a doubt, orders aren't what they used to be," Fischer said. "We have an oversupply of manufacturing capacity. The only places I've heard where there is increasing business and more employees is in Internet sales and fulfillment offices — bicycle parts, motorcycle parts, things like that."

Whether retail or industrial, Fischer said, falling consumer demand is draining cash flow and forcing business owners to make tough calls.

"The reality is that people are not going out to lunch and dinner like they used to and not buying consumer goods — from radios to cars. Go down Riverside Avenue and you will see a half-dozen restaurants with two or three cars in the parking lot instead of a dozen at dinner time."

Hill's predicament is both similar and different from many.

He and his wife, Sherry, opened the three-story, 21,000-square-foot Cardinal Building in September 2007 and an insurance company, United Risk, occupied about half the space soon after.

Since then they haven't found additional tenants, although many have been on the move over the past year.

"We're kind of in a unique position with 7,000 feet on each floor," Hill said. "We will divide it into half, but that's still 3,500 feet. Most of the calls — probably 95 percent — are from people looking for much smaller space — the 500- to 750-square-foot range. They are generally people whose leases have expired or are expiring and they're checking out the marketplace to find out what's out there."

Businesses shedding employees aren't interested in relatively expansive digs.

"Most of our potential tenants would be existing businesses that have outgrown their space, maybe adding people," Hill said. "Nobody is adding or growing. In fact, in general, it's going the other direction. Until this economy turns around and business starts growing again, we'll remain in a stalemate."

With nearly every shopping center and many office complexes struggling with open space, people are looking for deals — and finding them.

"You will find places for as little as 75 cents per square-foot per month where you would have had a hard time finding space for a dollar a foot a year ago," said Scott Henselman, a veteran Medford commercial property manager.

"Downtown is holding up better for this being a recessionary period than before," said Henselman, who has been through more than one economic cycle. "In the 1980s we were in a strong recessionary period, seeing vacancy rates for ground-floor spaces somewhere around 30 percent. It's about 10 percent right now."

He qualified the difference, noting space has increased and there are different kinds of tenants filling that space.

"The downtown demographics have changed," Henselman said. "Government and quasi-government agencies occupy or have built new spaces."

He numbers the Medford library, Rogue Community College and Southern Oregon University among that group.

Those downtown tenants, however, don't necessarily bring additional dollars for goods and services to the neighboring area.

"People just going to the library are just going to the library," Henselman said. "People going to school don't have money and are on tight budgets."

When business suffers, it doesn't take long for tenants to fall behind in their rent payments. Landlords find themselves having to make adjustments or risk losing tenants. When leases expire they also have to be willing to take less than they did under the previous agreement.

Landlords who bought buildings recently or refinanced have another set of issues, Fischer said.

With banks pressured by regulators to keep commercial debt at a ratio based on the property's value, property owners who either bought or refinanced in recent times may have to increase loan payments.

"After you get a residential loan, the bank doesn't have a right to say what your house is worth and change your payments," Fischer said. "But in commercial property, it's typically part of the note that a bank has the right to look at the property and tell the borrower they need to pay down the loan."

It's easier for economists to point out the elements that will lead to space filling up again rather than predicting when it will occur.

"It's going to take a solid base of economic activity absorbing some of that capacity going forward," said Tim Duy, director of the Oregon Economic Forum at the University of Oregon. "Manufacturing isn't going to come back any time, so we'll need to see stronger exports and consumer activity."

Reach reporter Greg Stiles at 776-4463 or e-mail business@mailtribune.com.

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