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Officials to bargain harder for state space

Mar 12, 2013


By MICHAEL ROSE
Of the Salem Statesman Journal

SALEM — Oregon has put landlords on notice that it expects better deals for state office space.

Negotiations for 58 state office leases throughout Oregon have been frozen, state officials confirmed. The reason: the state wants to act like a private-sector company, exerting as much clout as possible in lease negotiations.

Oregon could save tens of millions of taxpayer dollars on office leases with more effective bargaining tactics, according to state-hired real estate consultants.

Rather than automatically renewing leases, as it often does, the state is poised to demand better terms. It hopes to spur more competition among landlords.

In the Salem area, the state leases about 1.2 million square feet of privately-owned office space. That's about 25 percent of Salem's office market.

“They are certainly the 800-pound gorilla in our market,” said Curt Arthur, a real estate broker and managing director of Sperry Van Ness Commercial Advisors LLC in Salem.

The soft market for office space makes it an opportune time to squeeze concessions from building owners, such as free rent. Sperry Van Ness statistics indicate that 2012 was Salem's weakest office market in 15 years, with the vacancy rate for suburban Class A office space at just over 30 percent.

Taxpayers should be pleased that the state is capitalizing on a market that favors tenants, Arthur said. Landlords will still get the market rate for rent “just less than some had anticipated,” he said.

The state's Enterprise Leadership Team, a group created in 2011, is leading the effort to change the state's approach to real estate leasing.

“A dollar that we save on occupancy is a dollar we're able to use to deliver our mission,” said Patrick Allen, director of the Department of Consumer and Business Services. Allen is among the directors of state agencies and designees on the Enterprise Leadership Team. The 24-member team sent a memo to state agencies telling them to stop whatever lease negotiations they had in progress.

Eleven of the 58 office leases in limbo mature between now and the end of August, so time is short to resume negotiations.

If the state had relied on its standard operating procedures for leasing office space, Allen said, “we were going to leave a lot of money on the table.”

How much money? A report prepared by Leland Consulting Group and Cushman & Wakefield reviewed 137 large state office leases.

Currently, that group of 137 leases costs the state $52.2 million in annual expenditures. Improvements in the state's leasing strategy could achieve annual savings estimated between $10.2 million and $20.4 million, the consultants concluded.

Among the consultant's suggestions: create six-year strategic plans for agencies, and seek more competition for the state's business.

Planning would allow the state to harmonize leases, so they would expire at the same time, giving the state more leverage in negotiations.

Cost reductions by consolidating state offices into fewer, but larger locations with shared reception areas and meeting rooms, was another recommendation made by the consultants.

Sperry Van Ness’ Arthur said the overall effect on the local real estate market will be minimal in the long term. As the market continues to improve, rents will stabilize and steep discounts will begin to fade.

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Information from: Statesman Journal, http://www.statesmanjournal.com

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