May 13, 2007 (The Bulletin - McClatchy-Tribune Information Services via COMTEX) -

Thirteen years after the old Brooks-Scanlon lumber mill sawed its last board, Bend's Old Mill District is nearing the end of its transformation.

Eleven building projects, at a collective cost of more than $250 million, are either under way or expected to start construction this year or in early 2008.

By the time they are complete, most of the old lumber mill's footprint east of the Deschutes River will be filled with homes, shops, offices and hotels.

Some of the projects, like Bend developer Steven Trono's 200,000-square-foot Mercato, promise to transform their neighborhoods with innovative shops, high-end condos and expensive offices.

Others, like the 90,000-square-foot Oregon Dental Services building, promise to pour more jobs into a district that has become one of the city's commercial office cores.

Still others, like the The Plaza, a $22 million, 42-unit condominium project that's rising above The Shops at The Old Mill District, and the 37-unit Deschutes Landing townhome project that's starting to rise along the river on Reed Market Road, promise to inject the district with a growing supply of well-heeled residents.

Looking further out to next year and beyond, the 199-unit, five building 500 Bond project will crown the hill above the Old Mill site with four- to five-star hotel-condo rooms, capped with a top-story restaurant that will drink in the view. The Brooks-Scanlon mill's old administrative building will come down to make room for it.

It's a view that has changed dramatically for Bend natives like architect Scott Steele, who remembers visiting his father as a child in the old mill's drying kilns, surrounded by the noise, the rail cars, the steam and the smell of fresh-cut wood.

"Definitely quite a change," Steele said Wednesday, thinking back on the scene before developer Bill Smith bought the dying mill site and opened his first shops amid the wreckage. "Pretty dramatic."

But, with 90,000 to 100,000 square feet of new retail space coming on line, along with 175 top-end condos and townhomes, at least 50,000 square feet of new leasable office space and 199 new hotel-condo rooms to sell and fill, is it all too much?

So far, leasing numbers tend to indicate that demand is running strong for the Old Mill's retail space, apparently without digging into the demand for space in other areas of town.

A survey of 14 buildings with 274,282 square feet of retail space in the Old Mill District's area showed a vacancy rate of only 1.6 percent in the first quarter of this year, according to Compass Commercial Real Estate, a Bend brokerage that tracks retail, office and industrial leasing activity on a quarterly basis.

Smith's River Bend Limited Partnership is adding three new buildings on the north end of The Shops at The Old Mill District this summer, adding another 45,000 square feet to the existing shopping district's 225,000 square feet of retail space. A fourth building might add another 10,000 square feet later on, depending on negotiations with a prospective tenant, River Bend administrator Mary Campbell said.

About 90 percent of the incoming 45,000 square feet is already either leased or has strong prospects, easily filling with interest from a combination of national chains and regional shop owners, said Heidi Berkman, marketing director for The Shops at The Old Mill District.

With national and regional players like R.E.I., Talbots and Anthony's HomePort already in its mix, the Shops have developed a buzz among marketing executives across the country, Campbell said -- a factor that makes its space much easier to fill than it was in the beginning, when a few lonely shops stood next to the Regal Cinemas building, surrounded by mud.

The mill area's national and regional draw also tends to give it a mix that differs substantially from the nearby downtown's quirkier blend of small boutiques, local restaurants and galleries, said Bend Downtowners Association Executive Director Chuck Arnold, but the difference makes the two areas more complementary than in competition.

Lease rates in the two areas appear to be running neck-and-neck. Space in newer downtown buildings is running around $36 a year per square foot, Arnold said, with rates bottoming at about $18 a square foot in older space.

In the Old Mill, the choicest spots are running in the $32-a-foot range, Campbell said, with most running between $28 and $32 per square foot.

Neither area seems to be suffering for tenants. Vacancy rates in the downtown area's 519,000 square feet of retail space ran about 6.87 percent in the first quarter, according to Compass' survey, with about 6,500 square feet of space absorbed by the market during the quarter.

Vacancy rates on the citywide inventory of 4.1 million square feet ran about 5.35 percent in the first quarter, with the North U.S. Highway 97 area running the loosest at 9.64 percent, largely due to new construction in the Cascade Village Shopping Center, according to the surveys, leading Compass retail specialist Jeff Mollencop to conclude that new construction is still catching up to the region's swelling population and Bend's increased popularity as a travel destination.

National retail vacancy rates exceeded 9 percent in the first quarter, according to Boston-based Property and Portfolio Research Inc., a company that tracks statistics in 54 of the nation's largest markets. Average lease rates varied widely by area, running $27 a square foot in San Diego by the end of 2006, but only $17.22 a square foot in Atlanta, according to Marcus & Millichap, a national commercial real estate broker based in Encino, Calif.

"I don't know if we are overbuilding," Compass Commercial's Mollencop said.

"I think we are trying to keep up with the demand. It runs in cycles, of course. There is going to be a lot coming onto the market and it may take some time to fill, but overall I think it's very strong and healthy."

The largest development in the Old Mill's pipeline -- the Mercato -- is expected to begin construction by late summer or early fall, Trono said. It will bring 45,000 square feet of retail space to the market, along with 52 high-end condos and a smaller slice of midstory office space.

The $80 million to $85 million Mercato's retail space, with its 400-plus spaces of underground parking, is designed to be unique enough to be an attraction in its own right, Trono said, with a European-style mix of small restaurants and food stands, shops, and larger spaces designed to draw people in for a leisurely experience, similar to San Francisco's redeveloped Ferry Building. He expects no problems with filling it, even though it will add almost 17 percent to the district's existing retail and restaurant space.

Trono is shooting to have at least one of the giant project's top-floor condominiums ready for the Central Oregon Builders Association Tour of Homes in July 2009.

In a softening residential real estate market, the saleability of the district's condo and townhome projects remains to be seen.

The marketers of Pahlisch Homes' riverside Deschutes Landing on the district's south end, Becky Breeze's and Tom Wurzel's The Plaza condominiums next to The Shops at The Old Mill District, and Trono's Mercato are all banking on uniqueness to set them apart.

Their key potential markets: Local baby boomers who want to get rid of their yards, and well-to-do urban buyers from around the world who want to pick up a second home or a new residence near the Old Mill's trendy urban markets.

Sales of existing homes in the district might give them grounds for hope.

At the Mill Quarter -- Aaron Lafky's brick-and-concrete, live-work townhome project on the district's northern edge -- 21 units have already sold at prices ranging from $700,000 to $1.295 million, Lafky said. Four more units are under construction, which will end the current construction phase, Lafky said, but he plans to build another 40 later on, if they survive the city's planning process.

The buyers have split about half-and-half between local Bend buyers moving down from larger homes to out-of-town buyers attracted by the combination of living space above and office or retail space below, Lafky said.

"It's all about a simplified lifestyle," Lafky said. "It they want to drop everything and travel, they lock the door and they're gone," he said. "They don't have to worry about the lawn or the sprinklers, or anything else."

A few blocks away, The Plaza is expected to have models ready to show next month, Breeze said. So far, 14 of the building's 42 units are under contract. Prices average around $650,000 to $700,000 for units in the all-residential building, but the most expensive unit so far -- a top-floor penthouse with views of the river, The Shops at The Old Mill District and the Cascades, went under contract for $1.999 million at Christmas.

The mix of buyers and prospects so far is similar to Lafky's, Breeze said -- a few locals, along with buyers from around the world.

Pahlisch is shooting for a similar market with Deschutes Landing, a string of 37 townhomes near Farewell Bend Park, Sotheby's Cushman & Tebbs Real Estate broker Debbie Tebbs said. The top-end units, ranging from $800,000 for terrace units to $1.595 million for the choicest buildings on the river, are decked out with multiple flat-screen TVs, surround sound theater rooms and other top-of-the-line amenities, Tebbs and Pahlisch Homes Vice President for Marketing Brian Bergler said, aiming for investors and for urban buyers from around the world who don't necessarily consider the prices high.

"They are that urban buyer who wants to bike or walk, who doesn't want to worry about exterior maintenance," Tebbs said. "We've had interest from people from L.A., people from Chicago -- from all over -- for that type of housing. So it is a different buyer than I think we have seen in Bend. It's not that golf course community or second-home golf course home buyer that we have seen more of here, and which was a lot of Sunriver in the beginning."

Pahlisch expects to open its first models in the Deschutes Landing project by July, Bergler said.

Trono is shooting even higher on the income scale, planning condos that will range to more than 3,000 square feet in size with price tags, in some cases, surpassing $3 million.

"We're looking for maybe 26 buyers who already love Bend, but don't have an urban product like this to buy into," Trono said, "and maybe 26 buyers who are maybe already in Bend, who want to come down from huge houses to something that's maybe still big enough they can visit with their grandkids in it. People who are living in 6,000- to 8,000-square-foot houses now."

In other words, he's shooting for buyers in an income bracket that most local developments have never really tried to target.

"Vail, Aspen, Jackson Hole. That's our competition. It's nobody in town," said Trono, who says his experience consulting with a regionwide radio and TV network in the early 1990s convinced him that the right development in Bend could compete on that kind of dollar level.

Farther up the hill, the $110 million 500 Bond condo-hotel project isn't expected to be ready for construction until early next year, with 18 to 24 months of construction expected to follow after that, Menefee & Associates broker Peter Menefee said.

Most of the Old Mill area's incoming office space -- the ODS Building at the northeast side of the new Wilson Avenue-Bond Street roundabout, the Wells Fargo Building that's under construction farther south on Bond Street and a third building that's under consideration on Bluff Drive -- are expected to add about 60,000 new square feet of leasable office space, in addition to space that is already leased to their anchor tenants. The city as a whole absorbed about 31,000 square feet of office space per quarter through 2006, according to Compass' surveys. Vacancy rates are running less than 5 percent.

Once the current list of buildings are done, only a few of the district's smaller lots will be available for buildout.

"Even as late as high school, for me, it would have been difficult for me to fathom the kind of makeover that's happened down here," said architect Steele, who's working on mock-ups for a 25,000- to 30,000-square-foot office building on one of the district's remaining sites. "Knowing what I know now, being in the business, it's quite a success story. Bill (Smith) has done a good job."

David Fisher /May 13, 2007 The Bulletin, Bend, Oregon.

  BEND OREGON HOMES - REAL ESTATE

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