Downtown Portland continues to be a tenants’ market for office space, though many are still weighing the pros and cons of allowing employees to continue working remotely against when and how often they should return to the office.
Ongoing uncertainty about inflation and interest rates are impacting the market as well, and the combination of a market flooded with sublet offerings mixed with high-profile deliveries is forcing properties to compete for tenants. This may result in further rent decreases in the coming quarters, according to Kidder Mathews’ most recent report.
Oregon was one of the last states to lift indoor mask mandates, which extended remote work further than expected compared to other states.
“Over the last two years, companies in Portland felt like they were in limbo when it came to office space decision-making,” said Alexandra Henderson, the firm’s senior vice president of Healthcare & Office.
“When we neared Q4 2022, there was an overall greater sensitivity to determining long-term plans for returning to the office. Decision makers grew more eager to design a plan for office space utilization to best accommodate their team’s work schedule preferences along with maximizing productivity,” she said.
As a result, office direct vacancies continue to trend upward across the Portland metro area, increasing 20 basis points year over year to 11.1% at the end of the fourth quarter. Average asking lease rates increased slightly year over year to $28.32 per square foot on a full-service basis, but fell when compared to $28.44 per square foot in the third quarter. Tenants may continue to control lease negotiations given the decline in space needs driven by hybrid work options, according to Kidder Mathews’ report.
“There is not one answer across the entire industry of how businesses will utilize the office in the future. Each company is designing a tailored office strategy to determine the best use of the office for their employees,” Henderson said. “We continue to see the hybrid model become the most popular as it provides a physical office presence for collaboration along with flexibility.”
Leasing activity dropped to an all-time record low of just 574,000 square feet leased, down 35% year over year. As companies continue to shrink their office footprints, sublease availability has been pushed to a record high of 2.36 million square feet. Office sales volume in the fourth quarter dropped to 474,000 square feet, a decrease of more than 50 percent and a 10-year record low at an average of $224 per square foot, according to Kidder Mathews.
Colliers International’s quarterly report noted that, over the past three years, vacant inventory has increased by 4.9 million square feet. This is more than the combined square footage of Portland’s seven largest office properties.
Across the greater Portland market, Class B properties experienced the greatest amount of negative net absorption in 2022, with a total of -938,000 square feet, 76% of which occurred downtown. This accounted for 63% of the total negative net absorption across all asset classes for the year.
The office market experienced negative net absorption for the 12th consecutive quarter in Q4 2022, with quarterly negative net absorption of 483,000 square feet. The year’s total of -1.5 million square feet negative net absorption marked slightly better than 2021’s total of -1.8 million square feet.
The vacancy rate in the market reached 17.9%, a 9.7% increase from the same period the previous year. The vacancy rate was highest in the central business district at 25%, a 4.1% increase from the previous quarter.
Capital markets activity slowed significantly in the final quarter of 2022, with a quarterly sales volume of $21.2 million, an 84% drop from the previous year. The largest transaction of the quarter was the sale of Parkwood Place in Clackamas for $6.95 million at a 6% cap rate.
Among suburban market sectors, the highest availability rate was among Class A assets in the I-5 South submarket at 18.4%. This is driven by rising asking rates pushing some tenants to look for cheaper alternatives. The I-5 South submarket has the highest average asking rate of any submarket in the greater Portland market at $35.53 per square foot, with the Kruse Way corridor commanding rents at $35.71, according to Colliers International’s report.
Mike Williams, president of Washington Trust’s Oregon region, said he expects the overall commercial real estate market to continue a downward trend, though it will vary by industry. Retail space such as shopping malls, movie theaters and big box retailers will see a weaker market while healthcare and public works development will continue to thrive.
While office space leases in downtown Portland will continue to be impacted by remote working, crime and homelessness, those in areas such as Sherwood, Tigard, Tualatin, Wilsonville, Beaverton and Canby will continue to do well, he said.
“As the cost of new construction and interest rates move up, that will continue to present a challenge in terms of getting stuff up and out of the ground,” Williams said. “As we head into this year, a lot of plans have been put in place as far as new properties and new locations. Some of those may be canceled if interest rates become too challenging, but I think that is going to be spotty across the board.”
