May Focus: commercial real estate
The smattering of cranes dotting Portland's skyline brings smiles to the local real estate professionals who represent clients seeking to lease office space.
Cranes mean construction, which means more supply to meet the demand that has been driving prices up over the last several years. And more supply means rental prices are leveling out, which makes the clients happy and, in turn, makes the real estate professionals happy.
Kristin Hammond, first vice president of CBRE's Portland office, said the last five years have been essentially epic for the Rose City's market for office space. In 2013, downtown office space rented for about $25 per square foot, and just under $30 per square foot for upper-end space.
Today, rental prices range from $34-$38 per square foot for older office space. New construction, such as the Broadway Tower, is commanding $40 or more per square foot. The 19-story tower features 175,000 square feet of rentable office space on the top 10 floors, ground-floor retail space at the corner of Southwest Broadway and Clay, underground parking, a hotel with a separate lobby from the office lobby, a restaurant and bar in the hotel and a second-floor, outdoor patio that overlooks the South Park Blocks.
"We've seen a rental increase of between 25 and 30 percent over the last five years and that's a pretty significant jump," Hammond said. "New construction is squarely above $40 a square foot now."
Rental rates are leveling off and will not continue on the same trajectory, but they are holding steady and demand will remain at healthy activity levels, particularly as more out-of-state real estate groups enter the Portland market. In addition, tenant improvement budgets are increasing to keep pace with rising construction costs, she said.
"We expect a lot more inventory coming on the market and ready to be occupied in the next 18 months," Hammond said, referring to projects such as 9North, Field Office and the renovation of the former Macy's department store building. "There is a lot of square footage that is trying to play catch up to a lot of demand with little inventory, so we expect the inventory to open up and kind of balance that out."
9North's seven stories will include 178,000 square feet of Class A office space in the Pearl District. When completed, it will feature six stories of creative office space above ground-floor retail and 58 parking spaces onsite, with another 99 parking spaces in the Station Place parking garage a block south.
Field Office, dubbed by its designer, Hacker, as a "new kind of creative urban campus" that replaces the traditional concept of an office park, consists of two, six-story buildings united by a courtyard and flanked on all sides by balconies. Its 302,000 square feet will offer new retail and office space within Northwest Portland's industrial district.
The Macy's makeover will convert the former department store into three stories of creative office space above retail shops, and portions of the basement will be re-purposed as a gym, conference space, multiuse area, bike parking and lockers.
Colliers International noted in its 2018 first quarter report that the $54.25 million sale of 38 Davis, a mixed-use office/multifamily project built by and home to Ankrom Moison Architects, represented the largest investment sale of the quarter, and that 97 percent of its 125,000 square feet of office space was leased before closing. More than 335,000 square feet of office space was delivered across the region, marking the largest volume delivered since the second quarter of 2015.
Custom Blocks North & South, along with Clay Pavilion, provided a combined total of nearly 150,000 square feet to the Central Business District perimeter. Of Clay Pavilion's 75,000 square feet of Class A office space, 65,000 was pre-leased. In addition to office space, the heavy timber building features ground-floor retail, a large courtyard and community gathering spaces.
Vacancies increased to 9.95 percent for the region, mostly due to space in the Central Business District that was not occupied during the first quarter of 2018 even though 41 percent of the square footage delivered was pre-leased, according to Jacob Pavlik, who authored the report on behalf of Colliers International.
Kidder Mathews noted that Portland's office market continued to benefit from the expansion of the technology sector in the first quarter of 2018, as a strong economy kept unemployment near historic lows in the metro area. An uptick in vacancy to begin the year belied robust fundamentals, evidenced by the market's 5.5 percent annual rent growth and notable investment activity from institutional buyers, the firm noted in its most recent quarterly report.
"Investors continue to see value-add opportunities in Portland, acquiring assets with an eye toward repositioning them as modern office properties to attract the market's variety of tech and creative users," the report stated.