REAL ESTATE FOCUS: Commercial market is passing its peak
Several new office towers have opened in downtown Portland recently and more are being built, yet the absorption rate for office space remains healthy despite the city having passed its peak activity, according to local commercial real estate specialists.
"People have been concerned that we're getting overbuilt, but the absorption figures demonstrate that we continue to have a strong market," said Kevin Kaufman, first vice president at CBRE. "A strong job market certainly helps that as well. Companies are looking to hire across all sectors."
Kaufman said a key factor driving the success of Portland's office market over the last several years is the technology, advertising, media and information (TAMI) tenants. Members of creative sectors are seeking buildings with enhanced amenities to attract and retain the best talent. Some of the most popular amenities include bike storage areas, locker rooms, fitness rooms and space for yoga, spin and other classes, as well as outdoor decks and rooftop terraces.
One example is Tanner Point, previously known as 9North, in the Pearl District. The eight-story tower features flexible office space, floor-to-ceiling operable windows, several outdoor balconies with views of the Willamette River and a pair of rooftop terraces. CBRE acquired the building for $76.6 million, or nearly $459 per square foot, during the last quarter of 2018, according to Colliers International.
Kaufman said the appeal of such amenities is spreading well beyond the TAMI tenants. "Initially, many of these types of environments were seen as specifically for creative or technology companies. We're truly finding that employers across all sectors appreciate amenities like access to natural light, outdoor space and comfortable spaces to work."
Another example is [email protected] Blocks, now under construction at Northwest 18th and Yamhill. The eight-story building boasts 140,000 square feet of customizable office and retail space with exposed ceilings and open floor plans. Its rooftop deck looks onto Providence Park, it has indoor conference and events space, and it is served by two light rail lines. Other amenities include bike storage, a fitness center, showers and lockers, ground-floor retail and sidewalk dining, and underground parking.
Andrew Rosengarten, managing director at JLL, is one of the leasing agents for the office space inside Canvas and said it joins several others that have either recently opened or soon will be completed and are generating a buzz for their "well thought-out design and outstanding amenities packages." He also pointed to Field Office, Leland James, Slabtown Office and 7 Southeast Stark as examples.
Rosengarten noted that Portland's commercial real estate market is continuing to show healthy signs and is not markedly different from this time last year, though year after year since the Great Recession the market has exhibited strong demand both from institutional capital firms acquiring office buildings as well as from high-quality tenants leasing space and growing their businesses in the urban core.
"We have seen a transformational shift in the urban core's rental rates. New construction projects are commanding record-high rents in Portland, and these high rents are rising the tide for the rest of the office market. In some asset classes we have seen nearly double-digit, year-over-year rent growth for the past several years," he said. "Older Class B and Class C rents are currently at levels today that some Class A rents were hovering around only a decade ago. It remains to be seen if these levels will maintain and withstand a downturn, or if we will see a rent correction in the future."
Rosengarten and Kaufman agreed that how older office buildings perform depends on whether their owners are willing to invest to keep up with the new buildings.
"Some Class A spaces have reinvented themselves to stay competitive," Kaufman said, adding, "Those that have not renovated have seen rental rate increases that are positive, but there is a definite difference among those that have not renovated. The investment required to renovate and/or construct new necessitates rising rents. We have seen a push in rents, certainly healthy increases going back the last five years or so, and that's a direct result of the investment tenants are putting into these properties."
In Colliers International's most recent market report, it states that Portland's office market exceeded expectations for 2018, with vacancy remaining within 1 percent and 10 percent for the last four and a half years. Total vacancy within the central business district remained more than 2 percent higher than the market at large due to new supply.
Rental rates are not expected to slow anytime soon and tenant improvements average $75 per square foot, partly due to rising construction costs. Recent sales such as the Moda Tower and The Galleria indicate that Portland's office market continues to attract investors and that the Rose City is "earning its place among the top secondary markets," the report states.
Cushman & Wakefield's most recent report notes that in 2018, 1.4 million square of new office space was delivered in the central business district for a 5.5 percent increase to the market's inventory. Among the new projects, Broadway Tower recently opened with 95 percent of its 177,000 square feet leased. During the past five years, Portland has seen overall asking rates increase 43 percent, about three million square feet of new office space delivered, and a continually improving vacancy rate.
"With our neighbors to the north (Seattle) and south (San Francisco) dealing with ultra-low vacancy and ultra-high cost of living issues, companies are finding more of a safe haven in Portland's affordable housing market and deep labor pool, which should translate to an ever-expanding market as the decade closes out," the report states.
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