Workers' return to offices lifts Portland's central business district market
Downtown Portland's real estate market is looking up as a growing number of workers return to offices, many on a hybrid schedule and some full time, and more companies are negotiating leases for 2022 and beyond.
TriMet's recent leasing of 95,000 square feet for administrative office space in One Main Place, located at 101 S.W. Main St. is among the signs that companies are returning downtown. Matt Johnson, executive managing director with Cushman & Wakefield, said that while some clients still have concerns about safety, he is working with several tenants who are negotiating leases in the central business district."We have a few issues that need to sort themselves out, but I think activity is going to pick up. I'm down here every day and I've seen the changes over the last two years," he said.
Johnson described attending a Portland Timbers game on a sunny day in early April and walking around downtown.
"It felt great, and people were out and Portland felt like Portland again. I think a lot of people don't realize what they've missed until they experience it again," Johnson said. "In spite of everything that's happened, we're still on the top 20 list of where college graduates want to move. There are a lot of great things we have going for our city."
Colliers International noted several new additions to the central business district, including the PAE Living Building at 151 S.W. First Ave. which adds Class A commercial office space to the market in addition to housing the corporate headquarters for PAE Consulting Engineers Inc.
Other new office space due for completion this year includes Volta, an adaptive reuse project at 1709 S.E. 3rd Ave. in the Central Eastside's Electric Blocks creative office campus; Clay Blocks at 633 S.E. Clay St.; and The Galleria renovation. The opening of The Offices at 11W, 503 on Tenth and Block 216 in the first half of 2023 are further expected to strengthen the central business district.
Colliers International's most recent report noted that asking rents in the central business district and suburban markets drew closer in the first quarter, with a difference of 66 cents for Class A space and 22 cents across all building products. Class A rents in the central business district have fallen 10.4 percent since the first quarter of 2021.
The amount of total space available, including both the direct and sublease market, decreased slightly from last quarter to 19.6%, following a 13-year high of 20.1% availability in the fourth quarter of last year.
Al Kennedy, first vice president at Colliers International, explained the "flight to quality" that is occurring in both the central business district and the suburban markets. For employers who want to make long-term lease commitments downtown, new construction and high-quality Class A towers are the draw.
"What we're hearing and seeing is employers are saying it's kind of difficult to get people back unless they are excited, and we need the nicest space on the market to get our employees back in the office," he said.
Other employers with concerns about safety and tax rates in the central business district are looking to the suburbs, with Kruse Way among the premier Class A submarkets. Kennedy noted that even though average rates are becoming more equal between the downtown and suburban markets, top-of-the-line office space downtown will remain more expensive.
"I do expect those trends to continue for at least the next year," he said. Kidder Mathews' most recent report shows that office direct vacancies increased by more than 15.8% year over year to 11.7% to conclude the first quarter. Asking lease rates decreased in the first quarter, reporting $27.92 per square feet full service as landlords begin to offer attractive rates and concessions in order to draw new tenants.
Leasing activity picked up from the year prior with more than 940,000 square feet leased, up 19.4% year over year. Total Class A lease activity reached 343,339 square feet, with sublease activity reporting 115,544 square feet for all class types. Office sales in the first quarter fell to 72 transactions, averaging $309.04 per square foot, with cap rates settling at 6%.
Kidder Mathews also expects movement across the metro to gradually improve this year as companies hire at a rapid pace and tenants begin to finalize back-to-office procedures. "Portland's suburban markets will likely outperform the downtown market as these buildings remain attractive for many tenants due to the amenity packages and a vibrant mixed-use offering," its forecast states. "With minimal construction in the pipeline for 2022, we can expect downward pressure on availabilities as tenants absorb existing inventory."
JLL points out that the first quarter of 2022 was the first quarter since the pandemic began where most of the negative absorption was felt in the westside suburbs. That market experienced 50.6% of occupancy losses in the first quarter, while 78% of leases signed over 10,000 square feet happened within the urban core.
Sublease space also saw an increase last quarter, as half of the 10 largest move-outs were attributed to subleases. One of the largest was by Navex Global, which gave back 45,000 square feet of Class A office space in the Kruse Way submarket. The asking rate for this sublease is about 11% lower than the current asking rate for the area, creating much-needed space in the exclusive submarket, according to JLL.
Over the year, Kruse Way has seen a 10% increase in asking rates, driven mostly by the $4-per-square-foot increase at Kruse Woods Corporate Park. Conversely, Portland's central business district has seen a 2.5% decrease in overall asking rates to combat the occupancy losses it continues to face.
JLL notes that Portland's labor force has increased by 56,000 employees year over year, returning to pre-pandemic levels and just 2.5% less than the peak in February 2020.
"A significant increase in the labor force is a promising factor for potential office demand," according to the JLL forecast.
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