Quarterly numbers show commercial owners are offering concessions, sweetening deals in downtown Portland.

PMG FILE PHOTO - A growing number of companies are surveying their employees to determine whether to institute remote working permanently or move to the suburbs.Landlords of office buildings in downtown Portland continue to try to sweeten the pot to attract tenants, even as a growing number of companies are surveying their employees to determine whether to institute remote working permanently or move to the suburbs.

Kidder Mathews reports that direct vacancy rates increased to 11.9% in the second quarter of 2022 compared to 11.7% last quarter and 10.6% last year. Net absorption was negative 243,135 square feet.

The average asking lease rate increased to $28.42 square feet full service, a 1.5% increase compared to the same time last year.

As a result of the increasing vacancy, landlords are offering attractive concessions packages to draw potential tenants.

Alexandra Henderson, senior vice president of Healthcare & Office for Kidder Mathews, said the concessions include extended rental abatement for new leases, in some cases up to two years of free rent for long-term leases committing to large blocks of space. Additionally, aggressive tenant improvement packages and moving and furniture allowances are being offered to attract tenants.

"During the summer months, there has been increased retail presence. However, there are ongoing safety and security concerns during the work week," she said. "We remain optimistic that as more groups return to work, downtown's vibrancy will continue to improve."

Still, Henderson noted, tenants are continuing to give back space because of employees' preference for hybrid working schedules or remote work entirely. Downtown specifically, many employers are electing to significantly reduce their footprint and relocate to the suburbs in some capacity, if not entirely.

"We are also seeing a trend in flight to quality, where tenants can enjoy higher-end product, occupy less square footage and utilize common-area amenities rather than having some of those within their own space," she said. "Overall, we are continuing to see tenants survey their employees, upgrade and right-size their offices, and relocate to an area that is conducive and desirable to their employee base."

The 1,066,282 square foot per quarter leasing average this year continues to closely mirror the rate of leasing last year, which averaged 1,038,400 square feet per quarter. Downtown Portland experienced 31% of the year-to-date total with 669,700 square feet, while Class B properties led the way across the region and accounted for 53% of the total at 1,122,827 square feet. Class A followed at 38%, or 812,626 square feet, according to Kidder Mathews' report.

Office sales volume totaled about $117 million in the second quarter of 2022, bringing the year-to-date total to nearly $282 million over 160 transactions while averaging nearly $282 per square foot.

Henderson pointed out that there are only a couple of new developments under construction downtown, which remain the most challenging projects due to construction costs.

"There is an unprecedented amount of inventory for tenants to select from in the CBD. As a result, new deliveries have not generally gained much momentum, with the exception of those that have market-ready spaces and can offer flexibility," she said.

Active developments totaled 386,266 square feet at the end of the quarter, more than 303,000 square feet of which is in the CBD with Block 216 at 900 S.W. Washington St. (168,188 square feet) and the Offices at 11W at 1106 S.W. Washington St. (134,185 square feet).

Colliers International's report noted that the quarter's conclusion marks 10 consecutive quarters of market-wide negative net absorption downtown. Portland's net negative absorption since the start of COVID-19 is equivalent to the US Bancorp Tower fully vacating nearly four times over.

Increasing inflation, rising interest rates and an inconsistent labor market are creating persistent uncertainty in Portland's office market, while suburban submarkets remain attractive due to employee proximity and various amenities. The direct vacancy rate in the combined suburban market for the second quarter was 8.1%, Kidder Mathews reported.

"Kruse Way, in particular, has raised its rates to historic highs, which is starting to deter current and potential tenants to explore other options in the Johns Landing, Tigard, Beaverton and Hillsboro submarkets," Henderson said.

Cushman & Wakefield reported that leasing activity continues to increase in the Portland West market, with large transactions including the 29,000 square foot lease at 217 Corporate Place in Washington Square and 13,000 square feet at Kruse Oaks I in Lake Oswego.

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