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Pandemic, protests among several factors dragging down Portland's office space market.

PMG PHOTO: JAIME VALDEZ - David Keys is chairman and managing director of Norris Stevens.

From the COVID-19 pandemic forcing people to work at home to property destruction during protests downtown, office space in the Portland metro area is steadily becoming vacant.

The market faces a shaky outlook for the remainder of this year, even as people receive their vaccinations and employers consider bringing their staff back into the office.

State economist Josh Lehner pointed to the combination of business closures, less foot traffic and lower demand for office space as key factors in declining construction activity. Lehner said leading demand for office, retail, and leisure and hospitality space would need to rebound considerably for vacancy rates to decline and rents to increase.

In his outlook for this year, Lehner noted that "it's going to be a while before we build another office building," and that Portland now ranks 66 out of 80 in national commercial real estate markets, according to a new report by PwC and the Urban Land Institute.

"Outside investors — and a lot of large projects rely on them — can pick and choose from opportunities around the country. If Portland, for whatever reason, is deemed a bit more risky or less desirable, then those investments and projects flow to other markets," Lehner stated in his January report.

Other possible factors that could be impacting investment in Portland's office market include policy changes such as the state's new corporate activity tax, increased property taxes for the region, and a new income tax in Multnomah County.

Lehner said he and other analysts with the Oregon Office of Economic Analysis agree with the PwC and the Urban Land Institute's forecast that while large cities are likely to struggle for several years, the COVID-induced pause in their appeal is not expected to be permanent. Still, their desirability depends on other factors as well.

COURTESY CUSHMAN WAKEFIELD - As evidenced by the top graph, office market vacancy rates in the United States still exceed those of Portland. However, in the graph above, office vacancy rates throughout the Portland area continue to rise."We expect Oregon to remain an attractive place to live and work. However, the real threat to the economic and revenue outlook is what happens to our reputation longer term, and whether fewer migrants choose to live in the region," Lehner said.

According to an office market analysis by Portland State University's Center for Real Estate, as the COVID-19 pandemic reached Oregon, Cushman & Wakefield, JLL and other commercial real estate companies began predicting an increase in demand for office space flexibility and versatility as more companies utilized flex and coworking space.

A Cushman & Wakefield survey found that 90% of real estate executives expect to have some of their employees utilize coworking and flex space by 2024. However, JLL predicts that coworking space, where employees of different companies share office space to reduce costs and share equipment and other resources, will decline as more tenants prefer private spaces over public spaces and corporate culture over coworking.

A survey by the National Association of Realtors shows that demand for coworking space may also fall as freelancers continue to work from home. JLL stated that the decline in coworking is the most significant cause for concern in the national office sector.

Portland is somewhat insulated from this impact as coworking and executive suites account for just 1.5% of total office inventory. 'Though Portland's coworking share is small, the effects are felt as companies are putting a brake on expansion plans," the PSU analysis noted.

Portland recorded decade-high sales volumes for office space in 2019. Then the market experienced a 70 basis point leap in vacancy rate as leasing activities died down due to the pandemic. According to PSU's analysis, the largest increase in vacancy rates last year was recorded for the Central Business District (CBD) perimeter and I-5 south submarkets.

According to research by the firm Kidder Mathews, the downtown Portland office vacancy rate reached 15.3% in quarter one of 2021, 19.2% in Chinatown and the Pearl District, and 14.9% in the central business district overall.

JLL noted that the westside suburbs, previously a bright spot in the Portland market, were hit by large move-outs in the last quarter of 2020. These included Nike vacating 280,000 square feet of the Tektronix campus in the Sunset Corridor, and Comcast placing its 56,000-square-foot office on the sublease market. However, substantial leases signed by Microsoft and Twist Bioscience highlight Portland's growth potential in the technology and life sciences sectors.

The vacancy rate is expected to continue rising with Nike vacating another 200,000 square feet of office and flex space this year and a number of sublease availabilities turning vacant. New development activity will continue to decline as the market attempts to absorb more than 1.2 million square feet delivered in 2020. With Class B and C rates already on the decline, Class A properties will face pressure to drop rates as they compete for a smaller number of tenants currently in the market, according to JLL.

Despite the dim outlook for the office market this year, the Portland metro area boasts one of the most significant office deliveries in a single project with the Nike World Headquarters–Serena Williams Building in Beaverton, which added 1 million square feet of office space to the market. The metro area also is expected to add another 380,000 square feet of space to its office inventory this year, according to Commercial Café, a nationwide commercial real estate listings platform.PMG FILE PHOTO - Although Nike recently vacated 200,000 square feet of office and flex space this year, the shoe giant added 1 million square feet of office space with the completion of the Nike World Headquarters-Serena Williams Building (above) in Beaverton.

Melody Finnemore is a contract writer who regularly contributes to the Business Tribune. She can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it.

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