Tyler Hobbs,
CBRE / The Boulos Company
The real estate environment in the Greater Portland region has been incredibly strong this year. On top of the favorable vacancy rates in the industrial, retail, and multifamily sectors, the office market vacancy in the region continues to dwindle, following the trend we’ve seen over the last five years.
In a state with a geographic footprint that could nearly fit the rest of New England, the bulk of office inventory is concentrated in the southern region. Specifically, the supply is in the Greater Portland area, which comprises seven cities and towns. This region features just over 10.5 million square feet of Class A and Class B office space, with an additional 1.25 million square feet of medical space. Of that, 40 percent is located in downtown Portland.
Portland is in the midst of a renaissance of sorts. Demand and desirability to live and work here, especially downtown, has grown significantly in recent years. We’ve become a “foodie” destination with a surge of new high-end restaurants and hotels. This coupled with beautiful water views and a unique way of life has attracted a younger demographic. Baby boomers and empty nesters are also relocating to this area from the suburbs. The movement has put notable pressure on the local housing market, triggering the construction of multiple market-rate projects. The economic boom has enabled businesses to grow and relocate here, but in order to match demand, there needs to be new office development.
Like everywhere else, the region was hit hard by the Great Recession, with vacancy in the downtown Portland office market climbing from 3. 1 percent during our last economic boom in 2007 to over 14 percent in 2011. Availability of office space has decreased across the board over the past year, and we expect that trend to continue until new supply is introduced. At the start of 2016, Greater Portland had a total office sector vacancy of 6.5 percent. Moreover, the downtown Class A market — often considered the indicator of economic health in a region — posted a 4.5 percent vacancy rate, down significantly from the 8.8 percent posted one year prior. That rate has dropped an additional 1 percent over the past six months.
Companies requiring 10,000 square feet or more that are looking to enter the downtown market or expand their footprint are hard pressed to satisfy their needs. Five years ago options were abundant and tenants could negotiate aggressive lease terms. Not the case today. Of the current 3.4 percent vacancy, two office towers contain over 50 percent of the available downtown Class A product; excluding the aforementioned properties leaves vacancy at 1.5 percent. Clearly, all indicators point to a need for new construction to satisfy demand in this central business district. There hasn’t been any new construction in this sector since 2007 and it’s felt. However, new projects are in the works, including a 45,000-square-foot office building currently under construction at 16 Middle Street.
The suburban market for Class A space has also shown a positive trend, albeit more modest. At the beginning of 2016 vacancy dipped to 5.2 percent, down from 5.4 percent a year prior. This trend may continue as businesses are pushed into the market due to space constraints on the Portland Peninsula. The rising cost of city parking is another driver for businesses to move outside the CBD.
The one exception to the decreasing vacancy trend in Greater Portland is Class A medical, which rose 1 percent since last year, increasing it to a still-low 1.5 percent. The available space rose by 10,000 square feet over the course of 2015; however, rentable inventory grew by approximately 95,000 square feet during the same time period. This increase is due in part to the reclassification of 161 Marginal Way in Portland (50,000 square feet), as it was vacated by the Department of Health and Human Services and is now fully leased to medical users.
Suffice it to say we don’t expect these trends to reverse, which is generally a good thing — unless your client needs quality space downtown, in which case you have your work cut out for you!
— By Tyler Hobbs, Associate Broker, CBRE | The Boulos Company. This article first appeared in the June/July 2016 issue of Northeast Real Estate Business.