As 2018 begins, it appears that the Greater Portland office market has continued to hold on to low vacancy rates as supply remains low across both Class A and Class B buildings throughout the market. CBRE/The Boulos Co is conducting its annual market outlook; it will be exciting to see the results, which we release in January. I anticipate the numbers to show a steady or slight decrease in vacancy rates across all submarkets but also show a much lower absorption rate, as momentum has appeared to slow down over the last 18 months. Transaction volume is trending far lower than in previous years and could possibly be the lowest number of transactions in the last seven years. However, there were a number a relatively large transactions completed over the last six months that will have a larger impact on the overall vacancy rate than simple transact
Nate Stevens, The Boulos Co./CBRE
ion volume. And we must consider that the small number of leases signed could also be due in part to limited supply.
The Downtown Portland Class A office market, in particular, continues to operate at historically low vacancy rates. Over the last five years, there has been a steady decline in Class A vacancy rates, which hit a 15-year low of 2.62 percent in 2016. The very low supply continued throughout 2017, with no Class A vacancies over 8,000 square feet. The majority of vacancies that do exist tend to be inferior quality space that has been available for over a year. Tenants seeking Class A office space have had very few options outside of new construction, and many larger companies in downtown Portland simply leased smaller satellite offices nearby to accommodate their fast growth while contemplating new construction among few other options.
The lack of large, quality options in late 2015 and 2016 spurred the first new office construction in Downtown Portland in the last 10 years with the completion of 16 Middle Street, a 42,000-square-foot building in the India Street Neighborhood near the waterfront. This additional 42,000 square feet of space was added to the total Downtown Class A market in 2017 and there remains 16,000 square feet left to lease at the property, which is evidence of a low absorption rate and lack of demand in the marketplace in 2017. Research is showing a possible slight increase in the vacancy rate for 2017, a sign that the Class A market simply couldn’t absorb the additional 50,000 square feet added to the market this year. However, with rumor of a few deals under negotiation, it’s difficult to anticipate the final figures.
Regardless of a possible slight increase in the vacancy rate, the supply is still low enough that there is a need for new construction, especially for larger tenants. There are currently are two projects in the pipeline which add roughly 120,000 square feet to the market. A 20,000-square-foot office building will be constructed just off Commercial Street near the Old Port. It is slated to be complete in 2018, with about 12,000 square feet available for lease. However, the most significant new development is the new 100,000-square-foot WEX headquarters on the eastern waterfront of downtown Portland. This state-of-the-art facility will bring roughly 500 employees to the eastern waterfront, which is already popular among hotels and residential condominiums. This new building will create some minor negative absorption from other buildings in the suburban market in a couple years. However, it will not affect the downtown market in a negative way. In addition to the two projects that have broken ground, there are several other projects on the open market awaiting signed leases to move forward. Based on absorption and demand levels over the last 12 months, it may be late 2018 or even 2019 before we see activity at these sites though.
While there seems to be a fairly balanced supply and demand in downtown Portland right now, the vacancy rates are still low enough to put strain on Class A tenants downtown. New construction is a clear possibility, but the timing can be a hindrance — especially for companies looking to grow quickly. Portland isn’t typically a town where developers will build on spec, especially when a new building still sits 30 percent vacant. Besides new construction, downtown Class A tenants will need to look at an office reorganization, leasing a higher quality Class B building and making significant improvements, or being patient for the right space to hit the market.
— By Nate Stevens, associate broker, The Boulos Co./CBRE. This article first appeared in the December 2017 issue of Northeast Real Estate Business magazine.