Portland’s Office Market Continues its Evolution
By Mike Holzgang and Brad Christiansen, Executive Vice Presidents, Colliers
Portland is seeing a number of employers reassess their post-pandemic workplace. Generally, this translates to companies downsizing to account for hybrid work models, with smaller/shared workstations and more conferencing space. New development has slowed in anticipation of an increased interest rate environment, historically high construction costs and supply chain constraints. Construction timelines are protracted due to all of those issues by as much as 50 percent to 100 percent.
Most of the new construction coming online in Portland was initiated before the pandemic. Notable downtown projects include two mixed-use developments named 11W and Block 216. Both of these projects will add significant office space to the city’s popular West End district. The first, 11W, should deliver this year, while Block 216 will deliver in 2023.
Construction in the suburban submarkets has also been slow, but we wouldn’t be surprised if it starts to pick up within the next 18 months or so.
Interest and Effect
Depending on where you are looking, the market is favorable for both landlords and tenants. It is a landlord’s market in the suburban areas, particularly in those south and southwest of Portland. The Central City is definitely a tenant’s market. This is a reversal of the trend we saw pre-pandemic.
For various reasons, Portland’s suburban markets have the most vigorous activity. Downtown Portland is struggling with the overlays of the pandemic, homelessness, demonstrations and a high tax burden. As a result, we see many companies seeking space in the suburbs, which do not currently have the same challenges.
The South and Southwest suburbs see the most significant benefit of this dynamic, with tax savings being the primary driver. Washington and Clackamas counties enable service-oriented tenants as much as $10 per square foot in annual tax savings compared to Multnomah County and the City of Portland. We are also seeing significantly greater interest in Vancouver, Wash., with companies like Zoom Info relocating from Portland proper. Government and technology companies continue to lead the demand for space throughout the market.
Offerings and Demand
Generally, we are seeing deals in the Central Core with at least a year of rental abatement on a five- to 10-year term, tenant improvements (TI)of $40 to $125 per square foot and asking rates about 20 percent below pre-pandemic levels. In the suburban markets, we see three to seven months rental abatement on a five- to 10-year deal, TIs of $25 to $50 per square foot, and rental rates either remaining flat or increasing as much as 33 percent from pre-pandemic levels, depending on the location and landlord. Across all submarkets, premium space in highly amenitzed buildings continues to perform well.
Unfortunately, the investment sales market has slowed considerably in Portland. We currently have an oversupply of properties available for sale. Unlike during the financial crisis, we have not yet seen institutional investment groups immediately willing to take losses to weather the storm. Investment demand has slowed as investors have paused activity in the Portland market. Because of this, we anticipate significant value opportunities for investors looking to acquire assets in the area at higher cap rates and with value-add, long-term outlooks.