— By Jessica Ramey, Executive Vice President and Co-Lead for Agency Leasing, and Patricia Raicht, Head of Research for U.S. West and Latin America, JLL —
Portland’s office sector is a tale of market cycles, with many signs trending in positive directions. Leasing continues to strengthen, tenants are taking space for longer terms and certain sectors are performing better than others. All of this provides opportunities for those able to execute on them.
Portland’s suburban market is second best in the U.S. with a 13 percent vacancy that is significantly below the U.S. average of 21.9 percent. By contrast, the urban market recently tied with Phoenix for the fifth-highest vacancy nationally. Vacancy had been increasing in downtown Portland, but the rate of negative absorption is starting to moderate. JLL anticipates the numbers will turn positive in 2025.
Urban/Downtown Market Green-Shoots Rising
The revitalization of downtown is making significant progress thanks to efforts by both local government and private-sector groups. As such, the migration of tenants out of the urban core has largely subsided. Nevertheless, as corporations begin to evaluate their space needs and location options, they remain concerned about safety and parking. Many are also increasingly looking at public transit and area amenities to support their returning employees.
Tenants have continued their flight to quality, with close to 50 percent of Class B urban tenants upgrading their spaces to a higher class of building upon lease expiration. Urban rents have also moderated over the past several years, dropping slightly as vacancy escalated. Concessions have peaked and are now stable for urban core leasing. For example, tenant improvement allowances have leveled at $9 per square foot, per year. Free rent is leveling at 1.1 months of free rent per year.
Urban tenants are also returning to longer-term leases of a decade or more. Miller Nash and All Classical signed leases for 15 years; JPG Wealth Management and Walker Macy leased space for just over 10 years; Epstein Becker and Deloitte both committed to 10-year deals.
Sublease availability is moderating as some tenants take their sublease space back off the market, recognizing that they still need the space. An interesting segment of users are taking advantage of pricing as an opportunity to own their space, rather than rent. This includes non-profit, education and government-related users. Oregon Health & Science University acquired two buildings for roughly $46 per square foot, a significant discount from pre-pandemic pricing. Late last year, Portland Village School acquired 4650 S. Macadam Ave. in the close-in Southwest market as the school’s future permanent site.
Strong Suburbs Continue Improving
Portland’s suburban vacancy remains one of the lowest in the country. At 13 percent vacant, it is second only to suburban San Diego. Similarly, the cost differential between urban Class A and suburban Class A has narrowed significantly, going from a 36 percent premium in 2019 to lease in the urban core to just a 10 percent premium in the first quarter of 2024.
The migration of tenants from the urban core has slowed. Roughly 55 percent of metro-area leasing activity was in the suburbs in first-quarter 2024, compared to a high of 71 percent in 2020. Suburban Class A rents have seen strong escalation over the past several years, jumping 13.3 percent since 2019 while urban Class A rents have declined 8.2 percent during that same timeframe.
While concessions have escalated in the suburbs, they are lower overall for Class A space. Tenant improvement allowances currently sit at $7 per square foot, per year. Free rent is holding at 0.8 months per year.
In all, Portland’s office sector is responding to market conditions that continue to favor tenants, especially in downtown. Premium suburban office space has been performing well and continues to tighten but less at the expense of also-improving urban locales, and more as a result of severely limited construction opportunities.