Portland’s office market continues to evolve
By Mike Holzgang and Brad Christiansen, Executive Vice Presidents, Colliers
Portland is seeing a number of employers reevaluating their post-pandemic workplace. Typically, this translates to companies downsizing to accommodate hybrid work models, with smaller/shared workstations and more conference space. New developments have slowed in anticipation of an environment of rising interest rates, historically high construction costs and supply chain constraints. Construction times are extended due to all these issues by up to 50% to 100%.
Most of the new construction coming online in Portland was started 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 neighborhood. The first, 11W, is expected to ship this year, while Block 216 will ship in 2023.
Construction in the suburban submarkets has also been slow, but we wouldn’t be surprised if it starts picking up in the next 18 or so months.
Interest and effect
Depending on where you are looking, the market is favorable for both owners and renters. It’s a homeowner’s market in suburban areas, especially those south and southwest of Portland. The central city is definitely a renter’s market. This is a reversal of the trend seen before the pandemic.
For a variety of reasons, Portland’s suburban markets have the most vigorous activity. Downtown Portland is grappling with pandemic overlays, homelessness, protests and a high tax burden. As a result, we see many businesses looking for space in the suburbs, which currently don’t have the same challenges.
The South and South-West suburbs see the greatest benefit from this dynamic, with tax savings as the main driving force. Washington and Clackamas counties allow service-oriented tenants up to $10 per square foot in annual tax savings over Multnomah County and the City of Portland. We’re also seeing a lot more interest in Vancouver, Washington, with companies like Zoom Info moving out of Portland proper. Government and technology companies continue to dominate the demand for space in the overall market.
Supply and demand
Typically, we see offers in the central core with at least one year of rent reduction over a five- to 10-year term, tenant improvements (TIs) of $40 to $125 per square foot, and asking rates of 20% lower than before the pandemic. levels. In suburban markets, we’re seeing a three to seven month rent reduction on a five to 10 year contract, IT’s of $25 to $50 per square foot, and rental rates holding steady or increasing by up to 33% per compared to pre-pandemic levels, depending on location and owner. In all submarkets, premium space in highly serviced properties continues to perform well.
Unfortunately, the investment sales market has slowed significantly in Portland. We currently have an oversupply of properties available for sale. Unlike the financial crisis, we have yet to see institutional investment groups ready to take losses immediately to weather the storm. Investment demand slowed as investors suspended activity in the Portland market. For this reason, we foresee significant value opportunities for investors looking to acquire assets in the region at higher capitalization rates and with long-term, value-added prospects.