21.7%
Vacancy Rate
$32.69
Average Rental Rate
0.4%
12-Month Rent Growth
0
SF Under Construction
1Q
2023
Central Business District
Overview
The largest and most-heavily concentrated office hub in the region has historically seen demand generated from a mix of tech, financial services, apparel and government sector employment. The vacancy rate of 21.7% remains elevated, relative to the metro aggregate. This is an indication that space utilization per employee remains in flux, despite overall employment in office-using industries having grown to where pre-pandemic trends suggested. In turn, lingering reputational issues from pandemic-era protests that rocked the neighborhood could also be at play.
In more positive recent news for landlords in Portland's core, an announcement by the City of Portland indicates all city government employees will return half-time to downtown offices beginning in April. Amazon also recently announced a move back to in-office work part time. Given the presences of these entities, this could lead to a noticeable increase in foot traffic and space usage.
Nonetheless, a low ceiling on rent growth is likely to remain in the near term, given heavy competition for tenants and historically high sublet availabilities. Despite featuring some of the highest asking rents in Portland at $32.69/SF, the CBD's year-over-year rent growth performance had already began to stagnate in 2015, leading to slow, but steady erosion up until early 2021. At this point, base effects partially allowed rent growth to bounce back into positive territory.
Given the aforementioned fundamentals, sales volume in recent quarters has been muted. Currently, the metro's largest office transactions are occurring in the suburbs, where buyers—a hefty share of which are owners—are searching for value-add deals away from urban centers.
Rental Rates
Contributing factors to potentially middling rent growth in coming quarters include some recently announced moveouts and more competition to secure tenants. Elevated sublet availabilities and new trophy product hitting the market will amplify these trends.
Vacancy in the CBD as of second quarter 2023 is equal to 21.7%, far eclipsing the average metro area rate of 12.3%. Rates had already been trending upward for several years, though, with average vacancies over the past five years, equating to 15.6%. This was partially driven by over 1 million SF of space delivered in the last decade. CBD rents at $32.69/SF are some of the highest in Portland and have increased by about 35.0% in the past decade.
The metro's overall cumulative office rent increase of 42.7% has pushed average rents to $28.99/SF. Rent growth year-over-year currently equates to 0.4%, in comparison with the larger metro rate of 1.6%.
4 & 5 Star space in the CBD leases for $37.29/SF, on average, above the metro average of $34.62/SF for trophy assets. Several projects underway in downtown, along with the 5 Star Block 216 and 4 Star 11W, will command premium rents when they deliver.
Leasing Activity
Business synergy and the presence of some notable government entities have anchored leasing in recent quarters, keeping market activity from completely freezing as space utilization finds its footing.
To that note, leading the way of late are legal, government and government contractors leasing, driven by the proximity to federal and state agency buildings clustered in the central core. Kolitch Romano Dascenzo Gates took 11,500 SF at the American Bank Building across from Pioneer Square in 22Q4. In addition, Multnomah Defenders, Inc. and Metropolitan Public Defender Services took 23,000 SF at World Trade Center and 25,000 SF at One Main Place, respectively, in 22Q3.
Financial services firms are also relatively active for a similar attraction to synergy in downtown. Accounting and wealth management provider Cross Financial took 6,800 SF at the Powers Building in 22Q4. Asking rents were $24/SF, full service.
These leases alone, however, won't be enough to offset some signifcant moveouts in the short term. The US Bancorp Tower—downtown's largest office asset—is losing two major tenants in law firm Miller Nash and polling company SurveyMonkey. Fortunately, early indications are that Miller Nash will stay in the CBD. These moves will bring more available space to an already challenging leasing environment. Just under 20 buildings offer at least 50,000 SF of contiguous available space. Comparatively, 60 or so properties offer at least 20,000 SF of contiguous space.
Several high-profile tenants, particularly tech sector tenants, have established themselves in the area. While utilization among these players varies, Square, Google, and Amazon had all expanded their existing local footprints over the years. In addition to expanding tech firms, a number of national and regional tenants occupy at least 100,000 SF in the submarket, many of which are headquartered here. Their ranks include U.S. Bank, Wells Fargo, Standard Insurance Company (HQ), StanCorp Financial Group (HQ), Cambria Health Solutions (HQ), Moda Health (HQ), advertising agency Wieden+Kennedy (HQ), law firm Stoel Rives (HQ), and K-12 testing firm Northwest Evaluation Association (HQ).