Average Rental Rate
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Portland's office demand foundation remains shaky, as changing square footage requirements and long-term utilization patterns are still normalizing for many employers. Thus, physical space decommitments continue to plague the market. Employment gains in office-dominant industries and payrolls swelling to record levels haven't yet made a dent in record sublease availabilities, which have mounted to 2.5 million SF, or 2.2% of available stock.
Nowhere have physical footprints been more decimated than in the CBD, where well over 25% of Portland's office product is located. The core's reputation has been damaged by a variety of external factors including safety concerns and a lingering stigma stemming from prior bouts of social unrest. Some tenants responded by fleeing to the suburbs, while other large remaining firms are reconsidering extending leases. Metro vacancy rates are thus trending to 12.3%, but remain below the national vacancy rate of 12.9%. Portland's vacancy rate isn't projected to recede given the aforementioned headwinds, but is nonetheless forecasted to stabilize in the near term. One reason for this could be a speculative development pipeline that has shrunk drastically over the past five years.
Office product underway equates to 0.2% of existing inventory, well below the national average of 1.6%. The largest speculative projects currently delivering or planned are 5 Star builds clustered in the downtown core, as well as the Vancouver Waterfront. In inner urban areas like Southeast Portland, a growing biotech presence has generated some interest as well. Further east, developers of the Pavilion on Sandy – located at the former Pepsi distribution plant in the Lloyd District – aim to capture growth in an established corridor anchored by the Providence Portland Medical complex.
Despite a minimal threat from excessive supply, year- over-year rent growth performance remains below historical averages, most recently posting gains of 1.6%. This trails CPI growth by a large margin, and compares to national office rent gains of 1.3%. Smaller suburban submarkets like Tigard, Tualatin, Kruse Way, Wilsonville, and Sherwood have outperformed larger metro rent growth trends, a result of minimal new construction and some tenant relocations from core submarkets.
Market rent most recently posted gains of 1.6% year over year, versus the five-year average of 2.5%, and the 10-year average of 3.7%. Despite these recent rent gains, tenants should generally maintain control in negotiations over the next several quarters, given a structural shift in space utilization.
Portland's market rent of $28.99/SF as of the second quarter of 2023 offers a sizable discount to the national index of $35.34/SF, with the metro area's affordability one of several potential draws for large companies when considering other gateway markets. But part of the reason for Portland's noticeably softer rents comes from the metro's 40% share of 3 Star office inventory. When coupled with 1 & 2 Star space, Portland's non-trophy inventory totals around 65% of the office footprint. Average rent for 4 & 5 Star space in Portland currently sits at $34.62/SF, compared with 3 Star rent of $28.19/SF and 1 & 2 Star rent of $23.41/SF.
Rent growth in 3 Star rated properties turned in gains of 2.2% over the past four quarters, while 4 & 5 Star rents have grown 0.9% over the same period. Trophy office product is trailing its utilitarian counterpart, partly because vacancies expanded more rapidly in this sector with the addition of several Class A properties that struggled to lease-up even before the pandemic's onset.
And while the CBD and the west suburbs have secured some large tech, apparel and professional services sector leases, a few higher profile incoming speculative spaces and sublet availabilities in these areas will likely form a low ceiling for rent growth, at least in the near term. Case in point, Miller Nash's new lease signed in 11W downtown left a void of 50,000 SF to occupy just over 30,000 SF of new space, resulting in a net erosion of utilization for the core.
Shiny new deliveries such as 11W and Block 216 will also supress competing properties' ability to increase rents, because competition to steer tenants away from these spaces could intensify.
Elsewhere, unique offerings in creative office and restored historic buildings have also commanded some of the highest rates in the metro. In the NW Close-In submarket during 22Q4, techno-physio start-up Motusi took 6,200 SF at a 1915-built former warehouse building for an asking rate of $31/SF Full Service
Office leasing activity as of the second quarter of 2023 has positioned itself above historic lows reached in prior quarters, but volume remains depressed when compared to pre-pandemic activity and the trend stands in stark contrast to space being returned to the market en masse. This has pushed the amount of sublease square footage available to 2.5 million SF, equating to a sublease availability rate of 2.2%. As a result, net absorption, at -160,000 SF year over year, remains in the red. This push and pull effect suggests Portland's journey to recovery in the office sector isn't likely to take linear form.
One of the recent higher-profile space listings involves 338,000 SF given back to the market in the Sunset Corridor. The entirety of the Murray Business Center—once occupied by Providence Health and Nike—is being offered for sublease by CBRE. The 2 Star office/flex product was originally built in the late 1970s and remodeled in the mid 1980s, with a remaining term running through October 2031. Elsewhere, in what has been a string of bad news for downtown, Umpqua Bank, PGE and Unitus Community Credit Union announced they will be leaving their flagship offices in the CBD. The organizations cite relocations to the suburbs or space consolidation.
Thus, chief among concerns for stakeholders is the metro's ability to work its way through the immense amount of sublease offerings on the market. To date, however, space signings for subleased product over the past few quarters have been underwhelming at best, and the rate of sublet space being absorbed has slowed over the past few quarters. To illustrate this, the current availability rate for sublease space is nearly triple the historic average of 0.8%.
Discussions with one broker with a large client base of smaller firms revealed the tenants they are representing would be open to subletting if there were more smaller spaces available, primarily downtown. However, core area sublet offerings currently include over 40 spaces with at least 10,000 SF, but only around 15 space offerings under 2,500 SF in size, in which their clients would be interested. This insight indicates larger blocks of second generation and non-luxury space will be challenging to fill in the near term.
Some tenants are instead gravitating towards quality in new buildings, or seeking value and employee talent in suburban markets. Indicative of this trend are two large space decommitments at the U.S. Bancorp Tower in the CBD, where law firm Miller Nash and internet survey giant SurveyMonkey will leave behind about 100,000 SF. Miller Nash will relocate to the recently-delivered 11W, but their new footprint at the trophy asset will be cut by about 40%. The lease term will be for 15 years, beginning in 2024, but this move reflects a net decline in utilization for the CBD.
On the tech side, ZoomInfo recently committed to approximately 366,000 SF of future trophy space at Terminal 1 along the ongoing Waterfront development. Elsewhere, the presence of Nike and microprocessor behemoth Intel in Portland's western suburbs gives employers a rich talent base to choose from. This has attracted a number of businesses to the area. Major signings in recent quarters include Nobeltec, a marine navigation software company, Long Building Technologies, as well as GPS software company Garmin.
Uncertainty regarding the future of office space in Portland will linger until the CBD illustrates it is on a path back to prominence. In the meantime, Portland's dynamic economy may be attractive enough to develop new avenues of growth. Biotechnology firms are increasingly drawn to the area's affordability, talented work force and the presence of Oregon Health & Science University, a major research hospital.
San Francisco-based Genentech and Twist Biosciences have each made significant investments in the metro area of late. Moves such as these are likely to draw more companies to the area in search of talent.