"Portland, we have a problem..."
We've been through the exhaustive narrative surrounding Covid, work from home, and the anticipated ramifications for the office sector, so I won't bore you with the same recycled talking points. Instead let's jump right into the Portland market from a numbers standpoint and the image problem that will continue to keep the numbers from improving much over the short-term.
Office vacancy is rising faster than an Apollo rocket as sublease space continues to saturate the market and vie for attention. Companies are retooling their office configurations and realizing that perhaps they don't need all of this space, after all. Portland MSA vacancy rate now stands at over 15% on a weighted average, up considerably from the first quarter just one year ago, with the central core and close-in NW leading the charge. Suburban office has fared slightly better posting around a 10-11% vacancy and actually increasing their rental rates slightly despite negative absorption.
Speaking of absorption, we are now in the 6th consecutive quarter of negative absorption which has not been seen since the Great Financial Crisis in 2010. First quarter shows that absorption was negative by nearly 800,000 square feet and was surpassed only by the nearly 1M square feet that flooded the market in last quarter of 2020. This does not bode well for a battered sector that has to continue to absorb new supply and increasing sublease space.
Despite all of the doom and gloom, rental rates have stayed relatively flat in most areas as landlords have dug in their heels to preserve valuations and are happier to supply increased concessions in the way of tenant improvements and free rent. The Portland MSA was posting rental rates around $30/psf/year total on a full service basis. At some point there has to be some movement in rates and that should appear in the next few quarters, if fundamentals don't significantly improve. Most landlords are unwilling to sign long-term leases at reduced rates, anticipating a swift snap back to the economy overall and employees heading back to the office. However, companies subleasing space have no allegiance to valuations and could put additional pressure on the market to begin driving down prices along with concessions. We will see how this plays out.
Let's talk a bit about the future we are calculating. According to our office supply gap analysis, employment in office jobs is going to be a modest 1.3% increase from May of this year to May of next year (2022). With the current supply, vacancy, and absorption figures, including increasing office demand, we anticipate stabilized occupancy to occur in approximately 64 months. This means that it could take over 5 years to simply absorb the current supply stock based upon office sector demand. Add in anticipated new construction that has yet to break ground in the CBD and outlying areas such as Hillsborough, and this could take a while longer. This all paints a picture of increasing competition for tenants and unstable office fundamentals for the near future.
Obviously Covid is a heavy factor in this state of the office, however riots, homelessness, and rising crime rates are also factoring into decision-making from companies and landlords alike. Unless local government begins to make concerted efforts to reduce these negative factors, it could take much longer to find stabilization in this sector. Add in a trickle down effect and you will see other asset types, such as retail and multifamily, begin to be seriously impacted.
Downtown Portland has some serious issues, but we are rooting for the city and the serious changes that have to occur to see the city through these challenging times. We'll continue to provide updates in the data as they become available.
About the author:
Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty specializing in commercial real estate investment portfolios for high net worth clients and institutions, focusing on market, financial and risk analysis. He is also a faculty instructor for the CCIM Institute, teaching professionals globally in the CI-102 Market Analysis Core Course.
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