Signs Point to More Activity in Portland’s Commercial Real Estate Market, CBRE Researcher Says

A quarterly report by CBRE showed Portland’s commercial real estate vacancy rate rising, but the company’s field research manager is still bullish on the sector’s future.

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According to CBRE’s Second-quarter Portland Office Figures Report released in July, the overall vacancy rate rose across the Portland metro. The average direct asking lease rate across the metro area also remained flat, at $32.23 per square foot. At the same time, overall direct asking rates for office space downtown have increased 4% when measured from the same period in 2020.  

The report partially attributes the rise in vacancy to the completion of The Offices at 11W. The report also noted the amount of available subleased space in downtown Portland decreased 2.3% quarter-over-quarter, the first decrease since 2021. Sublease availability still accounted for 19.7% of overall availability in the market, increasing by over 1 million square feet year-over-year.

Samuel Hatcher, field research manager for CBRE in Portland, says while some commercial real estate prices are coming down, Portland’s premier Class A buildings won’t be lowering lease rates any time soon. He says overall trends showing workers coming back into the office, as well as cyclical indicators, signal the recovery of Portland’s commercial real estate market. 

This interview has been edited for length and clarity.

According to CBRE’s 2nd-quarter data, asking lease rates are relatively flat, despite the vacancy rate. Do you see lease rates going down any time soon?

I don’t think we would come to a consensus that rates are coming down, especially on Class A product. But there has been some movement downward, potentially, in Class B and Class C. We really haven’t seen your prices come down in Class A office buildings, whether that’s downtown in the central city, or in the suburbs. On Class B and Class C buildings, maybe some movement to the downside.

Why are Class A buildings slower to drop asking prices?

It’s just the nature of the environment, and the nature of the market. When you think about the mix between institutional owners versus family owners or smaller portfolios, I would say that institutional ownership can withstand turbulent market volatility, and they aren’t necessarily as incentivized to fluctuate with the market.

When we’re talking about Class A buildings, we’re talking about the trophy office buildings that have been determined to be the top-tier buildings in the market by our office leasing and sales professionals, whether it’s due to their age, location, and really, we’re looking at amenities. I would just say it’s the fact that there is a large share of the market owned by institutional owners with deep pockets that don’t necessarily move based off what other owners might move off of.

There are reports of companies moving into [downtown] Portland [or choosing to stay downtown], specifically Miller Nash, Davis Wright Tremaine, and All Classical Radio. Is there more demand from people wanting office space in downtown Portland?

We do have active tenants in the market. We are tracking an overall trend of flight to experience or flight to quality. It’s something that we’re building a database off of, their reasons for moving and so on and so forth.

The example that you mentioned with All Classical falls into the category of flight to experience or flight to quality, where they were originally located on the East Side, now they’re downtown, and KOIN tower is a Class A building in prime location. I would say that same with Miller Nash and Davis Wright Tremaine.  

Your report mentions sublease agreements expiring as a reason to be bullish on Portland’s commercial real estate market recovering. Why is that positive?

When you’re looking at Q4 of 2019 or Q1 in 2020, before the pandemic we were tracking about 500,000, 550,000 square feet. Fast forward two and a half, three years. We’re sitting at about two and a half million square feet across the market. Subleasing space could be an indication of a downturn in the market. But when we’re looking out into 2024 2025, there’s a great chunk of that space expected to expire.

During the time period of 2019 to 2020, when there was a lot of scrutiny on commercial real estate needs, you saw a lot of tech companies, a lot of health care companies, reevaluating their office needs and putting space on the market. That’s an indication of, I don’t want to say necessarily tougher times, just a higher level of scrutiny.

We’re projecting nearly a million square feet of sublease availability to expire between now and the end of 2025, so that is a signal of a recovery.  Now that is coming back on the market for direct space. When the sublease space is expiring, it’s an indication that the market is absorbing that space. Rather than having more space come online, seeing it come off in a wave is showing the cycle of the market.

What are the other trends you’re looking at for Portland’s commercial real estate market?

Irrespective of sublease, keeping a continued eye on office utilization. That’s not necessarily tracking occupancy, having in-depth conversations with property managers about employees returning to the office. As far as positive trends that we’re seeing in Portland, both downtown in in the suburbs, is a year-over-year uptick in office utilization.

We don’t account for every single last building in the market, but when we’re looking at July of 2022 in downtown, multi and single-tenant building utilization was between about 25% to 30%. Fast forward a year to the July-August time frame in 2023, we’re at about 40 to 65%. So, there has been a noticeable difference. And that trend is replicated in the suburbs where there’s a noticeable difference in not necessarily occupancy rate, but the amount of employees who are coming into the office building.

I think that’s a very positive trend, whether that means we’re getting further away from the pandemic or offices are implementing different types of incentives for people to come back, just the idea that we are seeing more people both downtown and, in the suburbs, coming into the office I think is very positive.

Why is your report bullish on Portland’s commercial real estate market’s recovery?

One of the things that Portland has going forward for it and I think always will, is people in their 20s and 30s. They’re always going to look at Portland as a destination for lifestyle. You know, it’s always going to be a metro area that offers live, work, and play options.

Downtown just welcomed a Class A premier trophy office building with 11W, a mixed use property that also has residential and retail space as well. The Ritz Carlton opening in block 216 is the first Ritz Carlton in the Pacific Northwest, and that is a very positive story for downtown, and Portland generally. I think that the Midtown Beer Garden that just opened in collaboration with Expensify and Chef’s Table will spur additional foot traffic back downtown. That’s all part of Portland’s culture.

There’s a lot of very exciting things happening in Vancouver both on the industrial side and on the office and residential side. Zoominfo signed a lease couple years ago for new construction of 365,000 square feet. The Vancouver waterfront is, I think, one of the most exciting places to be on a on a Thursday, Friday, Saturday night. The investment and development that is ongoing right now at the Vancouver waterfront is, I don’t want to say going unnoticed, but I think it’s almost a national story. Just the amount of activity and foot traffic.

What are you most concerned about?

When I have conversations with my colleagues or other brokers, it really comes down to a couple of things. Number one, the business environment. Then also, just wanting to do our best to get this city back to being as clean and as safe as it can be. I think we’re making great strides right now.

Downtown is in great shape compared to where it was a year and a half ago, but I think we need to just continue with that sentiment, and continue putting our efforts into making the city more lively. I think we’re doing a great job right now. But I think there’s room for improvement.

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