By Jack Stubbs
The Portland office market saw an interesting final quarter of the year, with the data from Kidder Mathews’ recently released Q4 2022 Portland Office Report showing varied outcomes: leasing activity was down year-over-year, average vacancy rates saw a year-over-year increase, as did average asking rents, and there were zero square feet of new inventory delivered.
Several market highlights shed further light on Portland’s office market at the end of the year.
Office direct vacancies continue to trend upwards across the Portland metro, increasing 20 basis points year-over-year to 11.1 percent at the end of the quarter, states the report, while average asking lease rates increased slightly to $28.32 per square foot during the same time period on a full-service basis.
In terms of leasing activity in the fourth quarter, tenants may continue to control lease negotiations given a decline in space needs driven by hybrid work options, notes the report. Leasing activity dropped to an all-time record low of only 574,000 square feet leased, marking a 35 percent year-over-year decrease. There were 752,339 square feet leased in third quarter 2022 and 886,249 square feet leased in fourth quarter 2021.
Some of the top lease transactions during the fourth quarter included the 48,897 square foot lease at an office property at 1120 SE Madison St., the landlord for which is Moore Family Trust; the 27,284 square foot lease at William Baxter’s property at 355 NW Division Street in the Gresham submarket to an undisclosed tenant; and DR Horton’s lease of 16,806 square feet at 4350 Galewood St. in the Kruse Way submarket from Allen Properties LLC.
Office sales volume likewise saw a significant decrease. Office sales volume dropped to 474,000 square feet, a decrease of more than 50 percent year-over-year. There were 870,499 square feet of real estate sold in third quarter 2022 and 953,203 square feet sold in fourth quarter 2021. This trajectory also reflected a 10-year record low, averaging $224 per square foot.
According to the report, some of the top sale transactions in the fourth quarter included Rita Duyn’s purchase of a 41,056 square foot property at 13500-13568 SE 97th Ave. in Clackamas from $6.95 million, or just over $169 per square foot, from Ezra and Marilynn Rabie; and Blue Arbor RE’s acquisition of a 32,637 square foot property located at 1815 SW Marlow Street from Chop, LLC, for $6.2 million, or just under $190 per square foot. Elsewhere, Paulam LLC spent $4.72 million, or roughly $487 per square foot, to acquire a 9,690 square foot property at 6600 N Baltimore Ave. from Moonstruck Chocolate Co.
Strikingly, there was zero square feet of new inventory delivered. However, there are a handful of properties in the commercial office pipeline set to be delivered in the coming quarters. Some of the noteworthy under construction endeavors include Lincoln Property Company’s 165,000 square foot The Waterfront – Block 1 property at 255 W Columbia Way in the CBD/West Vancouver submarket. The property is scheduled for delivery in the fourth quarter of 2025. BPM Real Estate Group is also working to complete the 158,464 square foot Block 216 Office project at 5660 SW 10th Ave, and a 134,185 square foot property called The Offices at 11W and is located at 1102 SW Washington St. is being developed by Downtown Development Group and Gerding Edlen. The latter two projects are anticipated to be completed by second quarter 2023 and first quarter 2023, respectively.
Overall, the Portland Office market certainly looks set for an intriguing year ahead, with a short-term outlook outlined in the report that paints an interesting picture of a city that continues to emerge from the pandemic.
The Portland office market will continue to shake out the negative impacts of the pandemic in the coming year. Due to Oregon being one of the last states to lift indoor mask mandates, remote work was extended longer than expected. Looking ahead, it’s possible that competition for office inventory will rise in the months ahead. The combination of a market flooded with sublet offerings, mixed with high-profile deliveries, will force properties to compete for tenants,which may result in further rent decreases in the coming quarters, notes the report.
Meanwhile, several factors suggest that the development of new inventory will continue to slow in anticipation of increased interest rates, historically high construction costs and supply chain constraints.
