JLL’s 2017 Skyline report reveals creative tenants returning to downtown offices
Portland, OR, July 18, 2017 – When it comes to premium office space across the United States and Canada, creative firms are doing what they do best: driving change. JLL’s 2017 Skyline shows that creative’s boomerang to this coveted space and the eighth straight year of occupancy growth are contributing to record rents and a landlord-friendly market. In Portland, this trend is driving the transformation of the city’s existing Skyline and leading more institutional investors to seek out opportunities to invest in high quality office buildings in the Rose City.
Skyline is JLL’s annual look at office space within some of the most prominent buildings in 57 markets across North America. Some Portland highlights from this year’s edition include:
- Portland’s Skyline vacancy remains below the national average of 12.9 percent, standing at 9.3 percent total (direct and sublease) vacancy in the first quarter, down from 10.9 percent in 2016. Direct vacancy fell 1.1 percent to 8.6 percent.
- Rents hit a record $33.80 per square foot, a 7.2 percent increase in the past quarter.
- Buyers, in a quest for higher investment returns, have found Portland’s Skyline to be a rich hunting ground.
- While construction activity in Portland is robust, the pipeline for Skyline buildings is empty with no new Skyline projects underway. Construction in Portland is taking place in mixed-use and smaller, non-skyline buildings.
“We’ve seen an important shift in demand for Skyline office buildings and that’s leading to a transformation within the Skyline itself,” said Sean Turley, Senior Vice President, JLL. “Owners of older Skyline buildings are wisely investing in their properties – creating new lobby experiences and adding tenant amenities – so as to compete with a growing inventory of cool, creative space throughout Portland’s emerging micromarkets such as the Close In Eastside and Slabtown,” he added.
Landlords on top, for now
At 103,267 square feet, the net change in occupied space (also called net absorption) in Portland’s Skyline buildings in the first quarter of this year almost equaled the figure for all of last year (119,960 s.f.). While we may not see absorption reach 2010’s record of 235,953 s.f. for the year, 2017 is shaping up to be one of the best years for absorbing Skyline space in the last decade.
In this regard, Portland is tracking a nationwide trend. Absorption in the country’s 57 Skyline markets jumped to 8.3 million square feet – more than five times what it was a year ago. However, we expect eight straight years of Skyline occupancy growth to ease soon as the market prepares for several large blocks of space to become available.
New owners reposition and push rents
In an effort to compete with new creative buildings, Skyline owners are investing heavily to upgrade their buildings. Rents dipped slightly in 2016 ($31.53; -2.6 percent) from the prior year ($32.37) but new investment into repositioning Skyline buildings is pushing rent up as rents jumped more than 7 percent to $33.80 per square foot in the first quarter. Despite this jump, Portland continues to offer Skyline tenants value, especially compared to other West Coast competitors such as Seattle and San Francisco. Equivalent rents there are $43.40 and $76.11, respectively. New York stands above all others with an average Skyline rent of $87.90.
Institutional buyers drawn to Portland’s skyline
Portland is viewed nationally as a top-tier secondary market and Portland’s Skyline market has attracted its share of institutional investment this cycle. In fact, the office market in Portland has undergone a shift from locally-based investors and operators to institutional investors. JLL estimates that almost 60 percent of Portland’s Skyline buildings have traded in this current cycle.
“Portland’s appeal is growing among institutional investors largely because of the strength of the office market and the strong demographic and economic growth combined with relative asset value compared to other West Coast markets,” said Paige Morgan, Managing Director, JLL.
So, just how much do investors love Portland’s Skyline?
- Five Skyline buildings changed hands since 2015 with Pioneer Tower setting a record per square foot price of $411.
- At least one other Skyline building –Wells Fargo Center – looks likely to trade this year.
All quiet on the construction front
What’s the outlook for further expansion of Portland’s Skyline? The Skyline set hasn’t expanded dramatically in the time that JLL has been tracking it. In 2005, Portland counted 14 Skyline buildings. Today, there are 16. One new Skyline building delivered in 2016 but nothing is currently under construction. There’s a different story around most of the other Skyline markets tracked by JLL. The Skyline construction pipeline nationally shows 15 million square feet is set to deliver in 2018 alone. With the potential for slower economic growth, Portland’s Skyline landlords may be in a better position than other markets where construction has yet to slow.
About the Skyline
Investors and tenants can access JLL’s Skyline via a digital platform. The interactive website features JLL’s exclusive market insights regarding office supply, demand, rents, leverage and investment into 57 markets across the United States and Canada. It gives users the ability to compare and contrast individual markets or multiples of markets, as well as individual properties or portfolios. In addition, the site offers videos and infographics, all of which are available via mobile access.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At the end of the first quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 78,000. As of March 31, 2017, LaSalle Investment Management had $58.0 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.