By Meghan Hall
Over the course of the past year, the impacts of the coronavirus pandemic were felt everywhere–even in the strongest of markets. In Portland, the commercial real estate market also faced tough challenges as a new recession took hold, prompting business closures and suburban migration. However, there are a number of green shoots to look out for, according to first quarter data released by Kidder Mathews, even if the short-term outlook for the market is uncertain.
“While the economy is continuing to present mixed signals and will remain volatile in the near term, there are a few positive signs pointing towards a slow recovery during the second half of 2021,” said Kidder Mathews’ Director of Research Gary Baragona. “An economic resurgence will be largely driven by pent-up demand across industries combined with a successful immunization process, increased consumer confidence and the reopening of various businesses throughout the region.”
Many trends that are common to San Francisco and Seattle during the pandemic have also held true for Portland, as both office and retail product types struggled. On the office side, office availability in Portland rose 45 percent year-over-year, reaching a current vacancy rate of 10.2 percent across all product types. Leasing activity also declined 42 percent year-over-year. As a result of new space hitting the market, leasing rates declined from $28.38 per square foot full service to about $28.09 per square foot full service.
In the near term, Kidder Mathews anticipates that a “soft market” will develop due to increasing supply and rising interest rates. Rental rates are also expected to continue to dip. Kidder Mathews believes long-term, federal stimulus and increased vaccination efforts will allow businesses to reopen and consumer spending to resume, bolstering the Portland economy by the end of the year.
Retail, too has faced its own challenges. While the vacancy rate remains relatively low, at four percent, it has risen from 3.3 percent at the beginning of 2020. Unemployment has also risen, impacting property fundamentals. New construction also declined 34.36 percent year-over-year, while square footage under construction also declined significantly. Between the first quarters of 2020 and 2021, new construction declined from 485,439 square feet to 162,444 square feet, or about 66.54 percent.
On a brighter note, average asking rents ticked up just slightly to $20.04 per square feet. Several transactions, including Old Navy’s 20,388 square foot lease on Cascades Parkway and PDX RC’s Underground decision to take 9,376 square feet in Beaverton, punctured the market. However, activity remains slow for the time being.
Like many other growing cities, Portland’s industrial market remains strong due to e-commerce and warehousing demand. Net absorption in 2021 currently stands at 708,557 square feet, which equals about 70 percent of all net absorption for 2020. As a result, commercial real estate experts are anticipating a large increase in net absorption throughout 2021. Kidder Mathews also notes that while activity in 2020 was lower, leasing was slowed not due to a shortage of demand, but simply due to lack of newly delivered space.
“The Portland industrial market is very strong with a tight vacancy rate, increasing demand and a shortage of inventory in the pipeline,” explained Executive Vice President Peter Stalick. “This fundamental market strength, coupled with the scarcity of developable land restricting supply has led to a very high level of institutional capital demand to acquire modern industrial facilities in the Portland metro area.”
Of the 3.3 million square feet of space delivered during the fourth quarter of 2020, about 83.2 percent has been leased. So far in 2021, an additional 1.3 million square feet of industrial product has been delivered, and another 4.7 million square feet are nearing delivery. However, 63 percent of this space has already been pre-leased. Currently, vacancy sits at about 3.2 percent, and as a result, Kidder Mathews expects land values and rents to continue to rise significantly.
Portland’s multifamily market also remains active. While rents are down about four percent year-over-year, rental rates are rebounding quickly, states Kidder Mathews. Like many other markets across the country, the suburbs have fared better than the downtown core, but that trend is expected to moderate as offices and businesses reopen.
“Portland’s apartment market remains one of the more attractive markets for multi-family investors, due to its affordability and excellent market fundamentals, when compared to other major west coast cities,” said Clay Newton, Executive Vice President. “As Portland comes out of the COVID 19 pandemic and its related restrictions, expect continued upward pressure on rent growth, as indicated by three straight months of increasing rents.”
At the end of the first quarter, the vacancy rate in Portland decreased from 6.2 percent at the end of 2020 to about six percent at the end of the first quarter of 2021. The average asking rent came to about $1,346 per month, and 2,323 units were absorbed. Kidder Mathews also notes that the market will continue to balance due to a slow down in new construction, giving the Portland market the time it needs to absorb its current supply.
Despite short-term uncertainty, experts are confident in the Portland market’s ability to rebound, bolstered by federal stimulus, increasing consumer spending, and an imminent return to the office.