The Portland metro area is grappling with unprecedented challenges in its commercial real estate market, as vacancy and availability rates soared to record highs at the close of last year. The Kidder Mathews Portland Office Market Report for the fourth quarter of 2023 shows direct vacancy rates have breached 12 percent, marking the first time in two decades that the region has faced such figures. This was the fourth consecutive year of negative absorption in the Portland metro area, a trend initiated by the onset of the pandemic. Portland also stands out from other regions due to its minimal development pipeline, a factor that may alleviate future supply concerns in the market.
Leasing and sales transactions have both reached historic lows, posting at three million square feet and 1.9 million square feet, respectively. The report states that the shift towards hybrid work models has driven smaller users to dominate space signings over the past year. Investors and lenders, however, are exercising caution in light of economic uncertainties, contributing to the muted transaction volumes.
The top lease transaction for the quarter was the 25,000 square foot property owned by Shorenstein Properties at 5885 Meadows Road in Kruse Way. This was followed by the 15,000 square foot office space at 5331 S Macadam Road in Johns Landing owned by ScanlanKemperBard Companies and the 12,000 square foot asset at 5 SE Martin Luther King Jr Blvd. in the Lloyd District. The asset is owned by The Green Cities Company and was leased to Parametrix.
The report lists the top sales transaction as the sale of the 119,400 square foot property at 501 N Graham in the NE Close-in. The asset was purchased by The Centurion Foundation, Inc. for $60.5 million, or nearly $507 per square foot.
The report also shows a limited development pipeline with only one project expected to be completed this year. This is the 15,000 square foot development by Robert Merril located at 1821 SE 192nd Ave. in Camas/Washougal with the completion date expected in the first quarter of 2024. Two other significant projects are the 360,000 development of Terminal 1 at the Port of Vancouver expected to be finished in the first quarter of 2025. Looking further ahead, Lincoln Property Company is expected to complete the development of the 165,000 square foot The Waterfront – Block 1 project located at 255 W Columbia Way in the last quarter of 2025.
The economic backdrop of the recent data shows that as of October 2023, the Portland-Vancouver-Hillsboro metro area recorded an unemployment rate of 3.3 percent, down from 4.2 percent in the preceding year. In comparison, Oregon’s unemployment rate matches Portland’s at 3.3 percent, while the national rate stands slightly higher at 3.9 percent. The report shows that despite grappling with inflation and increased interest rates, Portland’s above-average incomes and steady population growth remain attractive.
The Kidder Mathews report concludes that the current office environment in Portland favors tenants in general, with expectations of continued downward rate pressure, increasing concessions, tenant improvements, and extended downtime to lease space throughout the new year. The Portland office market, mirroring the challenges faced by many national counterparts, navigates through long-term post-pandemic woes compounded by a recent economic downturn. As businesses confront the new year with lingering economic uncertainty, the anticipated recovery may prove to be slower than initially expected.
