The third quarter of 2023 brought both challenges and opportunities to Portland’s office real estate market. While the city’s downtown area saw its first major office sales since 2020, prices for some prominent buildings plummeted. Additionally, the market-wide sublease availability hit a recent high, raising concerns among industry experts. Despite these challenges, there are signs of hope, including the Downtown Business Incentive Tax Credit, which aims to boost the local economy.
The Q3 2023 Colliers Portland office market report recorded the 14th consecutive quarter of negative net absorption in the city’s office market. Although this trend continued, there is a silver lining. The pace of newly vacated office space entering the market has slowed significantly. During the third quarter, negative net absorption totaled 201,000 square feet, which pushed the overall vacancy rate up by 10 basis points to 20.3 percent. This is the least amount of newly vacated space recorded in the past six quarters. However, the challenges are far from over, the report summarized.
One significant concern for the Portland office market is the looming lease expirations. More than 1.3 million square feet of leases in the downtown market alone are set to expire through 2025, which is approximately 3.6 percent of the entire downtown market, according to the report. While some tenants have committed to future office space, many of these commitments are in the suburbs. The prevailing trend suggests that tenants choosing to stay in downtown Portland are likely to reduce their real estate footprint. This could further contribute to negative net absorption in the coming quarters.
In response to the challenges faced by downtown Portland’s office market, the Portland City Council introduced the Downtown Business Incentive Tax Credit program in September 2023. This $25 million temporary nonrefundable tax credit program is designed to incentivize new leases and renewals in specific sub-districts within downtown Portland. These sub-districts include Downtown, Old Town/Chinatown, Lloyd, and Lower Albina.
To qualify for this tax credit, businesses must meet specific criteria, including having a City of Portland Business Tax License and entering into a new lease or extending a current lease within the eligible sub-districts for a minimum term of four years. The maximum credit available to each eligible business is $250,000.
While incentives like the Downtown Business Incentive Tax Credit offer hope for the struggling office market in downtown Portland, challenges persist. Lease expirations and tenant downsizing are likely to keep driving negative net absorption and rising vacancy rates in the near term. However, as more vacant space becomes available, tenants can expect to find opportunities for high-quality office spaces that meet their needs.
Institutional and private capital investors have expressed their interest in positioning themselves for the eventual recovery of the Portland office market, the report stated. This signals confidence in the city’s long-term potential.
In Q3 2023, several notable office sales transactions occurred in the Portland area. These sales include 2100 SW River Pkwy, a Central Business District (CBD) property spanning 192,541 square feet, which sold for $41,650,267 ($216 per square foot). Additionally, The Leland James, located in the CBD Perimeter and covering 118,104 square feet, was sold for $41,000,000 ($347 per square foot). Lastly, the American Bank Building, situated in the CBD and encompassing 172,817 square feet, was sold for $13,600,000 ($79 per square foot). These transactions reflect varying price points and sizes within Portland’s office real estate market during this period.
Several significant leases were executed in the Portland office market during the last quarter, as well. These include a confidential lease at 200 Market in the CBD, covering 58,770 square feet of space, as well as a lease by Umpqua Bank at Kruse Woods V in the I-5 South area, comprising 40,301 square feet. Additionally, Kiln secured a lease for 36,000 square feet of space at 1120 SE Madison St in the CBD Perimeter.
