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November 17, 2018
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Portland Office Market Benefitting from Strong Economic Fundamentals

10/17/18

Strong economic fundamentals, such as near historical low unemployment rates, continue to drive development of the fast growing Portland office market, according to the latest research from real estate services firm Kidder Mathews. Direct vacancy dropped 20 basis points, and is far lower than the national average due to strong tenant demand outstripping the current supply.

This is driving major development projects that are expected to increase the inventory of Portland’s office market by 2.5% by the end of 2018. Q3 experienced less construction deliveries than in Q2, but the cumulative deliveries expected at the end of this year and beginning of next year should provide the additional build-to-suit space that many tenants in the market are looking to occupy.

Overall, rental rates reached an average of $25.83 FS, with Class A office property fetching rental rates of $30.57 FS. As new office properties are delivered with the modern amenities and creative work space demanded by an increasing number of tenants in Portland, rental rates are expected to continue to increase at or above the pace it has been for the past few years. Despite some significant deliveries this and last quarter, new construction projects have actually kept the number of properties under construction at the end of the quarter at 14 properties that total to over 2.4 msf of office space.

At a current rate of 6.9%, office vacancies in metro Portland declined an additional 20 basis points from the second quarter, and have remained roughly stable year-over-year, rising just 10 basis points from this time last year. Tenant demand was considerably subdued relative to the second quarter with net absorption at 519.3k sf, which was just half of the over 1.1 msf of net absorption from last quarter. Due to the strong second quarter year-to-date net absorption is still positive with roughly 1 msf absorbed. Vacancy dropped by almost half in the Sherwood submarket, ending the quarter with a direct vacancy rate of 7.8%.

Demand for office space in Portland was less pronounced in the third quarter. Year to date, leasing activity totaled 2.78 msf, and on a quarterly basis, leasing activity totaled 789.7k sf. This was a drop of 60.3k sf quarter-over-quarter, but the change in net absorption quarter-over-quarter was even more stark with 662.3k sf absorbed this quarter than in Q2. The stark drops in quarter-over-quarter leasing activity and net absorption are most likely due to a very active Q2 followed by the summer malaise of Q3. Leasing activity and net absorption is expected to rise in Q4.

Despite the drop in leasing activity this quarter there were some very notable lease transactions that easily rival the most notable leases of Q2. The largest lease in Q2 totaled 41k sf at 12123 SW 69th Avenue, while the most significant lease of Q3, totaled over 61k sf. The largest lease of this quarter occurred in July when American Assets Trust leased floors 12-14 of the Lloyd Center Tower to an undisclosed tenant. The second largest lease occurred in the Gateway submarket when MAJ Commercial Real Estate leased out 48.5k sf of space in Hollywood Station to 24 Hour Fitness. To round out the top three leases of Q3, Woodside Palisades Partners leased out 35k sf of Cascade Station II to Vet Source.

Portland’s office market experienced a quarter-over-quarter drop of roughly half in sales dollar volume and building square footage sold. Additionally, average price paid per square foot fell 8.5% quarter-over-quarter. While the summer malaise adversely affected the overall office sales numbers for Q3, there were some significant transactions that took place.

The Central Business District of Portland again had the largest office purchase of the quarter, with American Realty Advisors and Unico Properties spending $178 mil ($447/sf) on the nearly 400k sf Moda Tower. UBS Financial Services Inc sold the property that they had owned through a subsidiary for 13 years, which netted them an 18.56% return on an inflation adjusted per square foot basis. Melvin Marks Companies sold the Water Tower and Bailey Building in the Johns Landing submarket as a portfolio deal with a total of 123.2k sf to WHI Real Estate Partners L.P. for $24.8 mil ($201/sf). The Sunset Corridor/Hillsboro submarket saw the third largest building sale when Crown Acquisition Associates LLC bought all 103.3k sf of 23175 NW Bennet St. from Washington Capital Management for $32.25 mil ($312/sf).

During the third quarter of 2018, three buildings totaling 507.9k sf were completed in the Portland market area. By contrast, this compares to five buildings totaling 728.4k sf that were completed in the second quarter 2018. There were 2.44 msf of office space under construction at the end of the third quarter.

The 320k sf Knight Cancer Institute Research Building in the Johns Landing submarket was the largest project to deliver in the third quarter. The largest projects underway at the end of third quarter of 2018 are still the Nike North Expansion Bldg B, which already has all 1 msf pre-leased, and Block 29 Center for Health and Healing, that is also 100% preleased. Development on a 190.8k sf office building at 915 SW 2nd Ave (dubbed 250 Taylor) started in the third quarter and is expected to deliver by December 2019. Rapid development of high quality office property is helping to fulfill the increased demand Portland has experienced over the past few years.

Notable Lease Transactions

• Lloyd Center Tower - 825 NE Multnomah St, Portland – 62k sf
• Hollywood Station - 4204-4224 NE Halsey St, Portland – 48.5k sf
• Cascade Station II - 9500 NE Cascades Pkwy, Portland – 35k sf

Notable Sale Transactions

• Moda Tower - 601 SW 2nd Ave, Portland – 398.4k sf - purchased for $178 mil or $ $447/sf
• The Water Tower & Bailey Building - 5331-5441 SW Macadam, Portland – 123.2k sf - purchased for $24.8 mil or $201/sf
• Wells Fargo - 23175 NW Bennett St, Hillsboro – 103.3k sf - purchased for $32.25 mil or $312/sf

Source: CoStar Data
Report author: Jerry Holdner, Director of Research, Kidder Mathews




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