Portland’s office market exceeded expectations for 2018 by year-end. Vacancy remained within 1% of 10% for the last four and a half years across the MSA, and absorption has consistently increased despite significant new supply hitting the market every quarter. The total vacancy in the CBD remained over 2% greater than the market at-large, resulting from the concentration of new supply.
Rates are not expected to slow any time soon. As construction costs have continued their meteoric rise, it is not uncommon to see TI awards of $75 PSF, which leads to higher rental rates regardless of the new supply hitting the market. The rent spread between the suburbs and CBD is growing: 2% YOY for class A products. For class A space in the suburbs, tenants will likely pay 26% less than class A space in the CBD, and this number does not include parking, which would likely increase the spread.
Major investment sales took place this year, including several iconic Portland buildings: Moda Tower ($429 PSF), The Galleria ($351 PSF), and Towne Storage ($627 PSF). 9North, now “Tanner Point,” also made a surprise sale early in the fourth quarter, trading for $76.6M (nearly $459 PSF) with no leases signed. This is indicative of how desirable Portland’s office market is for placing capital. Portland is earning its place among the top secondary markets.
Across the Columbia River, Vancouver’s Waterfront is performing exceptionally well with two existing restaurants (four in the pipeline), 63 apartments ready for occupancy (490 in the pipeline), 40 condos slated to deliver in 2020, 75k SF of office delivered in Q4 (155k SF in the pipeline). All these amenities and are located in the southern portion of Vancouver’s central business district providing the much-needed residential and class A office space to satisfy the pent-up demand to revitalize this low-tax suburb of Portland.
For the sake of emergency preparedness, buildings constructed with Unreinforced Masonry (URM) are now required to retrofit with any remodel or before selling FAR. For more information on the City of Portland’s URM policy, visit the Portland Bureau of Development Services website: https://www.portlandoregon.gov/bds/70766
The economic outlook for 2019 is characterized by decelerating growth. The Colliers International State of the US Market and 2019 Outlook cites “deteriorating trade and slowing global growth” as culprits beginning to have a “drag on domestic growth.” In addition, consistently rising interest rates from the Federal Reserve are intentionally cooling the economy by depressing consumer spending on everything from cars to homes. The Portland MSA’s increasingly diverse array of industries, such as apparel, semiconductors, healthcare, education, and technology, will cushion it from any downturn in one of the sectors.