It’s impossible to overstate the effects that Covid has had on commercial real estate everywhere, and we can agree that towards the top of the hardest-hit list is commercial office space. Beginning with remote working arrangements (which have become a permanent way of operating for many companies) then shifting to a hybrid model, the demand for office space has changed significantly. Another major contributor is the mass exodus out of the urban core which has shifted the type of office space that is in demand.

Prior to the pandemic, downtown Portland was experiencing a huge boom. Massive investments in new buildings, existing buildings and the development of many multi-use, live/work properties were driven by a high desire to live in a part of Portland flush with amenities, entertainment options, restaurants and nightlife. The pandemic virtually eradicated these perks, and rendered properties nearly useless.

As a result, the urban core has experienced 6 straight quarters of negative absorption, and office vacancy has risen over 20% for the first time in over 20 years. 

Meanwhile, suburban areas are experiencing a boom like no other. Companies are moving their physical operations to suit the demands of employees. And, since many people have moved from the urban core to the suburbs due to the aforementioned loss of amenities, the urgency for companies to relocate to areas that offer benefits such as ample parking and shorter commute times has resulted in a huge influx of leases in Portland’s suburban areas.

In these suburban areas, every key office indicator – vacancy rate, sale/lease prices, vacant space absorption – has experienced positive growth. For example, the Premier Class A submarket of Kruse Way/Lake Oswego has seen rents rise by  $1.70/square foot over the past quarter. Average asking rents are now higher and more than 125,000 square feet has been leased by tenants moving from downtown.

As we know about supply and demand, this is leading to increased lease rates in suburban areas, along with less flexibility to negotiate leases. Meanwhile, in the urban core, landlords are offering more flexibility in negotiating lease length, discounts, and concessions, in an effort to reinvigorate a suffering market. Even still, the downtown office market is not expected to see major signs of recovery until late 2022.

For more information about investing in commercial office space, please contact me at michelle@mmaltasegroup.com.