1st Quarter 2019 | 1 Real Estate Market Review Portland Office 1 st Quarter 2019 Strong demand for the Portland office market ensured that occupancy has remained constant quarter-over-quarter and year-over-year, despite seeing over 2.2 million s.f. delivered to the market since the beginning of 2018. The unprecedented deliveries of 2018 have barely made a dent in the development pipeline, as it is still very robust with over 2.5 million s.f. of space under construction. The first quarter of 2019 marks the ninth straight quarter of growth in asking lease rates, further proving that demand for office space in Portland is highly coveted. After reaching an impressive 15-year peak in 2018, average rental rates continued to climb, ending the quarter at $27.00 FS. Class A property continues to be highly sought after with an increase of 3.5% in asking lease rates quarter-over-quarter. The large increase in Class A office market supply over the last year has not tempered prices, as tenant demand for Class A office space continues to be very robust. Year-over-year and quarter-over-quarter vacancy has remained steadfast at 7.2%, despite new deliveries adding a vast amount of inventory. Seemingly insatiable demand for office property has caused vacancies in Portland’s office market to remain relatively static since 2015. Net absorption remained positive for the fourth straight quarter, ending at 79,754 s.f. The Gateway submarket far outpaced any other in terms of net absorption, posting 74,683 s.f. absorbed quarter-over-quarter. Suburban markets as a whole saw far more net absorption than their downtown counterparts, with the Central Business District ending the quarter with 75,870 s.f. of negative net absorption. Downtown space is still considered prime real estate, so it is likely that net absorption will reach positive territory over the year. Leasing activity is down both quarter-over-quarter and year- over-year, as the market braces for more development to deliver in the next two years. The expected rise in leasing activity for 2019 has not come to fruition yet, as the market only saw 76,845 s.f. delivered. As a result it appears the market is awaiting more deliveries before making deals. As the rest of the over 2.5 million s.f. of new property is delivered to the market, leasing activity is expected to pick up significantly. Continued, page 4 Market Forecast Trends YEAR-TO-YEAR BASIS VACANCY RENTAL RATE CONSTRUCTION DELIVERIES UNEMPLOYMENT University of Western States 8000 NE Tillamook Street Gateway 152,642 s.f. Spaces 525 SE Martin Luther King Boulevard SE Close-In 31,692 s.f. East West College of Healing Arts 1515 SW Fifth Avenue Central Business District, Portland 30,307 s.f. Notable Lease Transactions Heartline Building Buyer is Intercontinental Real Estate Corp. Seller is Security Properties, Inc. $48.5M or $672.40/s.f. Sunset Corporate Park Buyer is Kennedy-Wilson Properties, Ltd. Seller is Swift Real Estate Partners $29.0M or $210.81/s.f. 8000 NE Tillamook Street Buyer is W.P. Carey, Inc. Seller is Banfield Pet Hospital $25.0M or $163.78/s.f. Notable Sale Transactions
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Real Estate Market Review Portland Office · Real Estate Market Review Portland Office 1st Quarter 2019 Strong demand for the Portland office market ensured that occupancy has remained
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1st Quarter 2019 | 1
Real Estate Market Review
Portland Office
1st Quarter
2019
Strong demand for the Portland office market ensured that occupancy has remained constant quarter-over-quarter and year-over-year, despite seeing over 2.2 million s.f. delivered to the market since the beginning of 2018. The unprecedented deliveries of 2018 have barely made a dent in the development pipeline, as it is still very robust with over 2.5 million s.f. of space under construction. The first quarter of 2019 marks the ninth straight quarter of growth in asking lease rates, further proving that demand for office space in Portland is highly coveted.
After reaching an impressive 15-year peak in 2018, average rental rates continued to climb, ending the quarter at $27.00 FS. Class A property continues to be highly sought after with an increase of 3.5% in asking lease rates quarter-over-quarter. The large increase in Class A office market supply over the last year has not tempered prices, as tenant demand for Class A office space continues to be very robust.
Year-over-year and quarter-over-quarter vacancy has remained steadfast at 7.2%, despite new deliveries adding a vast amount of inventory. Seemingly insatiable demand for office property has caused vacancies in Portland’s office market to remain relatively static since 2015. Net absorption remained positive for the fourth straight quarter, ending at 79,754 s.f. The Gateway submarket far outpaced any other in terms of net absorption, posting 74,683 s.f. absorbed quarter-over-quarter. Suburban markets as a whole saw
far more net absorption than their downtown counterparts, with the Central Business District ending the quarter with 75,870 s.f. of negative net absorption. Downtown space is still considered prime real estate, so it is likely that net absorption will reach positive territory over the year.
Leasing activity is down both quarter-over-quarter and year-over-year, as the market braces for more development to deliver in the next two years. The expected rise in leasing activity for 2019 has not come to fruition yet, as the market only saw 76,845 s.f. delivered. As a result it appears the market is awaiting more deliveries before making deals. As the rest of the over 2.5 million s.f. of new property is delivered to the market, leasing activity is expected to pick up significantly.
Continued, page 4
Market Forecast Trends
YEAR-TO-YEAR BASIS
VACANCY
RENTAL RATE
CONSTRUCTION DELIVERIES
UNEMPLOYMENT
University of Western States 8000 NE Tillamook Street Gateway 152,642 s.f.
Spaces 525 SE Martin Luther King Boulevard SE Close-In 31,692 s.f.
East West College of Healing Arts 1515 SW Fifth Avenue Central Business District, Portland 30,307 s.f.
Notable Lease TransactionsHeartline Building Buyer is Intercontinental Real Estate Corp. Seller is Security Properties, Inc. $48.5M or $672.40/s.f.
Sunset Corporate Park Buyer is Kennedy-Wilson Properties, Ltd.Seller is Swift Real Estate Partners $29.0M or $210.81/s.f.
8000 NE Tillamook Street Buyer is W.P. Carey, Inc. Seller is Banfield Pet Hospital $25.0M or $163.78/s.f.
Kidder Mathews is the largest, independent commercial real estate firm on the West Coast, with more than 750 real estate professionals and staff in 21 offices in Washington, Oregon, California, Nevada, and Arizona. We offer a complete range of brokerage, appraisal, property management, consulting, project and construction management, and debt equity finance services for all property types.
This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.
Despite less leasing activity than initially forecasted, the first quarter saw some very significant lease transactions occur in Portland. The largest lease of the quarter occurred in February, when the University of Western States leased the entirety of the 152,642 s.f. building at 8000 NE Tillamook Street. Earlier in the quarter Beam Development pre-leased 31,692 s.f. of the currently under construction property at 525 SE Martin Luther King Boulevard to Spaces, Inc. In February the East West College of Healing Arts executed the third largest lease of the first quarter by taking 30,307 s.f. of space owned by Weston Investment Co. at 1515 SW Fifth Avenue.
Property in the Portland office market took a step back in terms of dollar volume, price per square foot, and building square footage sold both quarter-over-quarter and year-over-year. Despite this, cap rates closed the first quarter 11 basis points lower quarter-over-quarter, indicating that property in Portland’s office market remains highly profitable. With only 21 transactions this quarter, it was a particularly slow quarter for investment. Despite the slow start to 2019, some notable transactions indicate that sales could be picking up in the near future. The sale of the Heartline Building in mid-March carried the largest price tag of the quarter with Intercontinental Real Estate Corporation spending $48,500,000 ($672.40/s.f) to purchase the Central Business District property from Security Properties, Inc. In January, Kennedy-Wilson Properties pulled off the purchase of the Sunset Corporate Park, a three-property portfolio, from Swift Real Estate Partners for $29,000,000 ($210.81/s.f.). After a long time on the market,
the Banfield Pet Hospital finally sold their 152,642 s.f. office property on 8000 NE Tillamook to W.P. Carey, Inc. in February for $25,000,000 ($163.78/s.f.). W.P. Carey, Inc. was able to lease out the entire building the same month, indicating that this market is still very hot for leasing even if sales slowed for the first quarter of 2019.
After a historic year in deliveries of office property, this was relatively quiet with only two deliveries for a total of 76,845 s.f. The demand for new property is very strong, as those two properties are already 94.6% leased. At the end of the first quarter there were still 13 buildings spanning 2,575,222 s.f. under construction. The largest property in the development pipeline is still the 1,003,585 s.f. Building B expansion of the Nike North campus, which had its delivery date pushed back to June 2019. Oregon Health and Science University also had their delivery of the 360,000 s.f. expansion of the Center for Health and Healing in the Johns Landing submarket pushed back to the second quarter. It is still the second largest property in the development pipeline, and now expects to deliver in May of 2019. Unlike the two largest projects still under construction, third largest property in the development pipeline known as “250 Taylor”, is still expected to deliver 190,825 s.f. to the Central Business District in March 2020. Portland’s office market is still very strong and will continue to expand for the foreseeable future, as this market boasts one of the most robust development pipelines in the country.