Will Portland return-to-office plans reverse spike in vacancies?
More than a fifth of the office space in downtown Portland was vacant in the first quarter of the year, according to the latest data from commercial real estate firm CoStar. That’s double the vacancy rate in 2019, and the number of empty offices is continuing to rise.
Vacancies are up sharply across the broader metro area, too, but the overall vacancy rate is just around 12%, according to CoStar.
Those figures reflect two broad trends that cities are experiencing across the country — the shift to remote work and a move outside urban centers. CoStar says office vacancies are at a record high nationally.
There are signs remote work may be peaking, with employers from Intel to Portland’s city government asking workers to spend more time in the office.
“I definitely think you’re going to see a shift back toward the office, to a certain degree, where employees are coming back — if not full time, then in a hybrid way,” said Tim Harrison, director of capital markets research in Portland for the real estate firm Jones Lang LaSalle.
Offices may get emptier before they start filling up again, though. Harrison notes that the rate of office space available for sublease remains elevated. He said those numbers imply vacancies could rise an additional 4 percentage points as leases expire and those spaces hit the market.
Portland’s office landscape has changed dramatically in the past three years.
Companies that shifted to remote work during the pandemic reduced their office footprint as it became clear people would continue doing their jobs from home long after offices reopened.
And as Portland endured months of protests in 2020, then a rise in homicides and homelessness, major downtown businesses such as The Standard and Umpqua Bank moved employees to the suburbs.
Asking rates for leases in office parks along Kruse Way in Lake Oswego are now more expensive than comparable space downtown, according to Harrison, the first time that’s happened since 2015. (Kruse Way’s vacancy rates, though, are just as high as in the central business district. The suburban office park, favored by financial and professional firms that were clobbered in the Great Recession, never fully recovered.)
The exodus from the city’s core has reduced foot traffic considerably from 2019 levels, which means fewer shoppers and fewer stores. The number of empty storefronts downtown has increased in parallel to the rise in office vacancies.
Portland’s core is far from empty. Most major retailers have stayed, and a number of prominent firms have recently signed new leases downtown — including law firms Miller Nash and K&L Gates, and the Oregon Bureau of Labor and Industries. Many, though, are taking far less space than they had before the pandemic.
More employers are trying to lure workers back to the office, according to Harrison, seeking to use their real estate as a tool to get the most of their people. Workers have often resisted, citing lingering COVID-19 fears and the convenience and time savings that come from skipping the commute.
Employers haven’t had much pull in that tug of war, because Oregon’s job vacancies were at record highs in 2021 and 2022. The state had more open jobs and unemployed people for most of those years, so workers who didn’t care for their employer’s return-to-work policies often had the freedom to leave for more accommodating alternatives.
Oregon’s jobless rate remains low by historical standards, at 4.4%, but it’s risen by a full percentage point in the past year, and the number of vacant jobs is down sharply.
“As the winds shift, we’re definitely seeing a lot of power going back to the employer,” Harrison said.
Nonprofits are among those returning to downtown Portland, he said, along with law firms, engineers, accountants and others who benefit from being near the concentration of government offices and professional services in the central business district.
They’re often taking advantage of falling rents to secure a higher class of office space than they had before the pandemic, according to Harrison.
“You’re starting to see a lot of professional services trade up, because now’s a really, really good time to trade up,” he said. “The tenant really has that leverage.”
Unlike Seattle and some other cities, Portland didn’t come into the pandemic with a large volume of speculative office space under construction. So Harrison said the local office market will eventually tighten up.
Businesses are decrying a patchwork of new taxes, though, from homeless services to preschool funding, which have made the city among the most expensive taxing districts in the nation. And Harrison said many tenants are reluctant to commit to downtown Portland until other conditions improve.
“No. 1 is safety, which is a huge issue as we all know,” Harrison said. Homicides and homelessness are up sharply over the past few years, and while Harrison said there has been progress, he said the pace is too slow.
“That needs to change,” he said. “We need to focus on making the downtown core a place where people want to come and hang out, outside of work as well.”