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Is Portland a CRE Diamond in the Rough?
Portland is found to have the lowest construction activity, so is it a CRE diamond in the rough? Will it become the next hot CRE markets?
Office construction activity in Portland experienced the third-highest year-over-year decline, with just 63,500 square feet of space under construction at the end of 2024, according to new data from CommercialEdge.
Is it time for a shift in Portland?
But signs emerged that Portland may be a diamond in the rough for office investors. Properties traded for an average of $164 per square foot compared to the national average of $179 per square foot. Meanwhile, Portland’s office leasing and vacancy rates were some of the lowest among the top office markets in the West, which suggests an underlying demand for the properties.
“We’ve entered the beginning of the “slog” phase for what we expect to be a multi-decade transformation of the office industry,” Peter Kolaczynski, associate director at CommercialEdge, said in a statement. “We’ve seen some winners and we’ve seen some losers, but the threats of difficulty in refinancing and modest physical occupancy numbers remain.”
Portland’s office market has been under considerable strain since the beginning of the pandemic. As of November 2024, the market’s total vacancy stood at 22.1% compared to the 15.9% vacancy rate it recorded in December 2023, according to CommercialEdge data.
Return to Office
Local leaders have also backtracked on return-to-office mandates for city workers, even though large employers like Nike have told their employees to work from the office four days per week. Portland Mayor Keith Wilson backtracked on his RTO mandate on January 7, citing budget issues and other priorities, such as addressing the city’s growing rate of homelessness, according to local news station KGW8.
CommercialEdge data also shows that information technology and financial services employers in Portland have reduced their office usage, which speaks to the growing vacancy rate in the market.
Sales Trend
One bright spot for the market is that property sales have increased. In 2024, Portland recorded $222 million in property sales, compared to $211 million at the end of 2023.
At least some of that sales activity is from out-of-town developers buying Portland offices and converting them into residential buildings. For instance, DJC Oregon reported that San Mateo, California-based developer Bayspring Real Estate Partners has been in talks with the city to convert the historic Mason Ehrman Building into residential apartments.
In its latest market report, local brokerage Kidder Matthews said that conversion activity could reduce the oversupply of available offices and help the city address its housing shortage. However, few buildings make sense for this kind of project, and developers face some regulatory barriers to entry.
“There are still issues around continuing work-from-home policies, but the cut in rates should lead to more investment in the industry and alleviate some of the pain the market has been feeling the past few years,” the market report says.
