Demand for prime office space in downtown Portland is stronger than it has been since the Great Recession, with the vacancy rate so low that new construction is inevitable.
That’s the opinion of Portland real estate brokerage CBRE|The Boulos Co., which reported a 4.5 percent vacancy rate, the lowest since 2008, for “Class A” downtown office properties as of Dec. 1. The market added new tenants in December that most likely brought the vacancy rate below 4 percent, the brokerage said.
“Overall vacancy rates in the office sector are once again down, and we expect construction of new products in the near future to accommodate expanding businesses in the market,” said the report issued Wednesday, a day before the state’s largest annual real estate conference.
According to Boulos, this year’s Maine Real Estate & Development Association conference in Portland is sure to be filled with positive news for real estate investors and developers, particularly those active in and around the city.
Unemployment in the Portland metro area is down to an estimated 3.4 percent, the report said, and the vacancy rate for apartment properties is near zero. Meanwhile, vacancies at retail and industrial properties in the region also are tight at around 5 percent.
More rural parts of the state are experiencing weak demand and little growth, Boulos said, but there are pockets of activity in areas such as Bangor, Augusta, Lewiston, Auburn, Biddeford and Saco.
The vacancy rate among less-desirable “Class B” office properties usually trails Class A in a recovering market, because many businesses first seek out a prime office location and only choose Class B if none is available. That is the case in downtown Portland, where the vacancy rate for Class B space was 10.2 percent, down only slightly from 11.1 percent in December 2014, Boulos said. In contrast, the Class A vacancy rate fell to 4.5 percent from 8.8 percent the previous year.
The total amount of Class A space in Portland decreased roughly 2 percent, from 2.02 million square feet in 2014 to 1.98 million square feet in 2015.
Downtown Portland’s overall office vacancy rate as of Dec. 1 was 7.7 percent, down from 10 percent a year earlier, according to Boulos. It was slightly higher than Boston’s downtown vacancy rate, but considerably lower than those of Hartford and Providence.
The downtown Portland market’s recovery spurred some huge real estate transactions in 2015 involving Class A office buildings, including the Portland Square office and retail development at Spring and Union streets, which was purchased for $66.1 million by North River Co., a New York-based commercial real estate development firm and an affiliate of Waterfront Maine. It was the largest commercial real estate deal in Portland’s history, said Drew Sigfridson, managing director and partner at Boulos, which represented North River in the deal.
Another significant 2015 transaction was the sale of 100 Middle St. – which houses the Bernstein Shur law firm and several other businesses – to Boston-based Albany Road Real Estate Partners for $35.3 million.
The suburban office market in Portland is historically tight without a lot of movement, said Jessica Estes, who authored the office report and is a partner and vice president of operations at Boulos. Estes said most of the Class A suburban properties have large tenants that have been there for several years. As of Dec. 1, the vacancy rate for Class A suburban office space in Portland was zero percent, identical to the previous December. The vacancy rate for suburban Class B office space in Portland increased slightly from 7.5 percent to 7.9 percent.
For the entire Portland metro area, both downtown and suburban office vacancies decreased in 2015 from 9.2 percent to 7.3 percent. Estes described it as a healthy trend that is expected to continue into 2016.
“We see increased demand, decreasing supply and anticipate new development, some of which is already in the planning stages,” she said. “The current environment can be described as a landlord’s market, and occupiers are advised to plan moves and expansions well in advance of their anticipated need for space.”