Four years ago, Tilson’s Portland headquarters felt a little cramped.

On a given day, 150 of the technology company’s employees filled the third and fourth floors of the Middle Street office.

When the world shut down in March 2020 and office workers were sent home, Tilson transitioned to remote work. As other companies eventually returned to their offices, Tilson didn’t.

The third floor is now cleared out. The 20 to 40 employees who work in the office on any given day are now spread across the 10,000 square feet on the fourth floor. Most of the furniture has been sold, and roughly 5,400 square feet of office space are available for sale or lease.

Tilson joins a growing list of companies reevaluating their physical spaces now that remote and hybrid work have taken root.

Workers’ compensation provider MEMIC consolidated its two downtown towers into one. Wex called off plans to build a 200,000-square-foot corporate office in Scarborough and is seeking a tenant for its old South Portland headquarters. Unum leased about 88,000 square feet of its massive Portland campus to accounting and management consulting firm Berry Dunn.

The pandemic made remote and hybrid work the status quo for many office workers across the country, and now the office buildings they once occupied are emptying, causing vacancy rates across the country to rise.

The U.S. vacancy rate hit a record high of 18.6% last year, according to real estate company CBRE. Moody’s Analytics estimates that the rate was even higher, at 19.6%. And preliminary data published by the financial services agency this week shows that trend is continuing, with office vacancies climbing to another all-time high of 19.8% during the first three months of 2024.

Before the pandemic, the average rate was about 16%.

Some cities have been hit especially hard. San Francisco reported a nearly 36% vacancy rate and both Los Angeles and Denver were not far behind at almost 32%. Seattle, Hartford and Atlanta all reported vacancies at or above 25%.

The rising rates are bad news for landlords, the banks that hold the loans and the small businesses that depend on the foot traffic from office workers.

The high vacancy rate has caused construction to slow and investors to back off, wary of commercial real estate and high interest rates. Some buildings could be converted into housing, but that process is expensive and complicated. And Moody’s isn’t certain vacancies have peaked yet, calling the rising rate “a slow bleed.”

Greater Portland is not exempt from the trend. The area’s vacancy rate has been steadily ticking upward over the last few years.

Commercial real estate firm The Dunham Group puts Portland’s vacancy at 14.11%, up from 12.45% the year before and the highest overall rate since the company started tracking the data in 1993.

Real estate firm The Boulos Company puts the city’s vacancy rate at about 10.42%, up from 9.14% the year before and the highest total vacancy rate since 2012, which was the height of vacancy following the Great Recession. The Boulos Company factors medical space into its report, while the Dunham Group does not.

The takeaway is the same: There’s more empty office space than there has been in a long time.

REMOTE WORK PROMPTS DOWNSIZING

Despite the increase in vacancy, the city won’t be as heavily impacted as other parts of the country, said Jim Harnden, partner and broker at The Dunham Group.

The companies that are pulling out of markets like San Francisco and some Texas cities and leaving gaping holes in the office landscape are often large national or international corporations. Portland has fewer of those large institutions. Businesses with less than 4,000 square feet made up 71% of Portland’s deals last year but only accounted for 32% of the square footage leased.

Some large businesses have packed up and left. UnitedHealthcare occupied about 20,000 square feet in Portland for years but consolidated its New England presence to Massachusetts and New Hampshire. Amica Insurance, which had a smaller office building, also left town.

But one of the major increases in the area’s vacancy rate is from companies – both national and regional – downsizing, Harnden said. Subleasing has increased dramatically, more than doubling since 2021. At the end of 2022, there were about 343,000 square feet available for sublease. At the end of last year that had increased to roughly 482,000.

Prudential Insurance dropped from about 50,000 square feet of office space at 2 Portland Square to 18,000 square feet. WSP Engineers downsized to around 14,000 square feet from 42,000 square feet at 511 Congress St.

“It’s really driven by the fact that so many people are continuing to work from home,” he said.

The benchmark varies, but Harnden said many of these companies keep enough physical office space for about half of their employees.

A lot of them held off, hoping the unemployment rate might go up, easing some of the workforce shortages and possibly shifting the power balance back to employers. That might be the time to start pushing for workers to come into the office more – so what happens if they’ve reduced their space?

But Harnden said those concerns have largely abated in favor of cost savings.

“They’ve said, ‘We’ll cross that bridge when we come to it. Why am I going to be paying rent on 50% more space than I’m using?’” he said. “Occupancy cost is one of the biggest costs that a company is going to have.”

GROWING OUT OF MAINE

At Tilson, it was important to keep its headquarters in Portland, even if the company no longer had an in-office requirement, President Adria Horn said.

“It’s a great space, great for team engagement and we’re still a Maine-based company,” Horn said.

Tilson had a flexible work-from-home policy before the pandemic, but an employee needed permission from a supervisor, which, looking back, Horn said feels “inherently inflexible.”

Parking had become almost untenable, and Tilson executives wrestled with a solution for about nine months before March 2020.

Going almost fully remote has worked for the growing company, which has about 1,400 employees, only about 120 of whom are based in Maine. It opened up the hiring pool when, before, requiring employees to be in Maine had cost them several strong candidates.

“This has actually propelled us into additional growth,” she said. Most of that growth has not been in Maine.

In March 2021, the company had about 300 Maine employees, Horn said. When they decided not to return to the office, a surprising number moved out of state. A few left during the “Great Resignation” and about 10 were let go during a minor layoff, Horn said.

They went from “busting at the seams” on two floors to only filling about 30% of one, Horn said.

“We’re feeling good about the current space. It meets our needs but isn’t too big,” she said.

Now, Tilson is seeking a downstairs neighbor to buy or lease the third floor, listed at $1.45 million.

The commercial real estate market is challenging, Horn said. The listing has been active for about a year and has decreased from about $1.9 million.

REPURPOSING THE SPACE 

At MEMIC, approximately 65% of the company’s 350 Maine employees work two or fewer days in the office each week. The workers’ compensation provider consolidated its two downtown Portland offices in December and is still finding the right way to use its smaller space. A company spokesperson estimated that MEMIC went from about 88,000 square feet to 60,000.

“Our building feels way too big on Mondays and it feels a little tight on Wednesdays,” said Michelle Allen, senior vice president and chief human resources officer.

The company recently kicked off an employee survey to reimagine its interior.

MEMIC employees who are in the building three or more days a week have a designated office, while employees who work less than that have “flex space” – essentially unassigned seating.

That’s not going to change, but Allen said the company wants to reconfigure how its communal spaces operate.

“How do we maximize the space that we have available today? And then, where are the spaces we’re not using?” Allen said. “Every space has to be usable.”

That could include adding the ability to turn one large conference room into three smaller meeting spaces or finding a way to make use of a training room when nobody is training.

Allen said the office in the second building has not been listed yet, but MEMIC does plan to seek tenants.

Nate Stevens, partner and broker at the Boulos Company, said that while some companies are either abandoning or shrinking their offices, many others are trying to find ways to make their offices more conducive to a hybrid workforce.

“(The pandemic) hasn’t resulted in them needing a lot less space. It resulted in them needing different space,” he said.

He’s seen more collaborative space, fewer private offices and more small conference rooms for four to eight people.

Not all major companies are looking for a change, however.

Unum has no immediate plans to change its space. The Tennessee-based employee benefits provider owns over 700,000 square feet of office space in Portland, split into three buildings. Shortly before the pandemic, the company decided to consolidate its operations into just two (about 415,000 square feet), leaving the other available for leasing. In 2020, the company signed a lease with Berry Dunn for just under 89,000 square feet.

Liz Rickett, senior vice president of operations for Unum, said the remaining building is about 70% leased and interest in the available space remains strong.

Unum has about 2,300 Maine employees, about 15% of whom are fully remote. The company’s management-level employees work from the office three days per week, while the rest work two. Despite the decreased space, Rickett said the company still has room to grow and is actively hiring.

In 2018, Unum invested $42 million into modernizing the space. It did away with offices, bringing managers and their teams together in an open, flexible working space and upgraded technology.

“I think with the physical space itself, we’re in a pretty good spot,” Rickett said. “We’ve had more and more people coming into the office in the last 18 months.”

FROM WORK TO HOME?

Greater Portland’s growing vacancy rate is not a crisis yet. Instead, some think it could solve one. 

Cities across the country are exploring ways to transform empty office buildings into desperately needed housing.

In Maine, similar efforts have already been successful.

The former New England Telephone building at 45 Forest Ave. will soon be 81 apartments. A roughly 140,000-square-foot vacant office building at 511 Congress St. will be home to over 100 units. Updated plans for the historic Time and Temperature building, most recently used as an office, include about 140 apartments and a hotel.

According to Boulos, over 100,000 square feet of office space was removed from the market last year and has been earmarked for housing.

In the last three years, residential conversions have removed over 500,000 square feet from the downtown market, Stevens said. Without those conversions, he said the vacancy would likely be much higher.

“Converting space from office to residential is pretty complicated,” Stevens said.

Older buildings are generally better suited for housing conversion.

They’re generally smaller than modern office buildings, meaning there isn’t as much wasted space. The centers of office buildings are difficult to layout efficiently because they don’t have windows. They create longer, narrow apartments.

In New York, some developers have essentially cut a hole in the middle of some buildings, allowing for more windows that look over an interior courtyard.

It’s expensive, and the buildings generally require a lot of work to meet the necessary safety codes for residential use. This is also why older office buildings tend to work best – developers can access state and federal historic tax credits to renovate historic buildings.

Stevens expects to see more office-to-housing conversions through 2024, but possibly at a slower rate.

He also expects overall vacancy rates to level off or even decrease in the next few years.

“Demand over the last 12 months for office space is the strongest it has been since the pandemic, and while we can expect some sublease spaces to convert to direct vacancies, we do not anticipate a major shift in the market in either direction,” he wrote in the Boulos’s 2024 office market outlook.

There’s also less gray space – office space that isn’t vacant yet but will be soon. This gray space helps the group predict market movement. In the last two years the picture has been grim with significant gray space, he said, but there’s much less out there right now.

“If history repeats itself, there may be one or two more years of recovery, or a plateauing,” Stevens said. “As companies become more comfortable with their office utilization this could sustain demand, and the market in Greater Portland could continue to perform better than its larger metro counterparts.”

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