The Greater Portland office market continued to improve in 2016 as the vacancy rate fell for the 7th consecutive year for a direct vacancy of 6.17 percent and total rate of 6.77 percent including sublease space. This vacancy rate includes both Class A and Class B office and medical office space across seven towns in Greater Portland with a total market size of almost 12 million SF. While the market continued to improve throughout 2016, only half of the 14 submarkets we track experienced a drop in vacancy. The total net absorption in the market was slightly less than last year, indicating a fairly stable pace of improvement over the last 24 months.
The downtown Portland office market is one of the areas to experience continued improvement with the direct vacancy rate dropping to 6.6 percent from last year’s 7.65 percent. The majority of the absorption can be attributed to the Class A office market which continues to perform at a historically low vacancy rate and is currently 2.62 percent. Interestingly, this is not due to large leases, but smaller to medium sized transactions as availability in this market is sparse. There were only two new transactions over 15,000 SF, which were FC Beacon’s lease of 17,300± SF at 280 Fore Street and AVANGRID’s lease of 16,462± at One City Center. There are currently no existing direct Class A availabilities with over 10,000 contiguous SF on the market. As expected, the largest downtown transactions in 2016 were lease renewals, as relocation options simply didn’t exist. The Class B market experienced just a slight drop after a much larger decrease the year before, however did dip below 10 percent and stands at 9.95 percent. The majority of the vacancy in the Class B market, roughly three quarters of the total, is concentrated in the Monument Square/Congress Street area while the Old Port area has very little vacancy.
The suburban market as a whole, which encompasses South Portland, Scarborough, Westbrook, Falmouth, Yarmouth, and Cumberland, had a slight increase in the vacancy rate for a total rate of 6.53 percent. This uptick in the vacancy rate is largely due to the South Portland and Scarborough areas, and more specifically Class B office space. As was the case with the downtown market, there were no large new lease transactions to help balance a couple recent large vacancies including 30,000± SF at 75 Darling Ave and roughly 26,000± SF at 8 Science Park Road in Scarborough. A large vacancy remaining unchanged from last year is 134,000± SF at One Riverfront Plaza in Westbrook which continues to be a large hole in an otherwise healthy Class A suburban market.
The vacancy rate in the medical office market across Greater Portland fell again to 2.81 percent, down from 3.34 percent the year before. This accounts for just a slight absorption of 6,876± SF as this submarket, especially Class A medical space, has very few options for expanding companies and new construction may be required for any tenants requiring a significant amount of space. An example of this is the recent construction of 19,000± SF of medical space on Route One in Scarborough for Martin’s Point. At the time of this report the Class A medical market was nearing 100 percent occupancy.
The Greater Portland Class A and Class B office markets continued to improve in 2016, albeit at a slower pace, and with that tenant incentives became less apparent and landlords continued to have the upper hand in negotiations. The downtown Class A market was certainly the driver in the overall drop in the vacancy rate. Despite limited vacancy, areas of opportunity still remain for tenants in the Class B markets in downtown and South Portland area. The next 12 months will likely continue to see improvements in the overall market but will be somewhat constricted as options, especially over 15,000 SF, will remain limited.
Over the last few years there has been speculation that increasing demand and falling Class A vacancy rates would spur new construction in Greater Portland, especially downtown. The market finally responded to this demand with the ground breaking of a 55,000 SF building at 16 Middle Street, the first significant new construction in downtown Portland in 10 years. With about 50 percent of this building already committed, there could be additional new buildings constructed and/or planned in 2017. Possibilities include the permitted 50,000 SF office building as part of the Intercontinental site at Fore and India Streets as well as opportunities within larger developments at Thompson’s Point and the former Portland Company Site at 58 Fore Street. Expanding suburban companies are constructing new buildings to respond to their growing needs including a 94,500 SF expansion for Tyler Technologies and a new 34,500 SF building for Patriot Insurance, both of which are located in Yarmouth. In addition to these large scale developments there will likely also be numerous small-scale projects to respond to specific tenant requirements in 2017.