Office property fundamentals have steadily improved during the economic recovery. However, the office market will face some very unique challenges in the coming decade as workforce demographics affect corporate real estate decisions. Each office subtype, even in the same geographic market will face unique challenges. The differences are, perhaps, most easily summed up in comparing downtown and suburban markets. Absorption rates of Portland’s downtown office space continue to outpace those of suburban office. Landlords should take note, as this does not appear to be a short term trend, but reflective of the shift in workforce demographics as one generation steps into retirement and another takes their place.
Every day roughly 10,000 Baby Boomers retire and there is simply not a sizeable, nor experienced, workforce available to step in to fill their shoes. Despite a slowed workforce growth, retiring Baby Boomers will still demand the same level of goods and services. Growth in demand will far outpace the growth of the workforce, pushing human capital retention to the top of many executive’s list of priorities for the next decade. As a result, corporate real estate decisions will have an even higher profile in day to day business operations.
Downtown Portland could very well become a prime location for businesses looking to expand. Young professionals seek out urban environments with quality night-life, culture, reasonable rents, and walkability. Portland offers all of this with far lower rents per square foot than Boston, New York and other nearby urban markets, allowing executives to breathe a sigh of relief as inflating salaries cut into bottom lines.
With vacancy floating somewhere just south of 10% for Downtown class A space, the city is well equipped to handle new tenants in the short term, but we will need to see new development in the next few years to take full advantage of growth opportunities. Savvy landlords and developers will make sure they keep up to date on office design trends which currently include open space, mobility for workers, lots of natural light, and easy access to outdoor space.
Unfortunately, spillover in demand for suburban office space is unlikely, which will face its own unique challenges. Absorption rates have been low for quite some time, and landlords should expect them to stay low unless they repurpose or redevelop their properties.
A 6/10/14 report released by Cushman and Wakefield , Human Capital: The War for Talent and its Effect on Real Estate, suggests that suburban investors seek out mixed use opportunities that emulate the urban office experience by offering the opportunity to live, work, and play in one location. For suburban landlord’s space to remain attractive, they will need to consider undertaking redevelopments for mixed use to include contemporary office space, retail, healthcare, and other amenities. They must also work to expand public transportation throughout the greater Portland area lest they be left in the dust as executive select prime locations to retain scarce top talent.
While the upcoming changes in workforce demographics are drastic and present many challenges, Portland is well positioned to take advantage. Attracting employers means attracting a new young workforce which will provide a youthful injection that our state’s economy so desperately needs. Filling and developing new office space will have a positive effect not only on the local real estate market, but also on all other industries.