There’s a growing list of distressed commercial office buildings in Portland – some of the most iconic and largest ones. In the second half of 2023, this situation has finally come to a head. How bad is it? The numbers are almost twice as bad as they have ever been in 50 years, and some say Portland is facing at least a decade of downturn.
What is happening?
3 months ago, the Willamette Week made a list of 16 buildings that were at serious risk of foreclosure. Since then, the story has been playing out with dramatic forecloses and auctiones on a nearly weekly basis (Montgomery Park, Commonwealth Building, J.K. Gill Building, Field Office, etc). Sometimes they are bought back by the very firms that are defaulting, for a fraction of their original price because nobody else is interested in bidding. They’re also walking away from multi-million dollar re-payments to construction companies that remodeled them.
Nearly a third of Portland’s downtown office space now stands empty – and it’s a situation that’s growing worse in 2023. Many of these buildings, bought at top dollar during the time when Portland was one of the fastest growing cities in the country, now have too much debt and not enough income from rent to cover it. Owners aren’t just selling, they’re decided the situation isn’t going to get better and are now actively defaulting and walking away – just like homeowners did in the 2008 financial crisis.
The numbers are bad – off the charts bad
The commercial vacancy rate in Portland currently sits at 31.5%. Hard-hit San Francisco is 31.9%, Seattle 27.9%, Los Angeles 30.9%, Salt Lake City 19.9% and Denver 23.4%. Even during the great recession of 2008-2009, the commercial vacancy rate never broke 15% in Portland.
But things will get better right? “The Portland office market continues to face a bleak outlook at the midway point of 2023,” say analysts at Colliers – a Toronto-based firm that tracks global real estate. “Over the next two quarters, more than 500,000 square feet of leased space [in Portland] is set to expire market wide. Should these tenants maintain office space following the expiration of their leases, they will likely look to downsize their real estate footprints.” This means that as the leases expire, it’s highly probable the vacancy rate will go up even more – maybe to the highest levels in the country. This means even more foreclosures.
Meanwhile, a few miles away over the West Hills, just outside the Portland border in Beaverton and Hillsboro, companies are doing multi-billion dollar expansions. Companies such as Analog Devices and Intel. Beaverton is becoming the new foodie mecca. Why is Portland doing so bad just a few miles away?
Bob Ames, former president of First Interstate Bank of Oregon and a longtime investor in commercial property says this is the worst situation he’s seen in 50 years. He says Portland is still suffering as plywood covered windows from the 2020 riots and subsequent crime are still quite prevalent on 2023 downtown storefronts. Homeless camps have continued to grow. On some downtown blocks, you’re ‘just as likely to see someone smoking fentanyl as sipping a Frappuccino’.
Steadily increasing and expanding business taxes and regulation far beyond neighboring metro areas has also been discouraging businesses from Portland. Besides stifling new businesses, successful businesses are increasingly moving out too.
His assessment? “The problem with downtown Portland is that you don’t want to be in downtown Portland. We’ve driven a lot of capital out of here, and a lot of tenants. You’re not going to book another major employer into this city for a decade.”
Some locals are already drawing parallels to the same economic decline (Oregon has had a 2.2% drop in median income in 2022), population loss (Oregon AND Portland’s net populations have decreased for second year in a row), and urban decay (already called a humanitarian crisis in Portland) that caused the Rust Belt.
Not turning around soon
One thing is clear, the collapse has begun. Things in Portland are likely to get worse before they get better. Serious and long-term damage has been done by leadership and Portland is almost certainly looking at a continued decline for a good while before things have a chance of turning around. That’s if Portland can recover from the destruction of it’s business tax base – at the same time they are also experiencing a disturbing income tax reduction due to a growing multi-year population decline.