Portland ME’s 2024 Office Market Outlook

By Nate Stevens | Partner, Designated Broker

DECEMBER 2023

When the Great Recession hit the office leasing market in 2008-2009, there was an initial sharp increase in the Greater Portland vacancy rates which continued to trend upward over four years until rates started to decline in 2013. Many companies were committed to multiyear leases, as they are now, and it can take years until these leases mature and direct vacancies affect the market. With regard to the 2020 Covid Pandemic, the office market seems to be experiencing a similar trend, although not as dramatic. While the direct vacancy rates are nowhere near as high as they were 10-12 years ago, the Greater Portland office market is continuing to experience the effects of the pandemic as long-term leases continue to roll and companies adapt to utilizing their offices in new ways. This is especially true with regard to the increasing amount of space being offered for sublease, which remains an important post-pandemic metric and a significant difference compared with past market disruptions.

The Boulos Company’s 2023 Office Market Survey revealed few surprises as we anticipated movement in certain markets, and stability on others. However, in contrast with the upheaval that many larger metropolitan markets are experiencing, the direct overall vacancy rate for Greater Portland remains healthy. The 2023 direct vacancy rate increased slightly to 7.00%, up from 6.38% last year and almost identical to the 2020 direct vacancy rate of 6.97%. One area that has increased significantly since 2020 is the sublease rate as more tenants look to adjust their office space while still being committed in leases. The sublease rate increased over the last 12 months from 2.28% up to 3.41%, pushing the total vacancy rate (the combination of direct and sublease rates) to 10.41%. This is the highest total vacancy rate since 2012, which was the height of the vacancy following the Great Recession.

DOWNTOWN

The highlight of last year’s market survey was the vast improvement to the vacancy rates in downtown Portland. However, over the past 12 months the direct rate downtown has increased from 6.41% up to 7.48%. In addition, the sublease rate increased from 2.77% up to 4.19%, further proving that sublease space is a major factor in the vacancy equation across all markets. These increases, however, can almost be entirely attributed to the Class A market where the direct rates increased from 3.75% up to 6.25%, largely due to a large sublease space converting to direct vacancy and the significant downsizing of another tenant. The Class B direct market in downtown Portland continues to improve, dropping to a direct rate of 8.85%, a decrease from 9.48% in 2022 and 12.29% in 2021. In a similar trend over the last several years, we removed over 100,000 square feet from the Class B market due to residential conversions.

The majority of these being vacant office spaces, which is directly contributing to the improving rate. In fact, over the past three years we have removed over 500,000 square feet from the downtown market. Without these residential conversions, vacancy would be much higher in downtown Portland, likely pushing well over 10%. We expect this office conversion trend to continue next year, although perhaps at a slower rate.

SUBURBAN

After a significant increase last year in the direct vacancy rates for the Suburban markets, there was little movement in the vacancy overall with only a slight increase from 7.59% up to 8.12%. Once again this year, this vacancy rate can almost all be attributed to two specific submarkets, Class A properties in the Maine Mall area and Suburban Portland, which account for 83% of all suburban vacancies. Otherwise, suburban office markets such as Scarborough/South Portland, Westbrook, and Falmouth/Cumberland/Yarmouth remain strong, especially Class B suburban markets which have a direct vacancy rate of just 3.63%, increasing just slightly over the last year. This means the Class A suburban markets in the Maine Mall area, the largest suburban submarket, and Suburban Portland are the driving force in the high suburban vacancy rate. A strong concentration remains in the Maine Mall area with a direct vacancy rate of 19.04%, compiled of numerous large vacancies. For comparison, the average Class A Maine Mall area vacancy is 27,000± SF, compared to Downtown Class A vacancies averaging just 9,000± SF. The 2023 total rate increases to 30.54% when including sublease space, one of the highest total vacancy rates we’ve recorded, suggesting that the recovery from the pandemic may continue in this submarket longer than other submarkets.

MEDICAL

In what has become somewhat of a broken record over the last seven years, medical office space remains below a 1% vacancy rate, at 0.64%, and this submarket continues to lead the way for all Greater Portland submarkets. There are no vacancies in the Class A market and only three small vacancies in the Class B market. There was no new construction in this submarket to help the situation as the demand for medical office space is also low, resulting in a somewhat stagnant market. With no large vacancies on the immediate horizon, we can continue to expect low availabilities for 2024.

FORECAST FOR 2024

Moving into the new year, the outlook is more promising than it has been the last couple years. In anticipating market movement, tracking the “gray space”, which is available office space that isn’t vacant but will be in the near future, provides clues into possible larger vacancies for the next calendar year. The last two years there has been significant gray space that, when combined with lower demand, we anticipated would negatively affect the office market. However, we are not tracking as much gray space this year which could mean a plateau year or even a slight decrease in vacancy next year. 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. If history repeats itself, there may be one or two more years of recovery, or a plateauing. As companies become more comfortable with their office utilization this could sustain demand and the market Greater Portland could continue to perform better than its larger metro counterparts. There are certainly more options for prospective tenants in the marketplace and, depending on the submarket, increasing landlord motivation.

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