by Joe Herrle, CFA
Vice President, Alternative Assets
In our Investment Outlook 2025 events, we will share our thoughts on the real estate market and the opportunities ahead. While the commercial real estate sector appeared to hit bottom early last year, it showed a positive trend in the latter half, with core real estate values increasing 6% per the Green Street Commercial Property Index (Green Street CPPI). As mentioned in previous publications, we favor opportunities in industrial warehouses, apartments and data centers, which saw values increase last year. However, our publications have not as deeply explored one segment of commercial real estate (CRE): office space.
While our Alternatives investment strategy does not currently allocate much to office space, it remains a large and very important segment of the real estate sector with implications beyond CRE investing. The good news is that the hemorrhaging has stopped: values declined only 1% in 2024. However, on average, office properties are still 36% lower than when the market peaked in 2022. Green Street CPPI, the predominant real estate index, shows that office values have declined most among all 11 sub-sectors it tracks, which includes retail, apartment, health care and more.
For those working in downtown Portland, we don't need data to know that office space is struggling; we see it every day. Despite our parking lot getting a little fuller each month and the line at my favorite lunch spot growing longer, the central business district (CBD) still feels uninhabited at times. This anecdotal evidence is supported by hard numbers released this month, showing that Portland's downtown office market has a long way to go before recovering. For those interested in learning more, you can find additional information in the Colliers Portland Metro Office Market Report and the Kidder Portland Office Market Trends report.
The Portland CBD vacancy rate reached a staggering 34.7% in the fourth quarter of 2024 after experiencing the lowest quarterly leasing activity in history. This represents a 4.5% increase from last year when Portland's CBD already had the highest office vacancy rate nationally compared to other major downtown areas.
It's no secret that remote work arrangements are a significant factor in the decline of office values nationally, but this is particularly true for Portland. Of all major metro areas on the West Coast, Portland had the highest percentage of workers working fully remotely at 21.2%, according to the 2023 U.S. Census Bureau. Despite headlines of major companies like Amazon, Walmart and Disney calling remote employees back to the office – and even the newly elected mayor of Portland mandating that city managers and supervisors back – this trend has not fully taken root in Portland.
However, it's important to note that not all office properties are bad investments. "Class A" office space is doing quite well. These newer buildings with desirable amenities such as gyms, dining options and high-quality finishes are in demand. There's a strong trend of companies reducing the size of their offices but upscaling to these Class A properties, resulting in strong demand and low vacancies.
Moreover, there can be opportunities for good investment returns where distress exists. We've seen this in Portland over the last year, with transactions for good properties at significantly discounted prices. Take, for example, the Montgomery Park building, one of the largest office properties in the city, which sold in 2019 for $255 million and was just purchased in 2024 for $33 million – an 87% discount.
However, these opportunities are suited for a narrow group of investors: experienced real estate operators who can buy mostly with cash to avoid high financing costs, have a very long investment timeline and can wait years or even decades for values to recover. As is true with any investment, high potential returns come with high risk. While this strategy has its merits for certain investors, it's not our approach to real estate investing.
Instead, we favor real estate sectors with long-term demand drivers, properties with solid financial footing, positive and growing cash flows and located in geographic areas with growing populations and employment opportunities. Our favored segments previously mentioned include housing assets like apartments, industrial warehouses and data centers, all of which align with our methodology.
In conclusion, while the office market, particularly in Portland, continues to face significant challenges, there are still opportunities in the broader commercial real estate sector. By focusing on sectors with stronger fundamentals and growth potential, we aim to navigate the evolving landscape of real estate investment and deliver value to our clients.
Takeaways for the Week
A rally in the world's largest technology companies propelled stocks toward their best week since the November presidential election. The S&P 500 is on track to rise 3%, with the so-called “Magnificent Seven” tech giants playing a significant role in the market's performance. The S&P 500 and Dow Jones Industrial Average are poised to record their strongest weekly performance since the November election.
Major U.S. banks reported strong fourth-quarter earnings this week, with JPMorgan Chase, Wells Fargo, Goldman Sachs and Citigroup all exceeding analysts' expectations. The robust performance was driven by increased trading revenues, a surge in investment banking fees and optimism surrounding the incoming Trump administration. Bank executives expressed confidence in the economic outlook, citing potential deregulation and tax cuts as factors that could further boost growth in 2025.