A prominent skyline fixture in downtown Portland, Oregon, has sold in the region's latest deeply discounted office deal.
Lincoln Property Co. late last month landed a buyer for the PacWest high rise in a deal that represents a 65% cut to the price the real estate heavyweight paid for the building nearly a decade ago. Fountainhead Development, a small investment firm based in Fairbanks, Alaska, scooped up the property at 1211 SW Fifth Ave. for $55.7 million — a bargain compared with the $170 million price tag Lincoln laid out back in late 2016.
“PacWest is an amazing building, one of, I think, the key buildings in Portland,” Fountainhead Vice President Wyatt Cerny said in a statement. “PacWest is open for business.”
The nearly 550,000-square-foot tower recently wrapped up an extensive capital improvement project in which Lincoln upgraded amenities and finishes and invested in other renovations aimed at positioning PacWest at the forefront of a demand rebound Portland has yet to experience.
Similar to other cities trying to rebuild their pre-pandemic momentum, the city's office market recovery has had to contend with the ongoing impacts of remote work policies and other socioeconomic concerns that have made both landlords and tenants wary of the downtown area's future.
Tenants handed back nearly 1 million square feet more than they signed on for over the past year, according to CoStar data, extending a yearslong occupancy-loss streak that has pushed downtown Portland's vacancy rate to a record high of roughly 28.5%.
The picture is definitively brighter for PacWest, however, as it has been able to retain the bulk of its tenant roster in recent years by landing a few renewals critical to leveling out its occupancy. Companies including Becker Capital, KeyBank and law firm Schwabe collectively recommitted to nearly 97,000 square feet in the months prior to Lincoln's disposition, meaning PacWest has virtually no available office space on the market for lease.
Big buildings, smaller buyers
Still, the discounted sale underscores the challenges plaguing the city's attempts to claw back demand lost to the residual impacts of the pandemic.
It's a situation that has been playing out among other markets across the United States in which owners have had to contend with new pricing realities, even if it means selling office buildings for far less than their total investments.
The combination of depressed demand, stagnant leasing and the ongoing effects of flexible work has helped push the national office vacancy rate to a record high of more than 14%, according to CoStar data. Tenants collectively handed back upward of 65 million square feet last year, boosting the total to more than 210 million square feet of move-outs since the start of 2020.
Those pandemic-induced factors have been exacerbated for a number of property owners, and some — especially if they're facing maturing loan deadlines or mounting expenses — have been eager to offload underperforming properties, even if it means closing a deal at a deep discount to their initial investments.
Smaller firms such as Fountainhead continue to play an outsized role in the capital markets, though a growing sense of confidence in the long-term trajectory of the national office market is beginning to cajole larger investors into emerging from the pandemic-era sidelines.
Tishman Speyer recently closed on its first office deal since 2019 with the acquisition of a boutique building in New York City's SoHo neighborhood. Real estate investment trusts such as Douglas Emmett, Highwoods Properties and Kilroy Realty Trust have also snapped up some notable properties in recent months, a sign that buyers are willing to place larger bets on the office market's comeback.
Sales volume through the first quarter of the year more than doubled compared with the same period last year, according to CoStar's latest U.S. office report, "an early indication that investor activity is holding firm, even as broader questions about office demand, and the economy, persist."
In Portland, smaller buyers are picking up heavily discounted properties with a hold-and-wait approach that continues to dominate the city's investment scene. They've collectively closed about $165 million worth of deals in the downtown area over the past year, according to the data, just a slice of the roughly $440 million annual average reported in the years leading up to the pandemic.