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When Ben Kaplan became CEO of CashStar in late 2013, it was clear that the growing Portland-based digital gift card company was in need of new space for a workforce now topping 100 people.
CashStar had already reached capacity, but its office space had other limitations. It lacked the quality and amenities the company needed to attract great talent. Worse, the office was spread over three floors and across two adjacent buildings. It was far from an ideal situation for a company that puts a premium on open, collaborative spaces.
“We needed to have enough space that it could support additional hiring in the coming years, but not too much space that it would be cost-prohibitive or overwhelm the 100-plus employees that work in our Portland office,” Kaplan says. “We wanted a pretty open and integrated floor plan with a lot of meeting rooms, a lot of collaboration spaces. … The nature of our business requires a lot of cross-collaboration so we wanted to feel like one integrated building.”
So after months of planning, CashStar signed a lease for a 22,550-square-foot, Class A office space at 25 Pearl St. in fall 2014. Set in the heart of the Old Port, the lease would become one of the greater Portland area's largest commercial lease transactions of that year, according to a southern Maine commercial real estate report compiled by CBRE | The Boulos Co. What's more, it helped highlight the lack of Class A office space on Portland's peninsula, a prime area for companies like CashStar because of the city's many amenities and housing options.
“It's a great place to work,” Kaplan says. “The proximity to restaurants, water, stores, running trails — all of these things make it a really attractive place.”
As Portland's office real estate market continues to recover, the demand for Class A space on the city's peninsula has industry observers wondering if and when it could prompt new development. And while new development may be the right option for a company looking to expand or relocate to Portland, such a pursuit would have its own set of hurdles.
Greater Portland's office real estate market took a major hit during the recession, with the vacancy rate reaching nearly 13% in 2011, according to a real estate report by Malone Commercial Brokers. That peak vacancy rate was preceded by two years in which office tenants vacated a total of more than 300,000 square feet of space, the report says.
But the market has come a long way since then.
In 2014, the market's overall vacancy rate narrowed to 8.48%, continuing a three-year rebound to 2008 levels, according to Malone Commercial Brokers' report. And the market's net absorption rate — the total number of square feet occupied minus the total space vacated — remained positive for a fourth consecutive year, allowing the market to re-absorb space lost before the recession.
While the market has continued to improve, Nate Stevens, an associate broker at CBRE | The Boulos Co., says Portland's office market is still in the recovery phase of the real estate cycle. Stevens spoke at the Maine Real Estate & Development Association's annual forecast conference in January.
“I don't think we've hit the top of the market yet,” Stevens says, noting that vacancy rates haven't yet reached those of 2006 and 2007. But, he adds, “we are at surprisingly low vacancy rates.”
The Class A office market in downtown Portland, which includes CashStar's new space, is doing particularly well, with fewer and fewer options becoming available.
In 2014, the vacancy rate for downtown Class A space actually went up slightly to 8.8% from the year before, Stevens says, but it has since decreased to somewhere around 5% or 6% after a few leases were signed this year. One of the market's remaining holes is 161 Marginal Way, where the Maine Department of Health and Human Services vacated 50,400 square feet earlier this year. However, Stevens adds, “there is significant activity on that building at the moment.”
Class B space in downtown Portland, on the other hand, isn't recovering as fast, Stevens says. That market's vacancy rate went from 9.43% in 2013 to 11.06% last year, according to the commercial real estate report by CBRE | The Boulos Co.
While Stevens says he doesn't have a current figure for the Class B market's vacancy rate, two of those recent leases seem to indicate that the market hasn't improved much, if at all, this year. Two companies, Blue Tarp Financial and People's United Bank, are making the transition from Class B to Class A space, adding to the supply of Class B office space, he says.
Kaplan, CashStar's CEO, says when the company was looking for a new office, the decision eventually came down to only two options that fit the company's requirements for space, price and amenities. Even then, he says, only one of those options truly supported CashStar's open workspace philosophy, and that was 25 Pearl St., where the company is now located.
“I think the only challenge — and it's not insignificant — is finding enough contiguous square footage in the immediate Old Port area,” he says. “We had two great options come up and we're fortunate. ”
If those options had not been available, Kaplan indicates that CashStar may have had to compromise and settle on a property that didn't necessarily fit its requirements. It could have gotten lower quality space and paid more to spruce it up.
“It wasn't absolutely critical that we bought space that was designated as Class A,” he says. “The reality was, we wanted to have a nice exterior but we were planning a full build-out.” It's important that CashStar employees feel great about where they work.
Matthew Barney, a broker at Malone Commercial Brokers, says a lack of options for larger companies is one of the bigger issues facing Portland's real estate market right now. Barney authored and compiled his firm's most recent office real estate report for greater Portland.
“For smaller tenants looking for 1,000 to 3,000 square feet, there is plenty of supply,” he says.” When you get above 7,500, 10,000 square feet, you really start to run out of options.”
Without those larger floor plan options, Barney says, companies may have to settle on choosing an office space located across multiple floors. While two floors can be manageable, he says that going over that number can create workflow and logistics issues.
To address the market's lack of supply, downtown Portland needs new office construction, Barney says, but that will only happen if a one or a few companies can sign on as anchor tenants. He indicates that a large Portland law firm is currently assessing the market for new space.
“Developers are poised to do it if a tenant signs on,” Barney says.
The prospects for new construction are good, Stevens says, and that's being driven by increasing lease rates and a lack of supply. “There are a few tenants considering new construction as an option because they can't find existing space,” he says.
New development comes with its own challenges, including having to wait on the planning and construction. If new construction isn't feasible for a large company, it may end up moving into a Class B space and making its own improvements, Stevens says. That could help improve the Class B market and allow landlords to raise lease rates and make larger investments in their buildings. Another option, he adds, is to ditch the idea of moving downtown altogether and go somewhere in the suburbs.
“While there's a squeeze in the Class A, there's an opportunity for tenants to get into Class B and landlords will be aggressive in getting them,” Stevens says.