Office rental space scarce in Salem, but that could shift as some state workers stay remote

Salem’s office buildings remain largely leased despite the shift toward remote work over the past two years, but the full impact of the pandemic on local offices remains to be seen as state agencies sort out their long-term needs.

The city’s office rental market has escaped the high vacancy rates seen in larger cities like Portland as private companies there have moved to the suburbs or permanently shifted much of their workforce remote, said Curt Arthur, managing director for Salem’s SVN Commercial Advisors.

Salem’s office rentals maintained a low vacancy rate of about 4.5% at the start of 2022, compared with about 12% in Portland, Arthur said. That’s in part because the city has seen little construction of “speculative” office space, meaning developers construct a building without pre-signed tenants.

Average office rents in the Salem area have generally grown over the past two years following a small dip at the start of the pandemic, according to data Arthur presented at the recent SVN Economic Forum.

The average rent for leases completed in 2021 was $1.82 per square foot, about 64% of Portland’s rate and 76% of the national average of $2.86. Arthur said that’s in part because Salem’s average space is older, and the city has just one luxury office building.

The office rental market in Salem is unique because, like the rest of Salem’s economy, it’s heavily influenced by the actions of state government. And the impacts of the more permanent shift to remote work for many state employees are a year or more away, commercial brokers and the state’s lease manager said.

Of the state’s roughly 42,000 total employees, about 11,000 have jobs based in Salem, said Shannon Ryan, who manages private leases and state-owned facilities for the state Department of Administrative Services.

Many of those are office workers who have worked remotely since the state shuttered most of its office buildings in March 2020.

Department data shows about 9,000 of the state’s Salem-based workers live in Marion or Polk counties, with another 760 commuting from Portland, 600 from Albany or Corvallis and 180 from Eugene. But Salem-based workers now have addresses spread across the state, including in Klamath Falls, Hermiston, Bandon and Ontario.

With Gov. Kate Brown lifting the pandemic state of emergency April 1, state government offices are now preparing to transition back, with a May 1 reopening date for public buildings in Salem. Many employees are now making arrangements for permanently remote or hybrid work schedules, Ryan said.

Ryan is among those who plans to work a hybrid schedule. She moved from Lake Oswego to Pacific City during the pandemic and said she was willing to trade a longer commute on the day or two per week she’ll be in Salem for the scenery of the Oregon coast.

Many buildings housing government workers are state-owned, but the agency also leases about one million square feet of office space in Salem, making it by far the biggest office tenant in town.

The decisions of workers about whether to return to the office will determine the future of the state’s need for private office rentals in Salem and could lead to agencies shedding office space when current leases are up.

“We do know that there will be most likely a drastic change. We just need to kind of wait and see how it shakes out,” Ryan said.

The department generally uses state-owned buildings for office space first, then seeks private leases if needed. Agencies still pay rent in state buildings in Salem, a fee assessed by the Department of Administrative Services. The cost, though, is typically lower than in a commercial building.

Ryan said if a high share of a particular agency’s workforce elects to stay permanently remote, that could mean moving some agencies now in private offices back to state facilities, though the specifics depend on the particular needs of each agency.

“All things being equal, yes we would want to consolidate into state-owned facilities wherever possible,” she said.

But those shifts won’t be apparent for at least a year, she said, because agencies need to assess their needs after gathering plans from their workers, and private leases may have months or years left on them.

“Real estate doesn’t turn on a dime that way,” Ryan said.

She said the department will be conscious of its effect on Salem because of its outsized impact.

“We certainly don’t want to be the market disruptor,” she said.

Salem brokers and managers said they’re seeing strong interest in office rentals.

Laurie Miller, property manager for Equitable Center in downtown Salem, said she’s having to turn potential tenants away because of a lack of space. The office building is nearly fully leased, with about 30 tenants as of early March, though two street-level restaurant spaces remain open.

“My building was full of private people working the entire time, including myself and my staff. As busy as everyone is, expansion is really the word,” she said. “People are making plans now where they weren’t making plans last year.”

Josh Kay, managing broker of First Commercial Real Estate, said a lack of speculative office construction in Salem in recent years has kept vacancy rates low.

While some companies have built new offices in town, they’re almost without exception for a specific purpose, like a new medical office, Kay said, and generally don’t add to the stock of what’s available for lessors seeking more generic office space.

Kay said his firm has helped several private landlords who have recently lost larger government tenants.

“I think the majority of the office users have found out they can lessen their footprint and lower their office costs and maintain productivity,” he said. “Some people have really figured it out and some people are still trying to figure it out.”

Kay said he’s heard people discuss repurposing vacant office space into housing, but said it’s not clear whether that’s feasible because of zoning restrictions and cost. He expects agencies in Salem will downsize over the next few years, but to what extent remains unclear.

“There could be some very large holes depending on what agencies do,” he said.

Contact reporter Rachel Alexander: [email protected] or 503-575-1241.

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Rachel Alexander is Salem Reporter’s managing editor. She joined Salem Reporter when it was founded in 2018 and covers city news, education, nonprofits and a little bit of everything else. She’s been a journalist in Oregon and Washington for a decade. Outside of work, she’s a skater and board member with Salem’s Cherry City Roller Derby and can often be found with her nose buried in a book.