The Amazon Hangover
It has taken a year of soft absorption for me to digest the impact of Amazon opening 4.2m SF of warehouse space in 2018. I tended to ignore that number in my 2018 absorption numbers, which ended at around 3m SF of net absorption without Amazon. This continued the annual trend of roughly 3m SF of net absorption that has been occurring since 2015. Prior to 2015, we were clawing our way out of the Great Recession. The last quarter of 2019 ended strong, resulting in more than 500k SF of space being absorbed in 2019, after losing 1.2m SF of occupied space through the first three quarters. That’s more than 1.7m SF absorbed in the 4th Quarter. However, I believe some of this absorption was due to gyrations (old building adds/deletes) in the data base by our Costar data provider.
From a steady 3m SF of net absorption each year to a little over 500k SF of net absorption in 2019. That’s a hitch in your giddy up. As I have noted in the previous quarters, 2019 didn’t feel like industrial real estate took a pause. I had one of my best years (if not the best), as there continues to be considerable activity. With that being said, when you open over 4m SF of Amazon warehouse space, some other space will be vacated. The Amazon machine continues to grow. The amount of product we need tends to stay the same. Other warehouses shut down, whether they were operating in unison with Amazon, or as competition. As a result, the net absorption in 2019 experienced an Amazon hangover.
And Amazon isn’t done. Previous to 2018 they had leased 100k SF in NW Portland and 300k SF in Hillsboro. They have since leased 250k SF in Tualatin, with almost half of that space committed to vehicle parking. Amazon needs considerable delivery vehicles (and employee parking) for each of their last mile hubs, which usually isn’t provided in a tightly designed spec warehouse project. Rumor has it that the Developer of Portland Meadows horse track (projected to be 1.8m SF of industrial product) has signed a lease for a 135k SF BTS building with an additional 20 acres of vehicle parking. Talk about winning the Trifecta, as the paved parking is already there. Sounds pretty Amazon to me. Until Amazon builds their 10m SF building in each city (my conspiracy theory), they should help to improve our net absorption data through their piecemeal expansions.
With the positive absorption, vacancy for warehouse-only space has dropped back below 4% to 3.8%. With about 2.7m SF under construction and plenty more planned (see 1.8m SF above), I expect vacancy to creep back up over 4% in 2020, which is still very healthy by historical standards. A breakdown of submarket vacancy rates is detailed in the following PDX Industrial Market Report.
The rate of rent increases seems to have softened, yet is still nudging upward. Low $0.60’s shell rates in the Southwest and mid $0.50’s shell rates both south and north of the Columbia River. However, NNN’s continue to rise (taxes, insurance, common area maintenance). With additional taxes on water runoff, impermeable surfaces, exposed materials, construction site management, etc., the bureaucratic costs continue to increase year over year. NNN rates that were in the low teens a few years ago are now moving into the high $0.20’s. As with any tax, it will put a damper on growth.
There is scarce product available for sale, with pricing benchmarks being set by Speculative Developers who are constructing product both for lease and sale. 100-200k SF new construction is going in the $130 – $140/SF range for warm, dark shells. You buy the building knowing there is enough heat to stop the sprinkler pipes from freezing and maybe 1,200 amps in the utility vault. You construct from there. Tenant Improvements that were $75/SF a couple of years ago are now approaching $125/SF, as construction/labor prices continue to increase.
I believe the 4th Quarter net positive results are a re-engagement of strong positive net absorption that will continue through the year. We have come out of the Amazon hangover and are powering forward. Many of the uncertainties from the middle of last year seem to have been put to bed. We now have a North American trade pact. While not finished, it appears China Tariffs are starting to settle out, or the speculative price changes expected from it have worked their way through the system. Brexit has actually been accomplished, and the folks that have forecast the end of the world because of it seem to be quieting down. And there seems to be less uncertainty about the next President. Not that I’m saying the likely next President is good or bad, but the uncertainty of who it will be can slow (facility) decision making.
On the flip side, as mentioned above in the NNN conversation, local taxes continue to increase. Building Permit costs (which don’t show up in NNN’s) continue to increase and Salem keeps coming up with additional taxes. The rate of which I’m hearing that companies are moving north of the river seems to be on the increase. And even then, I’m working a 200k SF vacancy in Clark County because a global manufacturing company is moving production capacity to a more cost-friendly Colorado.
It has been the longest and slowest recovery in history. I believe we will continue to power forward. The Wall Street Journal recently complained we are back to a 2% growth economy. That works for me. I think we’re going to be back to 3m SF net absorption in 2020. Bring on the Roaring 20’s.