The new decade (kind of) has started where the last one left off. Sort of weak. I blamed the last quarter of 2019 on a hangover, self-induced by Amazon, while this quarter could be chalked up to feeling ill from an external influence of the Coronavirus. Net Absorption was a minus 230,000 SF in Q1 2020, meaning more people moved out than moved into space. I would say the weakness in the first quarter of 2020 was a combination of the Amazon Effect during the first part of the quarter, and the Coronavirus by the end of the quarter.
As a result, thanks in part to over 500k SF of new construction coming online, the vacancy rate rose from just below 4% to 4.1%. You can see the vacancies spread across the marketplace in the Capacity Quarterly Report, which is also included in this blog. Rental rates seem to be holding steady and we are not seeing any panic in asking rates. Owners and Landlords are certainly motivated to do deals, maybe conceding in areas they might not have last year, such as use, financials, term, maybe even a spif in TI’s or months free. That being said, there are probably going to be some sublease opportunities as companies downsize/exit, yet are still too healthy to go Chapter 11/7.
As we appear to be cresting with this virus, I can say I am glad I’m doing Industrial Real Estate and not Retail. For the vast majority of my clients, which are mostly Users versus Investors/Developers, it has been business as usual. Excepting internal separating, they are still getting product/ raw material, processing, and shipping. Sales are usually off, but they understand that this should be a short blip and that the market they serve has and will continue to need the products and services they provide. Consequently, I’m about as busy as I usually am, but having to work much more from home, utilizing a key Administrative Assistant, Support Staff, and Industrial Team that are all working remotely. I work from home all the time regardless, but it is less efficient. Things take longer, but like all of you, we’re making it work.
While our world should be getting better, our industrial data won’t. Industrial real estate is a 9-month lagging indicator, meaning it will take some time for this shock to work through the system. I expect our second quarter numbers to also be weak, and then for reasons shared below, I see the second half of 2020 getting stronger.
One of the reasons for this optimism is the nature of the stimulus package. Often the Government tries to stimulate through tax credits, or specific programs. They are usually too narrow or too delayed. This stimulus is basically putting money in just about everyone’s pocket. There is a range of a little free, to quite a bit that has to be paid back. I’ve talked to a number of companies that don’t need it, but who can turn down a grant? The result of this will be that companies will be a little more flush, and that translates into buying things and hiring people. For instance, while he really doesn’t need it, my son said he is going to put every cent of his grant into hiring salespeople. Thinking like this will drive us back to growth.
The virus has also moved us more quickly down the retail-to-warehouse shopping path. And, while not a new concept, I’m hearing that for quick delivery more warehouses closer to the consumer are required. This means national operators with 4 warehouses (never previously in the northwest) now probably need one up here. Also, as more people shop online, more flavors of warehouses are necessary. Kind of like a Zupan’s, Albertsons, and WinCo being located near each other. They look the same, but serve different customers.
And it’s not just about warehousing. Going into this virus thing, China shut down, and all of a sudden we realized that too many of our products were sourced solely out of China. I was in Mexico at a Global Real Estate Conference in early March, about the time it hit China, and the talk of the conference was diversification of sourcing. Sourcing from China is going to be redistributed and re-shored. The Portland area, already a strong manufacturing locale, will be doing more manufacturing thanks to what is currently happening to the world.
And for those with dry gun powder, mortgage rates are very, very low. I’m hearing about mortgages in the 3 - 4% range, with SBA rates below 3%. It is a very attractive time to get into building ownership. Unfortunately, there are hardly any buildings to purchase.
For those less socially correct, you currently can drive around the city now, which some are doing at some fairly high velocities. Hopefully this won’t last for long.
We are in crazy times. I’m old enough to remember the gas wars, 9/11, and the Great Recession. We came out of all of those, and we will come out of this one too. Soon, we will be talking about the Presidential Election, and then we will know our political course for the next four years. I expect those four years to see continued strength and growth in the Portland/Vancouver Industrial Real Estate Market.