A Small Dose of Reality
Net absorption for the Fourth Quarter came in at almost 1.2M SF negative to finish the year at just under 500K SF of positive absorption. A majority of the hit was a 1M+ SF grocery distribution center going vacant, however, as this virus unfolds, there are also smaller, local companies that are having trouble making a go of it. We have historically been seeing 3M SF of annual absorption, and even earlier this year I expected to see 1.5M SF, but I missed the mark. Fortunately, the older product that is hitting the market is seeing good activity.
By the end of the year vacancy rose to 4.7%. Even with a slightly positive annual absorption, thanks to more than 3M SF of new construction being delivered during 2020, the vacancy rose almost 1% from 3.8% at the beginning of the year. We are not seeing the sub-lease activity that we expected, but that might be in part because the locals are going Chapter 7 and the Nationals are going Chapter 11. Either way, the owner ends up with the property and the vacancy is a direct lease. With almost 4M SF of construction still in the pipeline, we are going to continue to see new product coming on-line through 2021. A more detailed report on the Portland/Vancouver marketplace follows this article.
Compared to the retail and office markets, considering everything that hit our local market in 2020, finishing with any level of positive absorption is amazing. As I have noted before, the move from clicks to bricks, reshoring, supply chain expansion, and multiple warehouse sourcing to battle Amazon have all created a fundamental strength to the Industrial Marketplace, both here and across the US. A recent National Real Estate Zoom Conference presentation noted that while from 2000 to 2019 online retail shopping had gone from zero to 15%, thanks to the virus, in 2020 alone it increased from 15% to 30%. I was at Washington Square recently (Sunday afternoon) and the place was actually quite busy. We’re social beings. People want to do some shopping in person, but the percentage of product bought online is only going to increase.
Admittedly, some of the cool down has been a slowing of Amazon growth. After opening more than 4M SF in three facilities over the last couple of years, in 2020 they moved their focus to last mile distribution. Their model is a 100-150K SF warehouse (fits on 10 acres) with an additional 10 acres of delivery van parking. Most speculative industrial developments try to maximize the site coverage (40% +/-), but Amazon, and now others, are moving to a lower coverage ratio to support the last mile delivery van parking requirements. Amazon has or is doing this in Tualatin, North Portland, Gresham, and Clark County, and undoubtedly is working on other similar sites at the various points of the compass.
Speaking of Amazon, it has taken them some years to purchase most of the delivery van supply, and, trailer van supply. Most Amazon drivers are now showing up in Amazon vans (versus Hertz?), and of course, the number of 53’ trailers with the Amazon logo on them just keeps growing. They are still pulled by independent tractor (truck) operators, but I wonder how long until that change will be made. I friend in the material handling business mentioned a while ago that Amazon had placed an order at their factory for 10,000 electric pallet jacks. The problem was that the company only makes 5,000/year, and most of that capacity was already allocated.
Capitalization Rates in the Portland/Vancouver area continue to get compressed. There was always plenty of money chasing Industrial Investments, but now the money that used to chase retail and office is being directed towards Industrial also. Cap Rates are commonly in the sub-five percent range, and now Real Estate Investment Trusts and other Institutional Investors are buying new construction that has yet to be leased (empty) at prices that were common a year before for fully leased projects. Once purchased, there are still considerable costs associated with the carry, tenant improvements, and commissions to fill an empty building.
We expect lease rates to remain strong. The underlying demand should keep them propped up. However, it is going to be interesting to see what impact taxes have. From the City to the County to the State, we are getting a continuous barrage of new taxes. We all know folks that are talking about moving their residence and/or business because of the tax situation. And there are folks willing to address this issue. Just Google Miami Economic Development. Or, in a following article in this blog is a recent marketing piece out of Clark County. As I’m prone to say, just across the river, but a state away.
At less than 5% the Portland/Vancouver marketplace still has a very low vacancy rate. They say that 10% is the fulcrum point for moving from a Landlord’s market to a Tenant’s market. Finding quality space where you want it is still a challenge. I’m estimating things are going to get better and folks are going to come out from under their rocks and am expecting 2M SF of net absorption this year. But probably a softening after that. Once we have adjusted for this spike in online shopping, I am afraid the tax situation and a most probable increase in federal regulations are going to start to shackle our local economy.