Well, we just hit the fourth quarter in a row with negative net absorption. After losing 800k sf of leased space in the first quarter, the second quarter saw a 1.2M sf loss. Companies are terminating their leases across the size range, with the larger companies relocating their operations to elsewhere in the US, and many of the smaller local companies just closing up shop.
As a result, the vacancy rate has ebbed up once again from 4.6% to 5.3%. Still healthy but continuing to increase. As mentioned in the previous newsletter, the vacancy dichotomy continues. Portland vacancies measured in a crude manner are at 7.6%, while Clark, Washington, and Clackamas Counties are at 2.4%. The appeal of exiting Multnomah County continues. You will find more detailed information in the Capacity Quarterly Industrial Report following.
Demand for larger spaces continues to wane as retailers are finishing the ramping up their national warehouse locations. Still empties would include1.2M sf of just about finished construction in Kelso by Trammell Crow and 600k sf of finished construction in East Vancouver by Panattoni. Other multi-tenant projects in the 200 – 400k sf range have also been slow to lease.
While the State did come up with the $14M to keep the Port of Portland container docks open, 3PL’s continue to be challenged as our economy transitions. With reshoring/near shoring, less product is being brought in through the west coast ports from China, and with the larger ships more are docking in the gulf or east coast ports. Plus, product is coming in by rail as Mexico near-shoring continues to grow. A rail friend indicated about 100 years ago almost all products moved on rail. By the ‘60’s it was only 20%. We are now back to 60% of all products getting a ride in a rail car. Not exclusively but moved by rail none the less.
For maybe the first time in my career I am hearing of softening in the Inland Empire area of East LA, with continued strength for the above-mentioned gulf and east coast port cities. Even with this strength, in a recent national industrial zoom call, the Houston broker noted that the number of developers building spec industrial product in their market has dropped from around 30 to about 5. Industrial is slowing across the US.
Lease rates have flattened in the $0.80 +/- range, with Rivergate being the weakest and the SW market being the strongest. Alta Bird just hit a home run with their 155k sf spec development in Cornelius. Questioned as being an outlying market, they landed an Intel contractor at a lease rate in the low $0.90’s, showing there are still some gold nuggets out there.
As noted previously, Cap Rates are tending to meet in the 6% +/- range, although BKM recently purchased Columbia Business Center, a 400k sf complex on Columbia Blvd. at a 5 ¼% Cap Rate. The most aggressive rate we have seen in a while. BKM has a history of purchasing and pushing hard to raise lease rates. It has worked well in Portland over the last few years. We shall see going into the future, especially in the Portland/Multnomah area (see higher vacancy rates above).
Coming up with fun things to talk about is a challenge this quarter. The market just continues to plod along in its weak way. It appears construction costs are peaking. Commodity construction material costs are flattening or dropping, and labor, while short in supply, their costs appear to be flattening to softening. As high interest rates drive down new construction, the contractors (and their employees) are working hard to be more competitive. Everyone believes interest rates have peaked and should be heading downward as the year unfolds, and inflation fears appear to be waning. And Portland/Multnomah appear to be trying to learn how to be business friendly. Recent elections indicate criminals may actually be arrested AND prosecuted. A novel concept. As such, the above all seem to be indicators that we may be in the bottom of the dip and hopefully headed upward.
Companies continue to drain out of industrial buildings in the greater Portland Metro area. However, there are indications that major market indicators have quit moving south, and some are starting to turn. It’s an election year, so we will continue to see a softness from the tendency to push out decisions until there is greater political certainty. Appears we could be in for a change. That will be good for some of my clients, bad for others. Last quarter I called a negative second quarter, but a neutral year. Negative 2M sf of absorption is tough to make up, especially since it appears Q3 will probably be slightly negative. I suspect we will end the year with at least a negative 1M sf of net absorption. Even at a 6% vacancy, no one is gnashing their teeth yet. And the tea leaves indicate a positive 2025.
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