I want to start with a confession. My report last quarter discussed how the market felt strong, but the numbers didn’t back it up. As such, I titled the report “Reaching the Crest?”. Well, I did some further digging, and turns out that our Quarterly Absorption reports are not unlike the national unemployment reports. There is the initial number as of the end of quarter date, BUT, there are “adjustments” made later in the month. The same happens with my data base, and I haven’t been going back to get the adjusted data. For instance, I reported a net negative 40k sf absorption in 2nd Quarter. Three months later that number has been adjusted to a positive 220k sf. I’m sort of getting into the weeds but I’ll leave it at this: I’m going to be updating all of the quarterly numbers each time I write a report. And oh…maybe we aren’t Reaching a Crest after all.
With all that being said, the Industrial market continues to be strong. We had over 700k sf of net absorption in the third quarter, bringing our total to 1.3M sf of net absorption for the year. Our benchmark over recent years has been 3M sf annually, so we’re behind on that, but still healthy. I expect the 4th Quarter to be strong, possibly doubling what we have already done this year.
As a result, the Portland/Vancouver vacancy rate has dropped from 5.0% to 4.7% (See Capacity Q3 Report following for more details). Available space continues to be tight, which brings us to the fundamentals of supply and demand. Lease rates have and will continue to go up – rents have increased more than 6% per year, compounded over the last 5 years. As we all know, the cost of construction materials (if you can find them) has been skyrocketing, pushing even harder on the rental rate increases. Not long ago, rental rates were in the $0.50’s on the East Side, and $0.60’s on the West Side. Those numbers are easily up a dime, with new construction costs climbing even higher. Plus, add in inflation at more than 5%, and that Landlords are starting to insert 3.5% to 5% annual increases in lease rates. It is getting very challenging for locally owned businesses to survive in this market.
Speaking of construction materials, a recent quote on a national Zoom real estate presentation identified that HALF of the construction materials in the pipeline are destined for Amazon construction. Amazon’s impact on the marketplace is substantial – I’m sure each of you have a product that you need or produce that is influenced by the whims of Amazon. Tilt-panel roof systems are scheduling deliveries more than a year out, and rumor has it that Amazon went to one of the largest roof system producers in the US and bought ALL their capacity for the next two years…the Amazon stories are almost endless.
In addition to materials, the actual construction costs are going up. A recent quote from a developer to sell a newly constructed 75k sf warehouse space as a shell (no office) was $220/sf. Second generation 30-40k sf buildings (few that there are) are being priced in the $200/sf range. There is very little product out there, and what is available, is commanding a price premium (yet further justification for increasing lease rates). From an investment standpoint, Industrial is the sweetheart of the institutional investment community. Any product more than 100k sf is commanding Cap Rates below 5%, a rate previously reserved for the LA Inland Empires of the marketplace.
It was maybe 3 years ago Amazon 1.0 hit, with 2.3M sf in Troutdale, 1M sf in Rivergate, 1M sf in Salem, plus other miscellaneous absorptions. I remember complaining that I needed to keep their numbers separate so it wouldn’t screw up our historical numbers. Amazon 2.0 is basically becoming our new data base foundation. Amazon is planning around 5M sf in Woodburn, 500k sf in Canby, has recently leased a few hundred thousand sf at the old horse track, and has/is opening several their last mile distribution centers (150k +/- sf on 10+ acres for plenty of van parking) in North Portland, Fairview, and other planned locations.
Admittedly, the size of Amazon scares me, although I have to admit I cash their checks. One thing I keep reminding myself is they are not creating new demand, just a new way to meet the already-there demand. Lloyd Center is closing, and we see that conventional grocery store demand is shrinking…Amazon is changing how we do business, and there will be those that benefit and those that don’t. Much of my work is helping the other 100 largest retailers find warehouse space so they can compete with Amazon’s fast delivery. I often wonder how you can make money quickly delivering a single $5 item to a household. We shall see.
The statistics show that it takes 3X the warehouse space to deliver a product directly to the customer, compared to a retail store. We are still behind in catching up when online purchasing went from 10% to 16% in 2020. Locally and nationally, industrial will continue to be strong well into the foreseeable future. Large national companies still consider the Portland/Vancouver area a relatively inexpensive west coast location to do business, including Amazon as they implement 2.0 in the Portland/Vancouver area. Hopefully the locals can hang on.