Another Drop

I ended a not too rosy 2025 report by noting that we could hopefully see a break even in net absorption by the end of 2026.  That still may be possible, but it is going to be difficult.  We finished the first quarter with a net negative absorption of almost 1.2M sf, one of the highest negative quarterly numbers on record.  So, who is checking out?  When the number gets this big, kind of everyone.  Local companies are shutting down, national companies are consolidating into other locations to meet their needs for Portland and the Northwest, and manufacturing companies both local and national are shutting down or selling out.  While it is easier to make money on the upswing, I’m actually doing OK, selling vacated manufacturing plants.  Not what I want to be doing, but it pays the bills.

I try to keep these reports on the positive, but the above is mostly the result of high costs and taxes.  At the State level the Governor has created a Prosperity Counsel, and then against the advice of businesses across the state, taxes are increased for roadways, and a bill is signed removing much needed national depreciation rules from the Oregon code.  Locally, the City of Portland is looking at leveling a vacancy tax, while another department is trying to expand environmental zones onto already developed property.  And Washington’s millionaire (for now) tax and Vancouver’s stop the fossil fuel rules aren’t helping the region either.  For these few and many other reasons, the data is telling us this is a tough place to do business.

Fortunately, we are not alone on the west coast.  A recent national study indicates Industrial space demand is shifting to the inland regions.  With generally more competitive business climates and continued increasing imports coming from Mexico or into the gulf ports, warehousing and final assembly growth is driven from the south and northward through the middle of the country.  As shipments from China and other Asian countries into the west coast ports continues to wane, industrial demand continues to drop for our side of the country.

As a result of the loss of occupied space, vacancy has rose from 7.7% to 8.1%, crossing the 8% threshold for the first time since early 2011, when we were still recovering from the Great Recession.  Again, not a bad number, but the trend is ominous.  Rivergate vacancy is up over 12% again, with the Airport area and further east in the Low 8% range, in part due to rental rate reductions and concessions to be competitive.  Clark County and the Clackamas area are in the healthy 6% range, while the once solid southwest Tualatin and Wilsonville areas are now up in the 10% range, in large part because that is where the Developers have been constructing new product.  And they have now found the bottom of the demand.   You can learn more about submarkets in the following Capacity Quarterly Newsletter.

New construction continues steady with the same 4.65M sf in the pipeline.  Trammell Crow with the assistance of their Equity Partners is under construction on 800k sf in Canby and 900k sf in Woodland, with almost 300k sf in Woodland already leased.  These are big bets on what could easily be considered remote locations.  However, so was 1.2M sf in Kelso, which after sitting vacant for around two years, was leased by Amazon, the Developer’s Ace in the Hole.  Located in Cowlitz County, it is a shot in the arm, but doesn’t show up in our four county data.

There continues to be a dearth of quality industrial buildings for sale.  Those that own them like them.  I am involved with selling manufacturing buildings, mostly for national companies that just need to not own them.  Fortunately, they understand that there is no bad real estate, just poorly priced.  The downward pressure on commercial property values, both office and industrial, is going to continue to put pressure on our local government’s budgets.

The national forecast for industrial space indicates a leveling in 2026 and excess space being leased up in 2027.  I’m just hoping we can stay neutral through the next three quarters and end the year around 1M sf down in net absorption.  But I wouldn’t be surprised if that number creeps up to 2M sf down by the end of the year.