Back to Bad

I titled my first quarter article ‘Turning the Corner’, and finished it with ‘I believe we’ve turned the corner’.  Well, the 300k sf of net absorption in Q1 has now gone to almost -700k sf of net absorption in Q2.  The second quarter was more than twice as bad as the first quarter was good.  There is still activity out there, and maybe it is because I do a fair amount of manufacturing, but it doesn’t feel that bad. 

Our industrial meetings (20 folks) are mostly positive as we discuss market activity.  But we keep draining folks out of space. 

After the great covid expansion, national companies are right sizing their new, larger distribution models.  And even manufacturing companies are adjusting their production sourcing, evidenced by our recent listing of a 200+ sf manufacturing facility being vacated for this reason.  Even as manufacturing expands in the US, taxes, regulations, and cost of living make the Pacific Northwest a tough place to do business.  A recent Business Journal article noted that Oregon had dropped from 29^th to 39^th in the list of states that are friendly towards business. 

The vacancy rate has edged up from 6.2% to 6.5%, in part from the vacation of space currently on the market, and also from new product coming on the market empty.  It is this new product that is pushing up vacancies even in the strong ‘suburban’ counties of Washington, Clackamas, and Clark.  While it can be tough to find smaller spaces in these suburban markets, larger blocks of new space are coming available.  A more detailed analysis of vacancies is presented in the following Capacity Industrial Market article.

One benefit of a general slow down in construction across all product types is that construction costs have finally trended downward.  Per the charts included in a Perlo Construction article following this one, if you wanted to construct a 150,000 sf warehouse, the contract cost for the Contractor (such as Perlo) would have dropped from slightly more than $80/sf in ’24 to slightly les than $80/sf in ’25.  Component costs such as steel, paving, roofing and insulation are all down from the 2023 peaks.  Concrete cost, due to raw material shortages in the Portland area, continues to climb.

With rising vacancies, lease rates in general are starting to soften, including a little more free rent and other TI/financial concessions.  New construction is still commanding shell rates in the $0.90’s as financially sound companies are moving into quality properties that will facilitate their efficient operations.  Most suburban product is leasing in the $0.80’s, with the Columbia Corridor reaching down into the $0.70’s due to the tough tax environment and higher vacancies, with Rivergate’s 13.7% leading the way.

Under construction has increased, partly due to many of the projects that are under construction slowing their progress, and Panattoni kicking off a 500k sf project in Clark County.  There aren’t any statistics, but I would say the average time from turning dirt to completion has gone from about a year during the hot covid days to close to two years today.  Our under construction numbers used to be in the 3-4M sf range, but now trend in the 4-5M range.  Yet, more was being completed each quarter during covid.  And, they were mostly being completed fully leased.

Downtown office continues to be in the tank.  The recent poster child for how bad is bad would be Big Pink.  Having sold for $372M in 2015 (maybe a $450m value in 2019 if it would have traded then?), just sold for $45M.  Less than 50% is leased, with that number expected to drop in half when US Bank finishes vacating.  Bought by Swickard who does cars, the US Bank Building could become The Chevy Building?

Changes are being made at the national level.  The tariff wars are going on, which all the economists said would create inflation.  But I believe we are finding creating a level global playing field for tariffs isn’t inflationary.  The process isn’t fun, certainly for many of my clients.  Additionally, there are new, accelerated depreciation opportunities, especially for manufacturers.  This will stimulate investment and growth, which usually means more industrial space occupied.  While these changes are fundamental to a sound, growing economy, they aren’t short cuts that will create magic change today.  I believe we will see some positive effect this year, ending with a net positive 1M sf absorption.  And once the above changes (and others) continue taking effect, next year should see us back at our 3M sf annual absorption rate.