Bogging Down in the Mess?
By Mark Childs, SIOR, Capacity Commercial Group
Industrial Real Estate in the Portland/Vancouver marketplace continues to be healthy. We saw over 1.4M SF of net industrial absorption in the third quarter and are at a total of 4.4M for the year, which is an outstanding year and close to record absorption. New product coming online is not keeping up with the absorption, so vacancy has dropped from 3.5% to 3.2%. Further, lease rates continue to ebb up, with shell rates now in the $0.70’s on the east side and Vancouver, moving into the $0.80’s on the west side. All in all, a good place to be, and if it stayed like this, I would be happy.
However, it is not going to stay like this. My last article was titled Powering Through the Mess, but it is getting tougher. Admittedly, the Fed needed to raise interest rates. They are slowing down the economy. But it never seems to end in a soft landing. There is always a brick wall they are looking for. Again, I would propose that the Fed is trying to slow down inflation caused by too much government spending by once again killing the housing industry. It eventually will work, but it doesn’t need to be so painful.
I’ve been through these before. The early signals are coming in. Sales are starting to collapse (or never get started) due to high interest rates, great space availabilities are actually still on the market a month later, and businesses are taking a pregnant pause on their expansion/move plans. I recently heard a report that an Institutional Equity Investor indicated their office is like a morgue as they have reeled in their efforts to place money at this time, and a private west coast investor was actually starting to see some product come available. Additionally, Amazon has previously indicated they are stopping new construction and now Prologis, the largest Industrial REIT, is indicating they are slowing down construction.
Things are not going to stay the same. But then hopefully the Feds will back off on their rate increases. Fortunately, we are still operating with considerable pent-up demand. We just finished leasing a 475k SF project in Ridgefield, which was basically leased by the time the project was completed. There are still national companies out looking for larger spaces, and there is considerable pent-up demand for smaller spaces by local firms because no one wants to build product that demises down into their size range.
On the positive side, material costs seem to have plateaued and building component lead times are slowly being reduced. Office HVAC and dock packages were well out over a half year, but are coming down, with some spot opportunities to pick up certain product types in less than a month. Everyone is still looking for employees everywhere, but it doesn’t seem as tight as it was a year ago when everyone got more money for staying home than if they worked.
Permitting is still a challenge. Most Jurisdictions still have not come back to the office. Portland would be the poster child here, with story after story arising. One well run metal distributor had been waiting 9 months for a straightforward office TI permit, when the Portland Permit Specialist realized the Company had bolted a piece of equipment to the floor, which of course now requires a building permit in Portland. Back to the beginning. Painful.
Continuing with the positive side, there might actually be product that comes on the market for sale. There has just been a lack of product as Industrial has become the darling for almost all investors. I’m talking to folks that purchase GSA, oh, and now industrial, and that purchase retail, oh, and now industrial. Maybe we’ll see more product come available. And for investors, it seems to be a two-tiered game now. Local folks that need debt are seeing Cap Rates pushed to 6% and beyond, while larger Institutional product that is purchased all cash is still staying in the 5% range. I’m currently dealing with an industrial sale out of market that is ebbing up to the 8% range.
I just got back from our CORFAC national conference in Seattle, and industrial is strong across the nation. We have dodged the bullet that hit retail and office (currently over 25% vacant in downtown Portland). While it feels weak here, we’re still better off than most the world. Europe is in the middle of an energy drain, and supply chain issues continue with China. I continue to see the trend to make more stuff here in the US. Hopefully this trend will continue long enough for the interest rate game to end. We’re on track for 5M+ SF of absorption this year, and I expect close to 3M SF of net absorption in '23. It’s still good to be in industrial.