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Finishing with a Thud

Mark Childs, SIOR

I was going to call this issue “The Slide Continues”, until I saw I’d used that title when we hit three consecutive quarters of negative absorption. We’ve now doubled that number. So, I picked a title that I believe summarizes the year. The 4th Quarter ended up with a negative 700k SF net absorption (move in sf minus move out sf), bringing the total for 2024 to almost 3M SF of negative net absorption. I of course forecast 1M SF of positive net absorption for the fourth quarter. I guess I need to trade in my rose-colored glasses.


I’m not an Economist, and I don’t want this to become an economic white paper, but it appears that the overall weight of inflation and challenging times are just taking its toll. It costs more to do business here than many other places in the country, and the Portland/Vancouver area is no tax haven. Plus, I probably didn’t factor in the election year pause that many companies take when considering expanding their space. We continue to see companies either not renewing their leases or putting their space on the market for sublease. The cumulative effect is now a year and a half of net negative absorption numbers.

Vacancy has ebbed up from 5.7% to a 6.1% vacancy rate. I checked the files. We haven’t seen a 6% vacancy rate in the Portland/Vancouver marketplace since the third quarter of 2013, which is when we were digging ourselves out of the Great Recession. While we never really rose above 10% vacant as a result of the 2008 collapse, our market also wasn’t a prime target for the national developers back then. Now we have numerous National Developers that have been active here, helping to push up the vacancy rate as their new product comes online, now more empty than full.


Coming out of the Teens and into the Twenties (and the pandemic induced drive for more warehouse space), the Portland/Vancouver market has historically experienced about 3M SF positive net absorption a year. The under-construction number continues to hover just under 6M SF, which makes sense for a normal market as it can take more than 18 months to get a multibuilding project polished off. However, that 6M number can be a little misleading, as some Developers have been prudent enough to not pull the trigger on going vertical. Of the dozen projects out there, a few decided last summer to just prep their sites with horizontal civil/site work, but not pull the trigger on going vertical with the structures. This should ease the pressure on future increases of the vacancy rate.


Vacancy by submarket continues to be a situation of two worlds. We now have submarkets in Portland with vacancies greater than 10%, while submarkets in the Southwest Washington County area are still below 2%. Vacancy in Clark County has gone over 6% mostly due to large projects hitting the market empty, while vacancy in Clackamas County has gone over 5% due to a major tenant vacating space to move to Washington County. You can see more specific data in the following Q4 2024 Capacity Industrial Market Update.


Because of the above noted market vacancy separation, lease rates are starting to spread across the segments. Lease rates in Washington County, and even for a recent transaction in Clark County, are in the $0.90+ shell rate range, while they are dipping into the low $0.70’s in the Columbia Corridor. A recent transaction in Rivergate for an admittedly difficult space has ended up in the high $0.60’s with 12 months free on a 10 year deal. It’s been a long, long time since we’ve seen these kinds of concessions.


For as challenging as it is getting in the industrial market sector, it is still difficult to find a decent building to purchase. Compared to the other products types of office, retail, etc., industrial continues to be very popular. The high interest rates continue to make financing a challenge, both at the local user level and at the national institutional level. Cap Rates appear to be settling out in the 6% range, and it doesn’t look like interest rates are going to change much in the near future.


Possibly why I think the glass is half full and expect to see net absorption go positive again is because of my bent towards manufacturing. As an ex-Industrial Engineer, I have always done a proportionately larger percentage of manufacturing deals. As I have mentioned previously, between reshoring in general, the Department of Defense driving sourcing on-shore, and the desire for companies to exit other countries (China included), there is still a fundamental demand for manufacturing space. I’m blessed to be working with industrial product that is designed for manufacturing, and in the last quarter completed transactions for 50k sf and 150k sf at The Vancouver Innovation Center. While only about 20% of the transactions across the market are manufacturing, this segment is still strong.


There’s a new Sheriff in town (at least nationally) that people believe is more business friendly. We made some headway in Portland with a new District Attorney, but the general consensus is we didn’t create enough change in the Portland City Council, or at the County and State levels. We’re probably looking at the same direction for another two years at the more local level. What does 2025 hold for industrial in the Portland/Vancouver area? Obviously from my recent projections I don’t know. Coming out of a year with negative 3M SF absorption, I’d take a break even year in 2025. We shall see.

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