Industrial Dodges a Bullet
I was thinking of titling this one “dodges a virus”, but in Portland you can title it “dodges a bullet” and still not be far off the mark. Even through these crazy times of 2020, the Portland/Vancouver Industrial Marketplace continues to perform strongly. Industrial net absorption was almost even in the 3rd Quarter, positive by just 50K SF, or plus 1.0M SF of net absorption for the first three quarters of 2020.
As a result, vacancy remains steady at 4.3%, which is still a very healthy marketplace. New construction has already delivered almost 3M SF of new product this year, which is what we have previously been absorbing each year. With what is in the pipeline, we will finish north of 3M SF delivered, which will push the vacancy rate up slightly. Commencement of some projects has been delayed, but most of those are going under construction as this is written to get some gravel down and beat the rainy season. A more detailed analysis of submarket vacancies can be found in the Capacity Quarterly article following this one.
The virus has put a significant hit on the retail and office markets. Store and restaurant closures continue to mount, while office market sublease availability is sky rocketing. Nationally, many malls and stores are being converted to last mile distribution centers, with resultant greatly reduced asset valuations. Locally, downtown office building owners are planning on installing more plywood on ground floor windows in preparation for the results of the upcoming election. If the nightly burnings don’t change, there will probably just be more buildings in downtown with plywood on the windows, and a continuation of companies departing the urban core. The phrase ‘someday back to normal’ comes to mind, but it is hard to imagine what the new normal will look like.
Industrial product demand is being driven by warehouse demand from a mix of Third-Party Logistics firms and Company Owned distribution operations. While the smaller tenants had slowed down in the second quarter, they seem to be popping their heads up and getting active again. A good sign in as much as the smaller ones are a much greater percentage of locally owned and operated companies.
In case you missed by last Industrial Update, the short version of what is keeping Industrial afloat in these stormy waters would include:
· Bricks to clicks transition
· Re-shore from China
· Additional buffer inventories
· More warehouses per distributor
· New virus-related products
You will find additional national market data reflecting the above forces in the following Economic Outlook article.
We continue to see a minimal amount of sublease availabilities in the Industrial sector, which is helping to support lease rates. Lease rates remain steady with possibly some small increase in concessions like free month’s rent or additional tenant improvement allowances. Similarly, industrial users are not bailing out of their owner-occupied buildings, meaning that it is still very difficult to find industrial to purchase, and when you do, it will be priced at a premium.
Construction costs remain high, although there should be some softening here. Office and retail construction have long lead times, so it is going to take a while for the current construction projects to be completed. The only qualifier here is that suburban apartment and single-family residential construction is expected to pick up.
There is still plenty of institutional money chasing deals, especially since the money that was going towards retail and office is being diverted into industrial. What used to be simply generic warehouse funds are now being refined to specific markets such as “last mile” and “freezer” funds, where investors are willing to construct speculative facilities that have a much narrower market appeal. However, due to the market forces noted above, they appear to be making pretty good bets.
The virus has yet to ravage the industrial market. But given enough time, even this market can take a bullet. Hopefully we will come out of this virus shut down by the end of the year, getting back to normal, whatever that may look like. I’m expecting maybe 500K SF of absorption in the 4th quarter, which would put us at 1.5M SF of net absorption this year, about half of what has been occurring over the last few years. At the beginning of the year, who would have thought that half as good would be considered a major victory?