We finished 4th quarter 2020 with a negative 1M SF net negative absorption, to finish the year at 500K SF positive absorption. While we track more than 200M SF, we can still get some statistical anomalies in our data. I had assumed the 4th quarter negative net absorption would be met with a data averaging large positive net absorption in the first quarter of 2021. We actually had 100K SF of net absorption in the 1st quarter of 2021. Almost like we are headed for another 500K SF net absorption year, well below our recent string of 3M SF absorption years.
Are we seeing a softening of the robust industrial market in the Portland/Vancouver area? I wish I could say with certainty. I am very busy, and our crew of industrial brokers at Capacity (largest group in the Metro area) all claim to be very busy. Yet we seem to be putting together a string of less than stellar quarters. What is going on here?
One of the reasons our industrial brokers are so busy easily could be because we make money on change. If the market is growing or shrinking, our business is helping people change where they do business. Interestingly, there currently are two industrial markets out there. The first market is the national companies. As I’ve shared before, let’s just say the top 100 retailers are out adding warehouses across the US to compete with Amazon. For instance, I’m working with Specht Development to construct a 475K SF warehouse that won’t be complete until 2022, and I’ve got 10 Brokers on the list with interested companies. The second market is the local companies. They are being hit with the shutdowns, increasing costs and taxes, and the rising cost of labor due to the inability to find entry level labor. As a result, in the Vancouver market where there are usually only one or two vacancies in the 20-40K SF range, a recent survey showed around 8 vacancies. So, while we are seeing national demand for large space, the locals are struggling to keep the small vacancies filled.
Even with the positive absorption, due to about 1M SF of new construction being delivered to the marketplace, vacancy increased from 4.7% to 5.0 %, hitting 5% for the first time since 2014. 5% is still a very low vacancy rate, but it continues to creep upwards. We have a strong pipeline with almost 3M SF under construction. Fortunately, most of this is larger product where the demand is. With the increase in online shopping which I have discussed previously, it easily could take a couple of years to catch up with the space demand for the national retailers as noted above. Even with the recent softness in absorption, rental rates continue to creep upward. Rates that started in the $0.50’s on the eastside are working their way towards the $0.60’s. Similarly, rates that started in the $0.60’s on the westside are working their way towards the $0.70’s.
Speaking of new construction, one wonders if it can be completed. We are simply running out of wood, copper, and rock to name a few commodities. At the national level there are stories of major projects being put on hold, and locally it is at best driving the prices up. It wasn’t too long ago that the office surcharge for a leased space was $0.85/SF. Now folks are quoting $1.00/SF, and I just got a quote of $1.10/SF. Seattle’s Kent Valley, a market we tend to follow, is quoting $1.25/SF. A normal office buildout for 2,000 SF of office in a new warehouse shell used to be less than $100/SF. Now it is tough to get a quote for $125/SF.
As the cost of new construction increases it pushes up the values of older buildings that are put on the market for sale. If you can find one, large buildings (100k+ SF) are commanding close to $150/SF, while smaller ones are north of $150/SF and even $200/SF as you get down into the 20,000 SF range.
With Retail and Office on the sidelines, almost all the Institutional money is chasing Industrial. As a result, Cap Rates are routinely being pushed into the sub 5% range, if anyone is willing to sell.
The Portland/Vancouver market is going through some interesting times. Working the Vancouver market, currently two of our vacancies are being pursued by Portland companies. Fortunately, companies moving to Clark County still show up in our data base.
As 2021 unfolds it is tough to make the crystal ball call. Hopefully we can return to some form of normal by the end of the year. I’m thinking that the national folks should help with our absorption. I’d be happy with a mediocre 1.5M SF absorbed this year. While only half as much as previous years, it would be three times better than last year.