Powering Through the Mess
By: Mark Childs, SIOR, Capacity Commercial Group
As we continue to battle through these interesting times of war, inflation, rising interest rates, stock market volatility, and a never-ending series of Covids, the Portland Industrial real estate market just keeps chugging along. Second quarter saw a near record number (have to admit I don’t know the exact number) square feet of net absorption (space taken minus space vacated) at over 2.3M sf. Including the first quarter absorption of over 700k sf, we are now over 3M sf absorbed in the first half of 2022. In as much as I expect additional absorption in the second half of ’22, I guess my estimate of 3M sf total absorption for the year at the end of my first quarter newsletter can be thrown out the window.
Vacancy dropped from an already tight 3.4% to 3.3% vacant. This number would have dropped lower except that the space under construction dropped from 5.9M to 3.2M, with the new product helping to keep the vacancy rate from dropping further (1M of the new construction by Intel which doesn’t show up in the absorption data). Examples of completed projects include TS Corporate Park, Vancouver Logistics, and Sandy Blvd. Industrial Park. Excepting for the 217 Corridor, vacancy on the west side from Hillsboro to Wilsonville is basically at 1%. While Clark County registers in at 2.5%, the vacancies are in a few larger spaces, with really no space available in the 5 – 50k sf range. For additional details on the local market please see Q2 2022 Capacity Industrial Newsletter following this article.
Developers continue to focus on constructing large boxes, ranging from 300k to 600k sf buildings. They get economies of scale and are easy to manage the lease up. Usually, one to two deals and they are down the road. And it has worked for the last couple of years. As Amazon has expanded, so also have the largest retailers need to expand their warehouse/ecommerce delivery footprints. There is a phrase in real estate known as build it and they will come. For the last couple of years, it has been build it and Amazon will take it. Well, those days are over. Amazon has put the brakes on new expansion. And it appears the largest retailers are starting to catch up with their expansion back log. There is still demand for large spaces out there, but the rate at which the requirements are showing up has certainly declined as this year has unfolded.
As mentioned in the previous newsletter and noted above, the locals are banging their heads against the wall. There are very few if any locations for them to move into. That 5k – 50k sf product is very hard to find. PacTrust has a 4 building 300k sf project under construction in Vancouver, and it is basically pre-leased by a half dozen tenants that have been searching for smaller spaces but have been unable to find it.
With the exception of wood products, construction costs continue to rise. The Feds are trying to stop fuel related inflation by raising the interest rate to purchase a new home (heavy wood content). It eventually will work but it will end up putting the economy into a recession. More problematic than the costs are the shortages. Roof systems are more than a year out, and dock packages and roof mounted HVAC systems are 6 months out. Developers and owners are having to commit to purchases before they even have a deal inked. And if you like certain brands or model numbers, you have to take what you can get to do the job.
As a side light, downtown office continues to struggle. Current vacancy is close to 30%, and with an estimated 40% of the folks actually coming into the office, this number will probably continue to climb. It would help considerably if government employees returned to the office, not only to increase the vibrancy of the core and the supporting retail, but returning should also help with the permitting turn around times, which are either very long or just not at all. A recent survey in Pamplin media indicated the City workers don’t care about downtown (the City). Now that was a surprise. Retail at the Mall level continues to struggle, but the small locals continue to figure out how to get businesses started and expanded.
Finding an industrial building to purchase is almost impossible and the cost keeps going up, driven by the increasing cost to construct a new facility. I recently heard the cost to construct a 300k sf warm dark shell was in the $200/sf range.
It’s kind of a mess out there. But Portland industrial continues to power forward. I will adjust my 2022 absorption estimate to 4.5M, possibly a record year ignoring some Amazon hits from a couple of years ago. Absent one of the problems I noted at the beginning of this article going off the charts, I expect industrial to stay strong for the next couple of years. Hopefully the City will come back to work by then.