By: Mark Childs, SIOR
I will start by apologizing for the delinquency of my Q1 report. I got bogged down on the technology side (or my Associates did), and things got delayed. My goal is to support the Company in creating the Quarterly Newsletter (following), which takes close to a month, and then get my Quarterly out close to the end of the month.
With all the noise out there, including Global wars, national inflation and bank failures, plus local taxes, homeless, and crime, the Portland Industrial real estate market just keeps chugging along. During the first quarter of ’23 we had almost 500k SF of net absorption (move ins minus move outs). That is off the torrid pace of 1M+ SF of average quarterly net absorption that we saw last year, but still healthy. As I’ve shared before, our sweet spot seems to be around 3M SF of absorption annually, so we are within range of that given the quarterly variability of the data.
With little new industrial product coming to market, the vacancy rate continues to drop. It ended last year at 3.1%, but now has dropped below three to 2.9%. We have 3.2M SF under construction, which should keep us neutral in a normal year, however, little new product hit this past quarter. One area of relief could be sublease space coming back on the market. We have seen an uptick in tenants vacating space and putting it on the market. National companies are moving their operations to more tax friendly locations and many locals are just giving up because of the homeless and theft problems.
Lease rates continue to climb, albeit at a slower rate than we’ve seen over the last couple of years. Increases of more than 10%/year for the previous two years seem to be cooling off to more in the 5% range. Unfortunately, with +/- 3% vacant, the rates are expected to continue to climb. Our shell rates are in the $0.70’s to $0.80’s range, but $0.90 is starting to show up in the tightest markets in the Southwest. Shell rents on quality new industrial product in the Kent Valley are now in the $1.10 to $1.20 range, and we follow the Kent Valley by roughly 2-3 years. Expect rates to continue to rise.
Unlike other product types, demand continues strong for industrial space. The key driver is the underlying move from bricks to clicks. 10% of shopping was done electronically coming into the pandemic in 2020, and it instantly jumped to 16%. That number is now above 20% and is estimated to increase 1% per year to 30%. With every item shipped to your door rather than a store, it takes 3 times more warehouse space, and certainly more tractor/trailer rigs that need to be parked. Add to that the general increase in buffer stock for the “just in time” supply chains, plus the reshoring of production operations, and you’ve got a great demand scenario for the foreseeable future. That being said, many companies are also near shoring, and as a result Mexico is seeing considerable industrial demand. Labor is always important, and when I was in Mexico City (20M population) in 2020 it was shared that half of the city’s population was under the age of 18. Plenty of workers for plenty of years.
Other than Apartments, which benefit from high interest rates and inflation, the other product types aren’t doing well. Retail continues to struggle in Portland, not just by the clicks to bricks problem, but shoppers just scared for their safety. Maybe to buck this trend, I recently heard that retail is gravitating to the Lloyd Center Mall because they can provide security in an enclosed environment. Downtown office continues to be a blood bath as owners are now turning their buildings over to the banks (if they will take them), and the problem is going to get worse. The one shining light would be suburban office, where many downtown tenants are fleeing to.
There really is no industrial product for sale. To begin with, it is a great product type to own, so few want to sell. Smaller buildings continue to command high prices over $200/sf, and most buyers bring all cash to the table due to the high interest rates. Even at those prices, it is still a deal as the cost of construction is leveling, but not declining. Product availability is improving, with the exception of major electrical components, which are still more than a year out for delivery. Larger sales are in a quagmire, as product was purchased or constructed expecting a 5 Cap at time of sale. The general consensus now is the world is operating at a 7 Cap, which means you are leaving close to a third of your value on the table. Folks are waiting.
I heard taxes in the Portland area have increased by 30% in the last two years, and that Multnomah County is the highest taxed county in the Nation. I’ve heard we tax more per capita for the homeless, but have more homeless per capita than anywhere else. High voltage fencing is becoming the norm for industrial space users with outside storage. But Portland Industrial continues with resilience. We’re still the cheapest town on the west coast. I expect a steady 3% vacancy rate, continued increases in lease rates, and another year with 3M SF of net absorption. This is a crazy place, but I’m glad I do Industrial, steady as she goes.