After two quarters of negative net absorption, the slide continues. First Quarter 2024 saw another negative 800k sf of net absorption, about matching the average for the previous two quarters. As a result, vacancy continues to rise, ebbing up to 4.6% from the 4.2% ending 2023. We haven’t seen three quarters in a row of negative absorption since 2010, coming out of the Great Recession. Companies continue to terminate at end of term, with national firms consolidating to other distribution points on the west coast, or put space up for sub lease, while new construction is coming on line empty, after a number of years of new construction being pre-leased.
However, an interesting trend is starting to emerge in the vacancy numbers. Historically, the Columbia Corridor, extending from Rivergate (confluence of the Willamette and Columbia Rivers) to Troutdale (confluence of the Sandy and Columbia Rivers), has been an industrial hot spot. Located at the only place in Oregon where two interstate freeways intersect (neither one ending), with the I-5 freeway connecting to Canada and Mexico, and a view (admittedly from the dike) of ships, trains and airplanes, this location has been the place to be if you wanted to move product. But now that Multnomah County has become the highest taxing county in the country, and Portland tried the de-police strategy, the City of Portland and surrounding Multnomah County cities are not so popular.
The second article in this quarterly report is the Capacity Industrial Market Report that I help author. Buried in the report is a breakdown of vacancies by submarket. Not taking into account the relative size of the submarkets (doubt it would matter much), rough math indicates the average vacancy in the Portland/East County area is over 6.5%. The vacancy rate in the Clackamas/Washington County region is less than 2%. Industrial real estate is a lagging economic indicator, and it takes time to burn off leases, but ever since the second quarter of 2020 when Portland was well on their way to leading the nation in the growth of not good statistics, companies have been flowing out of the Portland market. As a fifth generation Oregonian born and raised in East Portland, with a list of schools many would recognize, this is yet another statistic that I’m not happy with.
The trick of course is to not just complain, but to do something about it. You will find additional articles in this quarterly report on how to get involved to fix it. Revitalize Portland Coalition is working to clean up the City and its reputation. Birch Community Services feeds the working poor, no doubt often stopping families from the last step before they too become homeless. And there certainly are numerous other ways to get involved. Only by each of us doing our part are we going to get Portland (and the community of cities that it reflects) back on its feet again.
One thing nice about a statistic that is declining, it also impacts other statistics. As such, it appears that lease rates are flattening. New product is still getting its premium of rounghly $0.90 +/ per sf shell rates as it should, and southwest rates are in the high $0.80’s, with low $0.80’s elsewhere. Except for Rivergate, which is dipping down into the $0.70’s. For all we are being taxed and things are being subsidized, the State couldn’t come up with $14M to keep the Port of Portland container docks open. So effective this Fall Portland will no longer be a container Port, further impacting the already decreasing container traffic coming in from China and other Asian ports.
Similarly, construction costs are starting to stabilize. Although, thanks to some data from Perlo Construction, lead times have not dropped for all material types. Roof structure, insulation and structural steel lead times have dropped back to normal from what had become ½ year to one year lead times. However, electrical switchgear continues to have over a one-year leadtime, plus HVAC and dock equipment continue to have about a half year leadtime. As I’ve mentioned before, an electrical switchgear distributor client of mine told me that as long as we are trying to electrify our transportation, these electrical components will be a lead time problem well into the next decade.
Institutional grade sales are still way off. Owners still want the 5% Cap numbers from a couple of years ago, and Buyers are faced with the need for a 7% Cap purchase price to cover the cost of debt. For an investment with $100k/month income, that creates a value spread from $24M to $17M. At a recent RPC meeting (see a following article for what it means), folks working to attract National Equity to Portland are still being told they believe there are still riots occurring nightly in the City. We got national press while they were happening, and of course, the press never bothered to tell the world that they have stopped. As Portland tries to fix things, and they/we are, we need to be sharing the story with the rest of the world.
I had forecast last quarter a negative 1M sf of net absorption for all of 2024. We’ve already used up most of that. But I’m going to hold, as I think we will be negative next quarter also, but then finish in the black. Portland is trying to fix itself, and we have the other three counties to help carry the water.
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