The year ended with another quarterly negative net absorption (more folks moving out than in) of around -450k sf, resulting in a -550k sf net absorption for the year. After starting out strong at 1.2M sf absorbed in the first half of the year, the -1.2M sf 3rd quarter and negative 4th quarter finished us in the red for the year. End of 3rd quarter I thought we would zero out 4th quarter for a zero net absorption change for the year, but the market was softer than I expected.
The absorption softness appears to be happening across the board. Companies are letting their leases expire, with locals just shutting down and nationals consolidating into other geographic locations. Some are accelerating the process by vacating and putting product on the sublease market, while some of the negative net absorption is new product coming on the market that hasn’t been leased. An example here would be 600k sf in Clark County that is now complete but vacant.
Due to the continued negative net absorption, vacancy has now crept past 4% to 4.2%. During most business cycles Owners would love a 4% vacancy rate, but having enjoyed a +/- 3% vacancy rate over the last couple of years, Owners are getting nervous. Vacancy in Rivergate has topped 10% as the 3PL market has continued to soften, and East Columbia Corridor and Clark County has pushed north of 5% due to new construction hitting the market with vacancies as previously noted. You can learn more about submarkets and other data details in the following Capacity 4th Quarter Industrial Market Update.
Rivergate continues to be popular for Third Party Logistics (3PL) companies, kind of as a hangover from when the Port received considerable container volume. While most of that cargo is now trucked down from the Puget Sound, Rivergate continues to be the closest in Oregon to store that product flow. However, as companies continue to move their production from China to other sources (near shoring in Mexico), 3PL volume continues to shrink in the Pacific Northwest. Portland has spent years benefitting from catching product produced in China. Those days appear to be waning.
We still have almost 6M sf in the construction pipeline. Part of this is because the development cycle takes so long and Developers are committed to move forward regardless of the most current data story. However, most Developers continue to push forward knowing there is still underlying demand for their product. New product is being constructed with 32’, 36’, and even 42’ clear heights. There is still underlying demand for this new product from National companies which can’t be met by the current, somewhat dated vacancies. Additionally, much of the new demand also requires tractor/trailer parking, something designed into the current construction but not available with the older product.
Lease rates appear to be plateauing in the low $0.80’s eastside and high $0.80’s westside. 4% vacant is still a Landlord market. New construction still commands a premium for the reasons above, but subleases are putting a downward pressure as some tenants are willing to take a hair cut to get out of their obligation.
Buildings for sale are actually starting to hit the market. Generally speaking they are older buildings with some form of obsolescence, be it low clear height, poor truck maneuvering, poorly located, etc. While not generally attractive, this is a trend that wasn’t happening a couple of years ago. Financing one of these for a local user is still a challenge with the high interest rates, but as mentioned in the last article, many Sellers are moving to Seller finance to get a deal done.
Construction costs appear to have plateaued. However, the new challenge now is insurance. Costs are skyrocketing, if you can find it. Flood and earthquake coverage can be especially challenging. We are doing transactions where the Tenant/Buyer is waiting until the last minute (yes, they are industrial folks) to tie up this detail, and it is delaying completion of the transaction by days and weeks. Even if you are staying, start working with your Insurance Broker earlier rather than later to ensure they have enough time to find you the best deal.
It is interesting times. Wars, election year, has the Fed licked inflation, plus our local taxes and homeless challenges. The Consumer seems to just keep spending and driving the economy. And the amount spent through ecommerce continues to grow 1 – 2% per year into the 20% range. And it takes 3X the warehouse to get a product to your door versus the store. While things are softening for industrial real estate in the Portland/Vancouver metro area, no one appears to be panicking. The expansion of Retailer’s distribution networks, reshoring, and other fundamental market drivers should keep Portland Industrial from falling off the table. I believe we are going to see another year of negative net absorption, maybe -1M sf, and end the year at a 5% vacancy rate. Then, after the elections, we should be moving back to our usual 3M sf annual positive net absorption in ’26.