Turning the Corner

We may have experienced the final impact of covid on the Portland/Vancouver Industrial Marketplace. Coming out of the Great Recession, as we moved into the late Teens, we saw steady growth in our absorption. Then as we rolled from ’19 to 20, covid hit. And things went crazy. Everyone needed warehouse space for a variety of reasons, and vacancies dropped. Finally we normalized and went through 6 quarters of negative absorption as the marketplace corrected itself. Now, as we roll into the first quarter of ’25, we are back to positive net absorption (space moved into minus space moved out of). We hit almost 400k sf of positive absorption. Among other things, ’24 was probably impacted by the elections. Folks holding off making space decisions. It is not uncommon that regardless of which side of the aisle wins the election, people now know they can make decisions.

Vacancy actually rose from 6.1% last quarter to 6.2% this quarter, which admittedly could be caused in part by the covid hangover. When things went nuts, the Developers ramped up their build process. Early on in covid everything was delivered pre-leased. But as we’ve gone through this dry spell, product has been hitting the market empty. So, while we had positive net absorption, the new product hitting the market empty has pushed the vacancy rate up. However, the amount of space under construction has dropped below 5M sf for the first time in two years, which should reduce this upward pressure heading into the future.

It appears the vacancy dichotomy I have been discussing is starting to moderate. Vacancy in the Portland/Multnomah County area known as the Columbia Corridor has been holding at between 8% - 9%, while vacancy rates in the healthy ‘suburban’ counties of Clark, Clackamas and Washington have begun rising. A year or so ago these were all at or below 3% vacant, but have now ebbed up into the +/- 5% range. They are feeling the impact of new construction, as these are the target zones the Developers have been focusing on.

Lease rates continue to spread across the marketplace. New construction in the suburban counties are regularly seeing shell rates in the $0.90’s, with second generation space still well into the $0.80’s. However, rates in the challenging Columbia Corridor are now regularly in the $0.70’s, with an occasional rate in the $0.60’s on sublease space. As companies continue to flee high taxes, the free market, with lower lease rates, is keeping the vacancy rate below the 10% mark across the board.

It is still very difficult to find a viable industrial building to purchase. For smaller buildings, local users are still trying to assimilate what 6% debt does to a payment stream. And for Institutional buyers, finding Sellers at or above a 6 Cap Rate is challenging. We are seeing some new product hit the market, but it is progressing slowly. Construction costs are holding. While labor has been slowly dropping, materials are holding steady, with electrical component delivery times still running in the 6 – 12 month range depending on the device.

Tariffs. We’ve been subsidizing the world for years by operating an open market while everyone else makes us pay. Educated as an Industrial Engineer, I’ve always been attuned to our manufacturing base. It’s ironic that probably our biggest threat to our freedom is the country we purchase the most from. It leaves us vulnerable. However, they are going through tough economic times right now, and tariffs are going to make it much more difficult for them. Everyone wants things different, but no one wants to change. There is going to be some stress before we see the benefits. As I’ve mentioned in previous articles, I’m seeing manufacturing moved on shore, by US and other countries.

Where are we headed? Hmmm. I was recently at a national conference of our Capacity CORFAC affiliates, and they brought in an outstanding Economist. The best thing on his resume was that he had been fired from UCLA years ago for actually presenting what the data said. His comment on industrial was that nationally vacancies were up (similar to our neighborhood), but that developers were hitting the brakes and the excess space would get absorbed. I agree. Shoppers will continue to migrate to warehouse-heavy ecommerce, and manufacturing will continue to return. A normal healthy year in Portland is a plus 3M sf of absorption. I believe we’ve turned the corner and would go with +2M sf for 2025.