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  • Writer's pictureMark Childs, SIOR

What Clouds?

By Mark Childs, SIOR, Capacity Commercial Group

I titled my first newsletter of 2022 ‘Clouds on the Horizon?’. And then spent the next two quarters talking about an impending mess. However, by the end of the third quarter we’d had 4.4M sf of net absorption. For all of my talk this year of impending problems, and the general economy is sure seeing them, the Portland/Vancouver industrial market just continues to crank. We finished 2022 with another strong quarter of more than a million square feet of net absorption, with an adjusted final net absorption of 5.8M sf for the year. By far and away a record year of absorption for the area, even including the ‘Amazon’ era from a few years ago.

Interestingly, most of the absorption is coming from expansions of companies already here, albeit many national in nature. Thermal Supply, Airefco, and Swagelok being examples, not coincidentally all related to the construction industry. An exception would be my client Child Logistics, a local packaging company that consolidated into a 345k sf lease in Ridgefield, the largest lease done in 2022. Demand quite simply has remained strong across the board for locals and nationals.

Most 2022 absorption was supported with new construction, however, the vacancy rate continues to trend downward and now stands at 3.1% across the Portland/Vancouver area. You can see the submarket vacancies in the Capacity 4th Quarter report in the following blog.

With the continued decline in vacant space, demand continues to drive lease rates up. What was $0.70’s westside and $0.60’s eastside has now become $0.80’s westside and $0.70’s eastside, and we’re expecting another roughly dime bump by the end of ’23.

Construction costs continue to escalate. A first generation TI cost (new office construction into a previously empty space) that used to be a little over $100/sf a couple of years ago, is now pushing up towards $200/sf. Office surcharges of less than $1.00/sf appear to be headed towards $1.30/sf. And its not just the cost, it’s the delivery. Roof systems are a year out, as are most electrical components, and dock packages are a half year out. I was told that with the move to electric cars, major electrical component deliveries will probably be a year out through 2030. We may never catch up.

There continues to be few industrial buildings for sale, in part because they are great to own, and partly because the cost to finance them has skyrocketed. Interest rates for users are now hovering in the 7% range. Institutional product sales have slowed as Cap Rates have risen and Capital Markets are not sure where things are headed.

Doing business in the Portland Vancouver area can be a challenge. If you make less than $25M per year, Multnomah County has the highest income taxes of any county in the country. And a recent survey of the cost to construct an industrial facility in any City in the US put Portland at the top of the list. These are lists you do not want to be at the top of.

For all my mis-calls over the past year, I’m going to continue to predict a slowing. We do a bi-monthly industrial meeting , in part to review overall leasing activity. The number of leases each interval is decreasing. Plus, not showing up in the data is the fact that Hawthorn in Vancouver (old Sunlight Supply) has recently put almost half a million square feet on the sublease market. And there are other sublease spaces popping up. As the Feds continue to up interest rates and inflation continues at accelerated levels, the ‘slow down’ will continue to expand from just the housing market to other business sectors. Eventually this slowing will catch up to the Portland/Vancouver industrial real estate market.

Wars, Federal Government spending, Local Government taxing, inflation, homeless, fentanyl. No prob. Portland/Vancouver rips off its best year ever. What does ’23 have in store? The nice thing about predicting a slowing, is that even if we hit 50% of last year, we’re still in line with our historic average of around 3M sf of net absorption, which is my admittedly safe guess. Vacancies will stay below 4% and lease rates will continue to rise. Who knows, we may come out of this recession before it hits our local industrial sector.

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