November 5, 2019

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The Pause Continues

November 5, 2019

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I was at a recent transportation forum concerning tolling freeways when one of the panelists, the Mayor of Vancouver, humbly referred to Vantucky, a moniker many of us have heard before. As I sat through yet another meeting on the topic of traffic in Portland, I realized that Portland also should have its own special name--Parkedland. Just as I don't get into economic details in these articles,  I won't get into traffic statistics. We all know that traffic in the Portland area has attained a state of, well, horrible. Although, I do have to share one statistics. At one of these traffic forums, I ran into just another Joe like me and he said he had spent some time doing the math: if you add up all the people and all the time they spend in "rush hour", it is enough time for 80 people to be born, live a natural life time, and then die each year. So, I guess in a way, our traffic jams are killing 80 people a year. 

 

Tolling is coming and it is fine with me. People say you can't charge some people who can pay so they can get there quicker. Well, I guess we need to shut down the airlines so everyone can take trains and buses. However, it probably won't work like that. Tolling for express lanes gets cars around town quicker. But the Trucking Association says that still leaves them in the slow lane, and we do care about freight mobility. We will probably see tolling across all lanes with no differential treatment. Then, of course, what to do with the funds? Hopefully, the money will be spent increasing capacity. However, there are those (I suspect I know the City, but won't name it because i don't know for sure) that want tolling to be used simply as a method to keep cars off the road at prime time, and to use the money to fund alternative methods of transportation. 

 

I'm a fifth generation Oregonian, but I have to admit that at every traffic even I go to, I open my traffic app and show folks the red in Parkedland and the green in Vantucky. BTW, at the end of the forum, I had to go up and remind the mayor what the view is across the Columbia River from the City of Vancouver's brand new, beautiful waterfront development. That right--a mobile home park. 

 

Ok, so you can't move your freight around, but do you have a place to put it? That's not much better. After an almost zero net warehouse absorption first quarter, we jumped to almost 900K SF of absorption in the second quarter. I'm still estimating ending 2018 at around 2.5M SF of net absorption, ignoring the Amazon effect. Amazon will be bringing on about 2.5M SF of ground floor warehouse (4M counting mezzanines) by the end of this year. The economy continues to be strong and at a minimum, the underlying tax cuts should keep us moving forward for another year or two, regardless of your opinion of our President. 

 

Portland-area warehouse only (versus Hillsboro flex-type product) vacancy has dropped below 4% again, to 3.8%. It is tight everywhere if you are looking to lease space, as can be seen by these Submarket Reports. There continues to be a flow of new, speculative construction, although, with the increase in material and labor costs, we are moving back into the situation in which it is more difficult for a developer to construct a building less than 100K SF and have it make sense. Most rental rates are holding around $0.50/SF shell plus NNN's, with rates rising on the west side across the size spectrum and rates on the east side moving towards $0.60/SF for smaller spaces. 

 

The four-county area continues to be a great place to do business, although I'm wondering if I'm not seeing some stress for small local enterprises. Rental rates have and will continue to increase. Cost to transport (even if it is just time in the vehicle) continues to increase. Also, of course, we have legislated close to a 10% wage increase that is unfolding over a number of years in a row. The tax cuts should help, but these are big burdens to carry. 

 

Purchasing a building continues to be a challenge. There just aren't any out there, and the few that are available are usually dated and functionally challenging. If you can find a reasonable building, say in the 40K SF range, you are now paying around $125 / SF. That's cheap compared to constructing new ($175 / SF), yet challenging to pencil if you can pay $0.50 / SF rent (less than a 5 CAP). As is usually the case, manufacturers that invest a lot of money in their space and can't afford to be kicked out are leading the charge, both in the purchase and renovation of existing inventory, and building from scratch. 

 

Institutional CAP rates continue to hover in the +/- 5% range while smaller, local-grade product is changing hands in the 6-7% range. There is still lots of money chasing real estate. I recently heard that a new office building in downtown Portland had been snapped up at a 3% CAP rate. The investor was in for the long haul. They didn't care about their return while carrying the product. They were banking on the appreciation at their exit. Yet another example of someone betting money that prices are going to increase in the city with the lowest real estate costs on the West Coast. 

 

We continue to run out of land sound of the river, but no one seems to be doing anything about it. Again, as a native-born Parkedlander, I have to admit, I've got plenty of land listed in and around Vantucky. Even with the shortage, cost of construction is absorbing value increases and land prices continue to increase ever so slowly. 

 

The economy continues to power forward, both locally and nationally. Recent news has the GDP growing at more than a 4% rate. It's a crazy world beyond our borders, but no one out there appears to want to put an end to it at this time.The Fed continues to tick up interest rates. However, no one expects them to get too aggressive. We live in fear of inflation, but that continues to be a problem we expect some time in the future. I see us continuing to experience close to 1M SF of absorption (Amazon adjusted out) over the next couple of quarters and a continuing slow rise in lease rates. Hopefully, we will see some freeway capacity added and people will see what happens when you add freeway lane-miles. Possibly adding transportation capacity might a new trend and an end to Parkedland. 

 

 

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