After a cumulative negative 600k SF of net absorption over the first two quarters, we experienced a negative 600k SF of net absorption in the third quarter alone. Put simply, we continue to have more companies moving out of space that moving into space. After a few years of around 3 million SF of annual net absorption, we're going to have troubles getting back to zero this year. As a result, our vacancy rate has now crept up to 4.2%, about half a point higher than the beginning of the year, but still very low compared to a balanced system (10%).
We now have 18 folks doing Industrial Real Estate at Capacity. That is a lot of people ACTIVELY engaged in what is happening in the Greater Portland / Vancouver Industrial Real Estate market. When we get together in one room, you have considerable intelligence on the subject (with the exception of when Thomas Jefferson dined alone). We are all very busy and fee quite bullish on the local market. There is a lot going on. But the absorption number keeps coming up negative.
The overall economy seems to be in good shape. While I tend to stay away from the Economists patch, GDP is still in the 2-3% range, unemployment is at record lows, we are hitting record stock market highs, interest rates continue at historical lows, and practically all my clients are looking for good employees. Speaking of my clients, most of them also say that business is good, if not very good.
So, where's the rub? Why the negative numbers? I'll give you my two cents below, in approximate order of importance (in my humble opinion):
Maybe I should be asking some of my peers across the US about this, but I have wondered what happens when you open more than 4 million SF of Amazon warehouses in a market at roughly the same time. While I believe Amazon brings its own set of supporting warehouse operators, which probably helped to prop up the numbers last year, now that Amazon is operating, the warehouses they compete with are starting to feel the pinch.
A national developer (with local ties) was recently quoted saying that the large tenants have kind of evaporated this year. Maybe it's due to the Amazon Effect. Maybe the transition from retail to warehouse shopping, or manufacturers moving to 3PL's, is starting to slow down. Admittedly, it has been the big tenants that have been carrying our absorption over the last few years.
It is not uncommon that businesses hold off on major investments (like moving) until they see how things shake out. This didn't used to occur until maybe 6 months previous to the election, but the media is already blasting us every day wit hthe product that sells--who the next president is going to be.
There are those that badly want a recession next year. Even though we continue in a robust economy, some are finding every tidbit they can to implement what can become a self-fulfilling prophecy. Yes, this has been the longest recovery ever. But as a national economist pointed out at a conference in San Diego a couple of weeks ago, it has also been the slowest. That being said, are folks getting tentative in continue to take steps forward?
I covered this last quarter. They are being latered on at an alarming rate. Interesting how often Boise is coming up in alternative location conversations (3% unemployment, by the way.)
To summarize, everything feels good, but our key indicator continues to come up slightly negative.
Most of the other market indicators continue to feel healthy also. Cap rates for institutional-quality industrial product continues to be in the sub 5% range, it is very difficult to find a building to purchase, and with almost 5 million SF of industrial product under construction, developers are still very bullish on the greater Portland/Vancouver marketplace. Additional market information can be found in the Portland Industrial Market Report (which can be found here).
After almost decades of absence, we continue to feel small stretches of freeway lane mile expansions. It is amazing how much better rush hour traffic flows when each stretch is opened. They've finally started talking again about a new I-5 crossing bridge, and it appears we are coming up on a vote for transportation funding. It will be interesting to see how much freeway improvements they need to throw in to get people to vote for another mega-expensive light rail project to the south. My son lives on mass-transit, but he doesn't work at any of the city halls that light rail goes to or from, so he finds it challenging to get around on the ever-decreasing bus schedules. Hopefully, the trend will continue for more freeway lane miles to move our good around this place.
I think for the last three years I've been forecasting 2.5 million SF of absorption, and it kept coming it at 3 million SF. Now, I'm hoping we can get it back to 0 SF of net absorption by the end of Q4. The economic fundamentals are still healthy. I believe the people are going to elect a business-friendly president next fall. Economic recoveries don't die of old age, just ask Australia (28 years). I'm expecting us to get back to 0 net SF of absorption by the end of 2019 and I'llforecast 2.5 million SF of absorption in 2020. I guess I just like that 2.5 number.