Portland Industrial Market Heading into Middle of 2019… Still Cruising?

With the latest economic expansion heading into its 10th year, industrial real estate both nationally and in Portland are showing the most resiliency of almost any commercial product type; yes better than office; multi-family; tech or retail.

10 Barrel Brewing Warehouse Delivery Forklift

While the current industrial market in Portland is sunny and pleasant there are some clouds lingering about that could be a passing haze or may be precursor of at least an inter-mitten rain shower and hopefully not turn into storm clouds. This is because absorption of both new and recycled existing industrial space is slowing with some big huge empty buildings lingering on the market that were completed last year which has led to rental rates slowing or stopping their march over the last few years.

To illustrate, two projects stand out as examples that have been “lingering” somewhat after almost a year after completion. Next to each other in Gresham both on the Port of Portland land of (over 200 acres) they bought years ago from chipmaker LSI. Specht Development’s 730,000 sf behemoth project Vista Logistics with partner New York life got a bit of a life raft with a 300,000 sf lease to Medline last fall but still is 40% vacant. Additionally Trammell Crow has a very similar project across the truck court from Specht and though they have just leased a whole building to pallet company CHEP USA (160,000 sf) they still have not reached 50%, all again almost a year after completion. Even if leasing regains its footing somewhat, there is another 1.3 million square feet coming on the market by the end of the year which should counteract any renewed leasing activity. But as a developer in the know related recently “There just seems to be a bit of a lull in some larger industrial requirements in the market and those larger requirements will have multiple options and especially now with some older last cycle projects have some big holes like the Solopower space in Rivergate, that can deliver space cheaper than all the new product.”

All of this new space like much of the development since coming out of the recession are the “big bomber” logistics or distribution tilt product with much of it catering to users over 100,000 sf and in many cases buildings that are surging over 400,000 sf to get that big sort of whopper that really had not been a big part of the Portland market previously. Not to worry too much because industrial shell rental rates have increased by over 50% since coming out of the recession and depending on your geography Portland shell rates have touched an asking rate of $.60 psf on some projects with most in the mid to high $.50’s psf which reflects both increasing demand and rising costs across the board from significant increases in land pricing (more about that later) steadily increasing construction costs (which are finally subsiding) and of course permitting and SDC costs which always are on a slow upward trajectory . This is far from the high $30’s and low $.40’s of not too many years ago and has been a big impetus for considerable institutional money flowing into industrial real estate where even with cost increases still is showing better market returns than many other product types and not to mention the simplicity of industrial project development and management. And you know for the big boys looking at 100,000 sf and higher of warehouse space there is some price “flexibility” and a basket of free rent for good credit long term leases.

It’s always weird to me when I look at the research of larger national companies that spend considerable sheckels on research and tout their capabilities how different some of their market numbers can be. In looking at three major brokerages I found net absorption of space in Q1 2019 in the following stats: 201,000 sf…432,000…48,000 sf sf and a negative 747,000 sf! Are we all looking at the same market? I will cut them a bit of slack but you would think there would be some closer uniformity on this but chalk it up to what and how they count space, but they do come together on vacancy rates where rates go from a low of 3.3% up to just north of 4% which the guys with nice slicked back hair and custom suits sitting in glassy high rises managing the mountains of institutional money like along with some of the better returns that secondary markets like Portland with good market fundamentals, location, somewhat high barriers to entry (can you say lack of industrial land) and demographics seem to deliver in the last few years. But will that continue and will vacancy rates creep as caution among large industrial users who see this economic expansion in the later innings look at committing to new or consolidated space when probabilities of a slow-down in the next few years increases??

New Construction is still Coming with the following projects delivering here by end of year with Blue Lake Corporate probably being more Q1 2020: All of these projects are geared more towards the distribution/logistics users stacking product to the stratosphere in ceiling heights up to 36’ but three of the projects have “little brother” buildings that could cater more towards smaller users potentially of light manufacturing uses and deals under 50,000 sf. Almost everything is located on Portland’s eastside.

Portland Portal Industrial Center: This two building project of 340,000 sf is sitting on a hill up against I-84 at NE 172nd and Sandy and is a project from long time west coast developer Pannatoni who bought the land from Weston Investment and had some challenging site costs. It should be all painted and ready early this summer.

The Cubes (interesting name) is out in Troutdale across the street from the massive FedEX and Amazon centers and the first Portland project by St. Louis based national developer CRG and is 350,000 sf in one building looking for the one big user and slated for completion in September.

Clackamas Corporate Park: This 280,000 sf two building development is by “tried and true” long time developer, Trammell Crow who is by far the biggest bully on the block in industrial in Portland for many years now and is located in Clackamas. The roofs are on for delivery in the next month or two and this has a bit more flexible layout as they can break space down into the 50-60,000 sf range.

Blue Lake Corporate Park: Another Trammell Crow beauty with 460,000 sf in two buildings being built on a former farm with a Gresham address is bringing up the rear delivery wise with an early 2020 finish. There is one large building at 378,000 again geared towards that one big sought after (and rare) one user and another 85,000 sf building

Industrial Land Disappearing…
This is kind of interesting as the city of Portland and even metro wide there has been an on-going concern and rightly so of our diminishing lack of decent size industrial land in which to retain and recruit new investment and businesses. Hemmed in by rivers, hills, greenspaces and the noose of the Urban Growth Boundary, Portland has a real problem with industrial land supply now and far into the future. Everyone in the industrial development game and business interests along with support from the city and Prosper Portland has been banging this drum for over a decade but there are just few viable options. There is just nowhere to go which has led many firms to looks north as far as Woodland and Longview and South to Canby and Woodburn and to Salem which is experiencing a bit of surge of industrial development west of I-5 along Hwy 22 with a big new Amazon center and vaunted developer Pactrust plodding along in their successful fashion on a multi-building business park development.

There is also a not so new industrial development movement centered around the “Last Mile” that is gaining acceptance, which is driven mostly by explosion in e-commerce with of course Mr. Bezos being a bit of the instigator. It is leading to logistics firms and developers to find smaller and obviously more expensive core industrial sites where product is brought in to cities closer to the customer and then delivered smaller vehicles (Sprinter Vans and the like) in a much more time sensitive manner which customers are demanding. “I want it now!”. This has led to some recent core industrial sites going for some bigger numbers to play into this logistics thinking such as the recent sale of 35 acres of industrial land off North Columbia Blvd to new market developer Bridge Development out of Chicago. Located on a former landfill with tons of site issues and the need for a quick close this site hit the market late last summer and had multiple offers and closed at a price just under $11 psf but people in know who dug into the site thinks there could be up to $5.00 psf putting development ready price into the $16.00 psf. Many like me who have been around for a few years, get a bit incredulous on these land numbers but given this Last Mile thinking and rate appreciation and insatiable appetite for the billions of dollars for industrial real estate, obviously these pros can still make their performas work at this higher land numbers. This industrial land number was further confirmed on a user sale of 32 acres that is slated to be sold down the street on Columbia Blvd which crested at $15.00 psf.

Along these same lines is one of the worse kept rumors of Prologis, the largest industrial developer in the world, working on closing the huge 110 acre Portland Meadows property of a similar sort of huge core industrial project but the size and type of development is still unknown. They are working their way through the byzantine city stuff for a closing later this year. Though it won’t hit the numbers psf mentioned above given the huge size and all the on-site investment in utilities, roads and more needed to develop this site, it goes to show a strong demand for industrial land in Portland and with developers (Amazon too) sucking up big chunks of industrial land for development in the last few years and how sparse our industrial future looks. Everyone is hoping for a tick up in leasing activity but it will be interesting to check in towards the end of the year to see if this is a small “lull” of something a bit more “stormy”.