Though individual analyses differ in some respects, the consensus among Reis and other observers consulted in the preparation of this report features ongoing recovery for Portland area industrial real estate. Net absorption of warehouse/distribution space for the first half of 2012 was measured by Reis at 143,000 square feet. While the total for the second quarter was negative 69,000 square feet, the 60,000-square-foot total recorded for July alone nearly eliminated the second quarter loss. No new space, meanwhile, completed construction during the period and no competitive product of this type was underway as recently as the firm’s September report on individual construction projects. Vacancy ended the second quarter at 15.5%, up 10 basis points for the period, down 10 year-over-year. July’s positive absorption returned the rate to 15.4%. Rents, following an extended period of significant loss, show signs of stabilization. At $5.40 psf and $4.99 psf, asking and effective averages for the second quarter were unchanged from the quarter before and were down 0.4% and 0.2% since year-end 2011. No change followed in July for the asking mean while the effective average showed a 0.2% increase.
Also with no deliveries of new supply, recent net absorption trend lines for the region’s large Flex/R&D market essentially mirror the performance in the warehouse/distribution sector: positive net absorption at 131,000 square feet during the first quarter, followed by negative 14,000 in the second followed, by positive 98,000 square feet in July. Vacancy in this sector closed the latest quarter at 9.1%, up 10 and down 50 basis points for the quarter and year-over-year. July’s high absorption total dropped the rate to 8.7%. As in the warehouse/distribution sector, losses in average asking and effective lease rates in 2010 and 2011 were followed by signs of stabilization in 2012. At $8.74 psf and $7.92 psf, respective asking average rents for the latest quarter were each down 0.1% for the period and were unchanged and up a penny, respectively, since year-end 2011. Similar to warehouse/distribution, July brought no change to the asking average, while the effective mean showed a gain of 0.3%.
According to Jones Lang LaSalle’s second quarter report on local industrial real estate overall, “The market remains bifurcated, with tenant leverage waning significantly in some areas as highly functional space options dwindle…Of more significance [than small rate increases in the second quarter] is the dwindling concessions offered to tenants in the tightest submarkets as leverage shifts to landlords” (see Special Real Estate Factors). Despite the positive trends now seen in the market, speculative development has yet to make a return. “New construction remains limited to owner/user and build-to-suit projects for the time being,” reports Jones Lang LaSalle. Kidder Mathews echoes the observation: “There is very little new construction planned or underway, and those projects that are underway or planned are build-to-suit.” Adds this source, “Many investors believe that significant supply will not be added to the market in haste because rental rates need to climb more before construction is justified.”
According to Reis, the 2012 completion total will consist solely of the April delivery of the four-building, 90,000-square-foot Wilsonville Road Business Park from developer Pacific Northwest Properties. The project, catering to small tenants, offers both warehouse and flex spaces. At the same time, however, the metro market as a whole struggles with a shortage of industrial land. A regional government agency is expected to recommend the support of state legislation “that could free up more developable industrial properties,” the Portland Business Journal reported in September.
“With little speculative construction underway,” opines Cushman & Wakefield, “the future looks bright for building owners, but as increased demand tips the scale, spurring construction, the competition for tenants will increase once more.” Reis predicts 2013 will be a year of additional improvement, including positive (if moderate) rent growth for both industrial market segments.