Commercial real estate is being leased faster than it can be built.

STEVE BROWN - Contractors for Perlo Construction work on the walls and floor of the 600,000 square foot Subaru parts distribution center, the largest project ever under construction in Portland.

Increased prices and constrained supply will lead to decreased sales volume, decelerated price appreciation and decelerated lease rates.

That’s what a team of Portland professionals forecast for the commercial real estate market along the Columbia Corridor.

The Columbia Corridor Association focused its most popular forum of the year, sponsored by Perlo Construction, on real estate trends along the corridor.

Don Ossey, principal at Capacity Commercial real estate group and a member of the Society of Industrial and Office Realtors (SIOR), usually puts together a team and executes the detailed presentation on what is occurring in the Columbia Corridor real estate market, but this year passed the torch to his team via metaphorical Bic lighter at a breakfast in the clubhouse at the Riverside Golf and Country Club near the airport.

According to the team’s research, commercial vacancy rates dropped down to 5.2 percent in Portland — eleventh lowest in the U.S. The national rate is 6.4 percent.

However, construction rates are higher than ever with more projects coming online at a steady pace, according to Rob McEachern, senior associate at Capacity Commercial.

Supply and Demand

JULES ROGERS -  Rob McEachern, senior associate at Capacity Commercial, is days away from earning his SIOR.

“That’s the product of supply and demand,” McEachern said. “With the economy being better — more people with jobs, more cars on the road — that’s kind of a byproduct of a stronger economy.”

According to McEachern, 2.5 million square feet are currently under construction, including the Interstate Crossroads Distribution Center being developed by Beaverton-based Specht Properties and leased through McEachern’s team.

It’s the largest single building under construction in Portland at 493,000 square feet, a trend commercial construction has been tilting toward of late.

According to McEachern, before the 2008 downturn there were 3 million square feet of commercial space delivered to the market.

“We are roughly at that level now, the difference is just the type of development that is happening,” McEachern said. “Right now, overwhelmingly you’ve got larger spaces, larger buildings under one roof so you can create some efficiencies, some economies of scale and it forces down your cost per square foot to build.”

SUBMITTED BY ROB MCEACHERN - A slide from the presentation shows absorption, construction and vacancy rates for commercial real estate in Portland over the past five years.

Increasing Sizes

The average industrial tenant size in Portland is increasing year over year. In 2012, the average was 79,012 square feet. In 2015, it had increased drastically to 331,836 square feet.

“Even nationwide, that’s something there’s a lot of demand for industrial space like that,” said Vicki Menard, communications manager with Perlo. “We are working on quite a few of those.”

Perlo is constructing the Subaru of America in Gresham, Portland’s largest commercial facility so far. It’s building two more projects in the Columbia Corridor — the PDX Logistics Center and the 205 Logistics Center, a 190,600 square foot project — and two in Vancouver, Sunlight Supply, a gardening wholesaler at 286,000 square feet, and Portside, at 352,000.

Perlo also holds the contract for Majestic Brookwood, a 1 million square foot business park development in Hillsboro.

Another factor in the squeeze is because of zoning shifts to alternative uses, industrial users are getting pushed out of the area — in price and in availability — to make way for multi-family housing, mini storage and creative offices. Oregon has been the No. 1 state people move to for the past three years, and everybody wants their piece of Portland.

“We are absorbing and continuing to absorb, more than we are building,” McEachern said. “The growth in rental rates has been tremendous over the last 18 months.”

JULES ROGERS - Jerry Matson, vice president of Colliers International real estate experts.

His colleague Jerry Matson, vice president of Colliers, said that the vacancy rate equates to 1.4 million square feet of free space, which isn’t as much as it seems. It’s divided into 100,000 to 200,000 square foot warehouses instead of the 20,000 to 50,000 square foot facilities that have been Portland’s bread and butter.

“As fast as we can build them, they’re leasing them,” Matson said. “The newly-defined little guy in Portland, they haven’t built anything for him.”

With demand strikingly high for limited spaces, constructing large facilities has the highest return on investment right now — and construction companies can’t even keep up with that demand, resulting in rapidly rising lease rates and fewer days on the market.

Shovel Unready

According to McEachern, the past 18 months in Portland have seen a 15 percent increase in commercial leasing rates.

“Some of the leases that have been signed right now are on buildings that aren’t even built,” Matson said. “They’re already leased 12 to 18 months in advance.”

But construction companies in Portland can’t build more, or faster, because land, workers and supplies are limited.

Land is constrained, and much of what’s left requires a costly process known as preloading, or piling dirt that weighs as much as a building on the lot to push down the earth so the building won’t later. Workers left construction and manufacturing industries during the 2008 downturn and never came back, a factor in the limited supply and driven-up cost of concrete, wood, insulation and roofing.

JULES ROGERS - Chris McLaughlin, center, the director of preconstruction services at Perlo Construction, addresses trends in commercial real estate along the corridor.

“Concrete is a supplier-constrained market,” said Chris McLaughlin, the director of preconstruction services at Perlo Construction, whose team tracks the cost of building components.

“Sites are more constrained, more challenging, we have slopes, preloading requirements and contaminated buildings,” McLaughlin said. “All those things drive the cost up and put the delivery time further out.”

In top markets for year over year sales, the City of Portland ranks eighth by industrial transaction volume. From the fourth quarter of fiscal year 2014 to the third quarter of fiscal year 2015, Portland’s transaction volume equaled $870 million, a 105 percent increase from the previous year.

“What’s the bread and butter of Portland? Ten years ago, I’d say a lot of product released, local development, local capital, 10,000 square feet buildings and that’s kind of our market,” Matson said. “There are some things that have changed that will probably never go back.”

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