Q1 'lull' belies strength of Portland's industrial real estate market
The exponential rise of e-commerce during the pandemic is among the factors driving the growth in Portland's industrial real estate market into 2022, with steadily shrinking vacancies and availability rates driving rental rates up, market analysts say.
Kidder Mathews reported that asking lease rates rose 5.7% year over year to $0.74 per square foot triple-net rent (NNN). Direct vacancy rates decreased to 3.1% in the first quarter of 2022, and total net absorption for the quarter was 648,870 square feet.
"It's hotter than it's ever been in the Portland market. Every quarter has been better than the last, and this quarter is no exception," said Peter Stalick, executive vice president and shareholder at Kidder Mathews' Portland office, adding rents are increasing each quarter and the values of buildings are rising as well. "That's why the big investment firms are so bullish on the industrial market."
E-commerce, which Stalick said requires three times the warehouse space of brick-and-mortar stores, already was on the rise before the pandemic and boomed as people shopped online during the shutdown. That has added to the demand for industrial space.
He noted that the low inventory of existing buildings has tenants competing for space.
"People are putting their buildings on the market six months before the tenant moves out, and when a tenant moves out it's usually because they are moving into something bigger," Stalick said.
Leasing activity decreased 22.9% year over year to 2.1 million square feet for Q1 2022. The most active submarkets were Northeast Portland and the I-5 Corridor with 751,828 square feet and 516,009 square feet leased, respectively.
Compared to the stellar fourth quarter in 2021, with 5.1 million square feet of sales activity, the industrial market started this quarter off with what JLL called a "lull" with 1 million square feet of sales volume. It attributed 87% of the quarter's negative absorption rate to 10 subleases that hit the market. The Northeast Columbia Corridor was home to the two largest subleases as P.K. Kinder Co. and Pomegranate Communications both gave back space.
JLL emphasized that the quiet first quarter does not reflect the thriving industrial market or the outlook for the remainder of the year. New buildings are being leased before they are completed, with 56% of all non-owner-occupied square footage under development this quarter pre-leased. Of the 1.3 million square feet set to deliver throughout the second quarter, 49% is pre-leased.
Supply under development has returned to pre-pandemic levels as supply totals nearly 4 million square feet. In addition to the strong demand and new deliveries, rent increases do not have an end in sight, according to JLL.
Kidder Mathews reported that more than 211,000 square feet of industrial space was delivered in Q1 2022. There is 5.9 million square feet of industrial space under construction, including 1.5 million square feet for Intel's expansion in Hillsboro.
Josh Lehner with the Oregon OfficaZe of Economic Analysis pointed to multiple announcements of future distribution centers, primarily in the Portland region, adding new construction should bring more capacity and future growth online.
Among the new inventory, NSI manufacturing has signed a 10-year lease on a new 62,000-square-foot manufacturing facility in Sherwood to expand its capacity to produce ampoules, liquid level sensors and integrated systems for the semiconductor and solar industries. NSI, which also provides repair services, plans to move into the new space in the fourth quarter of this year.
Kidder Mathew's Stalick said that with the shortage of supply in the Portland area, the market for industrial space is pushing out to Woodburn and Salem to the south and Longview, Washington, to the north. He expects to see Salem's inventory of industrial buildings increase as well as its labor force and stock of affordable housing, with more people commuting to Portland for work.
JLL looked north to Ridgefield, Washington, where a 468,810-square-foot industrial center is underway. Clark County has seen a 32% increase year over year in asking rents as it has quickly become attractive to tenants. JLL's report for this quarter states that growth in this submarket can be attributed to several factors, one of which is Washington's lack of state income tax.
"At this time, we are also witnessing elevated deal terms as more deals are completed with 3.5% to 4% annual increases," the report states.
You count on us to stay informed and we depend on you to fund our efforts. Quality local journalism takes time and money. Please support us to protect the future of community journalism.