We’re now on our 5th consecutive negative net absorption in a row for industrial space in the Portland/Vancouver marketplace. However, our negative absorption was only 160k sf, compared to an average of 1M sf of negative absorption each of the first two quarters of 2024. The bleeding has slowed, and hopefully we are headed to positive absorption for the last quarter of the year. Vacancy has edged up to 5.7%, and continues to be driven by Portland/Multnomah submarkets running at three times the vacancy as the other three counties. You can learn more about specific markets in the Capacity Quarterly Industrial Report following.
It appears the “Post Covid” adjustment is ending. We saw considerable demand for industrial space through the pandemic for reasons previously explained, and many companies increased their industrial footprint to the benefit of the local economy, with lease and purchase rates rising roughly 50% over the last five years. During the last year, many of the national companies have corrected from over expansions, and local companies have looked at renewing their leases with a 50% rent increase, and have just thrown in the towel. Hopefully we are back to a steady state with normal growth, historically 3M sf net absorption per year.
As the supply chain issues of the pandemic fade into the past, I’m seeing articles where companies are starting to tighten up their inventories. We really don’t have a very good memory, and risk entering into the same problems we had in ’20-’21. While warehouse demand may be waning, we are seeing strong demand from manufacturers. Initially this demand was driven by local companies reshoring to diversify their total reliance on China. Then, and still today, we are seeing the results of the government driving department of defense purchases to be sourced on shore. Now, we are seeing the demand driven by the Suppliers wanting to get locations in the US to diversify their risks. Taiwan is at risk from China, the Chinese are trying to get their money out of a faltering China (recent Wall Street Article), and other countries have their own stories. The US continues to be the place to build on the rock.
I’m no expert on China, but I’ve heard recently that with their historic population growth mandates, the population is dropping dramatically and there are 1,000,000 excess unoccupied homes. And of course it is getting difficult to staff positions. That being said, I’ve also heard they can load and unload cargotainers ships almost totally automated, while we’re still trying to get out of the 1970’s with 50 year old labor intensive processes.
Lease rates have stabilized, with high $0.70’s in the Portland area and low $0.90’s in the SW area. Finding industrial buildings to purchase continues to be difficult, as does financing purchases. While the Fed cut the borrowing rate recently, Treasuries went up at the same time. The result is little change in interest rates, which seem to be hovering around 6%.
The Capital Markets are loosening. Sellers are starting to understand the days of sub 5% Cap Rates are over, while Buyers are starting to understand they can’t hold out for 7% returns. The Buyer fear of not knowing where rates are heading are starting to settle on 6% as a probable, long term number. It makes buying a 6% return with 6% debt tough, but there is still a ton of cash on the sidelines investing in all cash deals.
National Search Firms helping companies figure out where to locate in the US have historically looked at lease rates, taxes, and transportation as their main decision factors. Now, it is energy and labor. As our government removes dams and coals plants, replacing them with finicky solar and wind, the ability to supply electricity becomes a much riskier play. Unlike water and sewer where you can build surge capacity into the system, electricity is a spontaneous supply challenge. There must be enough capacity in the system to meet the load at every moment. And while we put billions into wind and solar, we are realizing we need additional billions in electrical distribution and battery backup (the wind never blows when it is the coldest in the NW, and we know how sunny it is here in the winter). And labor, as you all are experiencing in your businesses, is still in short supply. It is just too easy to not work, and that is what is happening with much of the core employment. Search Firms won’t locate firms if there are employees to staff it.
We seem to be pulling out of a recession. I know the press has never said we were in a recession, but I think the government just changed the definition. It used to be two quarters of negative GDP, which we had. Not counting inflation adjusted, although I’m not sure how the economists deal with inflation and GDP. We’ve got the election coming up, which tends to weigh on absorption, so hopefully we will see some pent-up demand in the 4th quarter and into next year. Portland seems to be coming back from its political craziness, and inflation, while not checked, isn’t wild out of control at this time. And, the US is still the best place in the world to do business. At the end of last quarter I had us finishing the year with 1M sf of negative net absorption. I think we’re ready for the turn, and should see 1M sf of positive absorption in the 4th quarter.
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