By Meghan Hall
Like many West Coast cities, the industrial sector is hot in Portland. The growth of the industrial market, however, doesn’t come without growing pains. As industrial becomes an increasingly popular asset class and fundamentals strengthen, Portland’s landlords, tenants and developers will need to find ways to adjust to new challenges, according to a recent third quarter report released by Colliers International.
“It will be no surprise to hear that because of all the attention industrial is receiving and the fundamentals that make it a desirable product that Portland is seeing some challenges right now,” said Colliers’ Research Manager Jacob Pavlik. “Because there is so much demand for space, and the market can’t develop fast enough, not only because of the supply chain constraints of construction materials but also…a lack of available land for industrial development. It’s forcing developers to look further from traditional industrial submarkets than they would otherwise.”
“There is just not enough [space],” Pavlik emphasized.
A number of factors are driving the industrial market’s growth. In Portland, the unemployment rate sits at about 5.26 percent, while GDP is expected to grow 13.88 percent year-over-year. During the course of the pandemic, Portland also attracted new residents, and the population grew about 0.56 percent year-over-year. Other factors, such as the explosion of e-commerce and supply chain issues–prompting many companies to keep more product closer to population centers–has also exacerbated demand.
Supply, however, is struggling to keep pace. In 2020, 3.5 million square feet of new supply was delivered to market and subsequently occupied. The third quarter of 2021 saw 858,000 square feet of positive net absorption, and the vacancy rate in the metro sits at just 4.9 percent. Even during the pandemic, the market’s vacancy only reached a “high” of about 5.1 percent.
While there is about two million square feet of space under construction, there was just one delivery this quarter. The 90,000 square foot warehouse, located in Canby on the outskirts of Portland, was fully leased by an owner-user.
While Portland shares many challenges of growth with other West Coast cities, its local policies and initiatives have greatly shaped the development landscape.
“When you look at markets up and down the West Coast, we all have the same limiting factor of there is not enough space to build…In Portland, that is uniquely compounded by the Urban Growth Boundary which legislatively restricts the land that can be developed upon,” Pavlik explained.
Portland’s Urban Growth Boundary (UGB) was first drawn in 1979 with the intent to protect farmland and encourage urban density. The boundary has been expanded about three dozen times, according to public records, most recently in 2018, when 2,181 acres were added to the region. Notably in 2018, however, no cities proposed UGB-based expansions for employment uses, only housing.
A general lack of space has meant more competition for real estate. Rents in the Central City market are highest, averaging $1.16 per square foot. The Westside submarket trails not far behind, with rents coming in at about $1.02 per square foot. The North/Northeast and Southeast submarkets posted rents of $0.66 and $0.67 per square foot, respectively, while in the I-5 South Corridor, the going rate for space hovered at about $0.73 per square foot.
Another challenge faces the market moving forward: price discovery. According to Colliers, the largest sale of the quarter was of LogisticCenter 205, which totals 98,000 square feet and sold for $16.2 million. The Fry Distribution Center traded for $15.4 million, while the Tanasbourne Business Center sold for $15 million. Once investment activity picks up, the trajectory of the local industrial market will become more clear.
“It is not because Portland is not a desirable market; it’s because Portland was essentially too desirable…” said Pavlik. “Because of that lack of institutional grade investment sales, we’re not necessarily going to see in the numbers the growth that landlords are feeling in terms of how their rents are increasing and in how cap rates continue to compress. Until we can see more product change hands, I think that will be a big determining factor in what Portland’s growth will look like.”