PORTLAND, Ore. (Portland Tribune) -- After significant increases in industrial land prices, the prices appear to have stabilized and are starting to trend downward throughout the Portland metro area, reports find.
The industrial market remains strong with extremely limited supply, but higher interest rates may decrease new speculative development, further restricting supply, according to Kidder Mathews report for the third quarter of 2022.
Peter R. Stalick, executive vice president and shareholder with Kidder Mathews, said that demand for industrial space continues to outpace supply, with 3.18 million square feet now under construction.
Of the more than 4 million square feet delivered this year, 2.1 million was speculative and the rest was pre-committed and 97% leased.
Lease activity
Kidder Mathews reported that asking lease rates, on average, rose 17.31 percent year over year to 83 cents per square foot. Direct vacancy rates decreased 25% year over year to 3%, and 1,137,126 square feet of industrial properties were delivered this quarter.
Total availability rates decreased 2% year over year from 4.6% in the third quarter of 2021 to 4.5% this quarter.
Leasing activity decreased 21% year over year from 3.52 million square feet in Q3 2021 to 2.77 million square feet in Q3 2022. Sales volume grew by 62% percent year over year from 1.41 million square feet in Q3 2021 to 2.3% million square feet this quarter, according to Kidder Mathews.
Aaron Watt, executive director at Cushman & Wakefield, said the ongoing absorption rate shows not only strong tenant demand, but balanced tenant demand.
"We're not really seeing any slowdown in tenant demand through this quarter and into the first quarter of next year," he said.
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Cushman & Wakefield's most recent report for the industrial market shows that demand remains strong on small to mid-size spaces, while leasing transactions over 50,000 square feet were infrequent this quarter and primarily located in the North/Northeast submarket.
Leasing activity remains high in the Southwest submarkets, where data centers, semiconductor manufacturers and other advanced manufacturing users and flex space users are seeking large partial spaces.
Supply chain issues and limitations on available land continue to limit new construction in several markets, while vacancy continues a downward trend from 3.2 percent in the previous quarter to 2.9 percent this quarter. It is not uncommon for buildings to spend less than three months on the market, Cushman & Wakefield reported.
Future impacts
Watt noted that rising interest rates could impact new construction, especially as construction costs and materials cost continue to increase as well.
"Those are all things people are being very mindful of, but we're not seeing the effects of those at the moment," Watt said. "We believe, at least for the foreseeable future, the next 12 months or so, that that's going to continue because of the low vacancy rates and healthy demand and absorption."
Kidder Mathews' Stalick said he expects new construction that hasn't started yet to be much more difficult as interest rates impact capital markets and financing and construction partners are not locked in yet.
"With the construction costs rising, we see new construction slowing down and we'll have a shortage of supply," he said, adding rents are expected to continue to increase.
With net absorption already at 4.7 million square feet by the third quarter, the region's industrial market is trending to set a record with more than 5 million square feet leased this year. Stalick said he expects net absorption to be high next year as well.
"We're seeing more demand than activity in the suburban market. When companies have the choice of renewing and staying in Portland or Multnomah County, we're seeing an exodus," he said. "Crime and homelessness have been a real problem, so Portland and the Multnomah County submarkets have seen a slowdown because of that and it's picked up in the suburbs like Washington County and Wilsonville."
Kidder Mathews reported the most active submarkets were the Northeast and Clark County submarkets with 759,885 square feet and 744,055 square feet of total leasing activity, respectively.
Cushman & Wakefield's report points out the Vancouver and Clark County submarket has capitalized on significant vacant land for industrial projects, with 1.8 million square feet under construction. This includes the 665,000-square-foot Burnt Creek Industrial Park and PacTrust's four-building, multi-tenant business park totaling 293,000 square feet. Both of those are expected to deliver fully pre-leased next quarter.
The Tualatin/Sherwood submarket has benefitted from several larger building park expansions, including the T-S Corporate Park and Myslony Industrial park, while the Airport Way submarket is expecting 700,000 square feet of speculative construction from Prologis, according to Cushman & Wakefield.
