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Portland Industrial Market Continues to Improve


The Portland metro industrial market continues to improve, according to a 3rd Quarter 2014 industry report from. Kidder Mathews Valuation Advisory Services. Food and beverage companies are the most active in the Portland area, with several companies having leased large spaces and other tenants in this industry actively pursuing larger spaces. The inventory of substantial industrial distribution space in this market is dwindling, which paves the way for the projects currently under construction. This is especially true in tight submarkets such as Airport Way/East Columbia Corridor, where there are only three existing availabilities greater than 50k sf contiguous. We’ve seen improvement in the more challenged submarkets, such as Rivergate and 217 Corridor/Beaverton, with increasing occupancy and rental rates. Net absorption is up across the market and developers are optimistically planning for the future.

Vacancy & Net Absorption

The third quarter of 2014 closed with a vacancy rate of 5.2%, down 100 basis points from one year ago when the market-wide rate was 6.2%. Vacancy has been trending downward since hitting a peak of 8.7% in the second quarter of 2010. Rivergate has one of the highest vacancy rates in the metro area, currently averaging 9.8%; however, this does reflect a 110 basis point decline in vacancy since the end of 2013.
The supply-constrained I-5 Corridor South cluster of submarkets has the lowest vacancy, with less than 5%. The greatest amount of recent activity has been occurring in the Northeast market. Net absorption in the Northeast district has totaled 307.4k sf this year, with vacancy and availability declining significantly in the last 12 months. This quarter there were three lease transactions of 45k sf or greater in the Airport Way and East Columbia Corridor submarkets, the largest of which accounted for nearly 74k sf at 6800 NE 59th Place, where Wymore Transfer Company leased storage space for one of their clients. At Southshore Commerce Center, Kinco International leased over 68k sf, and Gateway Express recently leased 60.4k sf at the under-construction PDX Logistics Center, becoming the first tenant to sign in that new project. The increased activity, increasing rents, and decreasing concessions have fueled new speculative development.

Vacancy vs. Availability Update

The market availability rate has been declining since peaking at 12.2% in the third quarter of 2010. The current rate of 7.5% is 120 basis points lower than one year ago. The short-term forecast is for continued declines in availability, with the vacancy rate of 5.2% expected to remain relatively stable to somewhat declining given typical market turnover, the addition of new space, and improving market fundamentals. However, as large-scale projects enter the market, vacancy and availability may tick up somewhat. The declining availability rate shows that fewer properties are coming to the market. In a strong market, the availability rate is close to (if not lower than) the vacancy rate.

Current Supply and New Construction

Over the next two years, speculative construction projects currently under development will add about 2.5 msf to the Portland metro market industrial supply base.

The first phase of PDX Logistics Center is expected to be delivered to the market in the fourth quarter of this year. This project, which is located within the Portland International Center, owned by the Port of Portland and adjacent to Portland International Airport, reflects the market’s first speculative development since the recession. Phase I includes two buildings totaling 491.2k sf. This site was leased from the Port of Portland by Capstone Partners based on an underlying land value of $6.00/sf and a 10% rate of return. Given market interest, parties involved anticipate this project will be 100% leased by construction completion.

New York Life is currently working on a state-of-the-art 215.3k sf distribution center at Gateway Corporate Center. This facility will deliver in first quarter 2015 and offers sizes from 53.9k sf up to 215.3k sf.

ProLogis, the world’s largest REIT, has construction underway on ProLogis Park PDX, which is a 207.8k sf distribution facility expected to deliver in first quarter 2015. This project offers spaces from 100k sf to 208k sf.

The south phase of Koch Corporate Center, at the northeast corner of SW Itel and SW 115th Ave in Tualatin, is being developed by PacTrust. Two buildings totaling over 100k sf are under construction with an anticipated February 2015 completion.

Specht Properties commenced construction of Interstate Crossroads Distribution Center, at NE Cameron Blvd and NE 166th Ave, in the Airport Way submarket. This site, which includes just over 28 acres, was purchased in May 2014 for $5.75/sf. Upon completion, the project will include a 529.8k sf distribution center of concrete tilt-up construction with 30-foot clear heights and 107 covered docks. This project is slated for delivery in the fall of 2015.

Holland Partners commenced ground work for construction of their new Cameron Distribution Center project, which will neighbor Interstate Crossroads Distribution Center at NE 166th Ave. and NE Cameron Blvd. The project is set to total 320.8k sf in a single building, expected to deliver in third quarter 2015.

Trammell Crow has commenced construction on Colwood Industrial Park, which is also in the Airport Way submarket, near the Portland International Airport. This project will include over 800k sf, of which the first phase will likely be one single 408k sf cross-loaded distribution building. The project is located on the northern 46.44 acres of the former Colwood Golf Course on NE Colwood and NE Alderwood Rd. The purchase price for this site was originally an approximated $4.20/sf, though costs associated with rezoning and wetland mitigation had a significant impact on the final price paid for the land.

In the third quarter, ground-breaking began on Hillsboro Majestic Business Park, which will ultimately add 1 msf in 11 buildings containing industrial, office, and retail properties. The 73-acre site was purchased by Majestic Realty for just over $15 mil, or $4.68/sf. The first 155.5k sf building will be delivered in the summer of 2015. In negotiations with Majestic Realty is TopGolf, which looks to purchase about 16 acres for construction of a golf entertainment complex, as well as ViaWest, which currently has two data centers in Hillsboro. Reportedly, ViaWest is interested in constructing a new 100k sf facility.

In August, Dermody Properties closed on 6.03 acres of industrial land in Vancouver for a price of $1.1 mil, or $4.25/sf. Dermody Properties has engaged Perlo Construction to begin site work to make way for the construction of LogistiCenter 205. LogistiCenter 205 will be the most state of the art distribution building in the Vancouver submarket. This new project will total 98.4k sf with a 30’ clear height, 21 dock doors, and an ESFR sprinkler system. The building is scheduled to deliver in third quarter 2015.

Trammell Crow Company, with Washington Capital Management Inc as their partner, has closed on 17.3 acres of industrial land in Tualatin in September for a price of $4 mil, or $5.31/sf. Trammell Crow has commenced demolition of the existing buildings to make way for the construction of Southwest Industrial Park. Southwest Industrial Park is one of the newest large scale industrial parks in the I-5 Corridor south submarket. This new project will include four new buildings totaling 301.7k sf, including one large scale distribution building of 145.1k sf with a 30’ clear height. Buildings are scheduled to deliver September 2015.

Some major challenges facing developers today include rising utility costs and storm water mitigation requirements for new construction. While there are some concerns about the large number of projects underway, they are tempered by the growing popularity of e-commerce and omni-channel retailing, which are fueling demand for big-box facilities that function as warehouse and/or order-fulfillment centers.

Investment Activity

Industrial sales volume is up this year, with the first three quarters already surpassing the total volume amount of last year. The bulk of the volume, by dollars, has been in lower-quality properties, comprising nearly 60% of transactional volume this year. This is due to a general lack of good quality properties available for sale. Removing the less functional properties from the dataset reveals an average price paid of about $75/sf in the third quarter. Overall, the average capitalization rate in the market was 6.76%. In the greater Pacific region warehouse market, the average overall capitalization rate was 5.77%, reflecting an eight basis point decline from last quarter and a 27 point decline from one year ago. Investors are underwriting Year One rent growth at about 3%.


Market rental rates are not generally supporting construction of smaller warehouse projects for the typical owner-user; however, larger developers are able to work with economies of scale. As a result, there are significant projects under construction in the market. Over the next few years, these projects will change the shape of the industrial landscape, positioning Portland as a leader in the design and development of modern industrial properties on the west coast, and ultimately allowing greater flexibility for tenants seeking quality industrial space. The market-wide vacancy and availability rates continue to decline, though as the speculative developments come on-line over the next 12 to 36 months, they should tick up, along with rental rates. With improvements in the trade, transportation, utilities and manufacturing sectors, the overall industrial market outlook remains positive.

Market Highlights

• The shortage of industrial land in the market, coupled with Portland’s post as a warehouse hub near ports and major transportation networks, positions the region to cope favorably as demand increases and the economy matures.
• Manufacturing employment is up 3.6% over the past year in the Portland metro area. Employment in the trade, transportation and utilities sector is up 3% over the same time period, and nonresidential building construction is up 4.8%. Unemployment in the market is nearing 6%.
• Continued activity by tenants seeking large chunks of space creates a tighter leasing environment in the market.

Author: Rebecca Liddell, MAI, Kidder Mathews Valuation Advisory Services
Source: CoStar Data

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