The industrial market in 2006 didn’t see any significant activity, but instead saw a series of incremental increases resulting in a market that is healthier overall than it was 12 months ago.
Metro absorption increased in each of the past five quarters, resulting in total activity for 2006 of more than 2 million square feet.
Several industry drivers were responsible for this activity, including distribution, biotech and manufacturing. The result of this industry growth is a stable platform for future growth this year, encouraging a development market already gearing up for additional activity.
A further shining star for the industrial market, as with other property types, was the investment market which continued to attract investors to the region despite limited industrial space.
Market Assessment
Positive trends continued for the industrial market during the fourth quarter, with six of 11 submarkets seeing significant declines in vacancy for the year, dropping metro vacancies by 130 basis points.
Overall leasing for distribution spaces dropped vacancy for industrial space by 290 basis points. The research and development/flex market also is heating up in the majority of submarkets, driven by dramatic increases in office lease rates that are pushing some tenants to consider newer and cheaper research and development/flex space as an option.
Year-end 2006 absorption levels significantly surpassed 2005 levels, rising by more than 1.5 million square feet from the 550,000 square feet absorbed last year and marking the fifth consecutive quarter of increases. Leasing activity during 2006 surpassed that of all previous years on record with the exception of 2000 when 6 million square feet was absorbed. This record is tempered somewhat by the fact that the metro market is now nearly 10% larger than it was in 2000, but is impressive nonetheless.
The availability of industrial land remains the primary topic of discussion among brokers, users and developers as they search for the best way to move forward in the coming year. Rising land and construction costs, labor shortages and increasing rental rates pose additional challenges to those willing to take on this demanding market.
A few major projects are under construction with several planned in the near future. Harsch Investment Properties’ Speedway Commerce Center will be completing a new phase in the first quarter consisting of an additional 523,000 square feet.
Thomas & Mack Development Group’s Northern Beltway Industrial Center, a seven building project that will consist of 1.9 million square feet, will deliver the first two buildings midyear.
In order for the industrial market to grow in the years to come, future development will need to expand beyond the Las Vegas metropolitan area.
Apex Industrial Park, which consists of 10,000 acres of industrial-zoned land located to the northeast, may be one possible solution, although it is still in the planning phase. It remains to be seen if any of the communities just outside of Las Vegas, such as Mesquite or Pahrump, will receive additional interest from local developers.
Landlords will be the big winners in 2007 as lease rates continue to increase and vacancy remains low. Developers, on the other hand, will face another year in which land prices and lease rates will not support the profitable construction of new warehouse/distribution projects.
Industrial projects for sale in the 5,000- to 10,000-square-foot range will continue to be popular as interest rates are expected to remain stable.
While the overall economy in Oregon is slowing, the state has bucked the national trend with the manufacturing sector outperforming the nation.
Most states lost manufacturing jobs during the year, but Oregon posted a slight increase in overall manufacturing employment and recorded strong construction employment gains during 2006.
The industrial market is reflecting this with healthy demand and a dropping overall vacancy rate. With a vacancy rate of just 6.3% and more than 3.5 million square feet of net absorption during 2006, the Portland industrial market ended the year on a high note.
Construction activity will pick up as a result of solid tenant demand and rising rental rates. Tenants will face a progressively more competitive environment during 2007. Functional space will be hard to come by, and likely will see interest from multiple tenants. This will drive larger tenants to explore all their options including build-to-suit and ownership to satisfy their space needs.
Overview
Of significance to the Portland metro area is the strength of commercial and industrial construction, while housing construction has slowed along with a cooling housing market.
The Portland industrial market continues to improve and has begun to attract national attention for its strength. A recent Merrill Lynch report on the industrial market has ranked Portland No. 5 out of the 30 major industrial markets with significant real estate investment trust holdings, primarily due to a low vacancy rate in comparison to historical trends.
The industrial market closed the year with a strong showing. Vacancy is down in all but one submarket and overall vacancy is down to 6.3%. Net absorption for the quarter was 1.2 million square feet, ending the year at more than 3.5 million square feet.
Rental rates are holding steady, but all indications point to rising rates this year.
The Puget Sound economy finished the year with a flourish as job growth reached an eight year high.
Job growth will slow to 2.5% this year, but will remain at more than twice the U.S. pace, according to the Puget Sound Economic Forecaster.
While the national economy is in a slump, the regional economy is maintaining momentum. Accelerated population growth during the past four years has led to increased demand for housing.
Nationally, home prices have fallen. The Puget Sound has maintained one of the highest rates of home price appreciation in the country.
The industrial vacancy rate dipped slightly in the fourth quarter, still hovering near its lowest level since late 2001. Asking rates for warehouse/distribution space fell for the first time since late 2003 by 1 cent to 48 cents. The drop follows seven consecutive quarterly increases of 1 cent.
After averaging approximately $320 million in volume and nearly 60 transactions per quarter through the third quarter, sales dropped markedly in the fourth quarter to half their previous level as investor interest waned.
With production of Boeing’s 787 Dreamliner set to impact Snohomish County, Harsch Investments recently purchased Paine Field Business Park in Everett.
Harsch’s acquisition banks on an influx of third-party contractors to work on the 787. This influx did not materialize in 2006 as was expected.
Expect demand to remain high as regional economic and population growth remain strong.
