Western Region Industrial Market
PORTLAND
Economic indicators suggest that the U.S. economy is in recovery mode, although it sure seems to be taking its time trickling down to the Pacific Northwest region.
Small improvements in Portland metro area employment and job growth are welcome news; however, after a year and a half of bleeding, the local market still needs a few more solid quarters of positive news, especially in the manufacturing and semiconductor sectors.
In other words, while the economy no longer appears to be contracting, the slow pace at which the economy is expanding has created an extremely competitive market tilted strongly in tenants’ favor.
Build to suit and owner-user activity remains the focal point of positive news for the industrial sector. In fact, a substantial portion of the positive quarterly net absorption posted in the second quarter can be attributed to the delivery of build-to-suit and owner-occupied projects.
This trend will continue to dominate the industrial landscape, potentially for quarters to come, as a number of large users have submitted requests for proposals to the market.
Of the 916,350 square feet of new space delivered in the second quarter, 78% registered as positive net absorption. Most of that was build-to-suit and owner-occupied projects, such as Novellus Systems Inc. This trend is expected to help anchor the industrial market for quarters to come as about one million square feet of user and build-to-suit activity is bumping around the marketplace.
This activity will translate into positive momentum for some submarkets. The I-5 South Corridor is one example. The completion of the 382,000-square-foot Nov-ellus Systems’ manufacturing facility in Tualatin has already brought increased activity to the area, which could boost leasing activity as well as employment figures, as related industries scramble to move near the site.
At least three Novellus suppliers have purchased land or leased space near its new plant so far.
With little available land and even less demand, developers will have a difficult time justifying speculative development without significant preleasing.
If landowners and developers want to make a buck anytime soon, they will be challenged to capture the few deals created by large corporate users who are out looking for build-to-suit or owner-user sites.
This has created a very competitive situation among the region’s developers. On the flip side, users will also be challenged to find affordable land in their desired location.
Still, the largest challenge facing the industrial sector will be keeping vacancy and absorption levels in check until the economic recovery has a chance to build enough momentum to facilitate real growth.
One project that may help or hurt the numbers is Trammell Crow’s 488,000-square-foot Rivergate Corporate Center. Thus far, the project has seen no preleasing, but there has been strong interest from a user. This lease would definitely help absorption, but if the deal doesn’t go through, this project could push overall vacancy up even higher at yearend.
Some good news, however, is that despite Intel Corp.’s recent announcement of significant new layoffs, the chip maker is still pressing onward with its owner-user sites at Ronler Acres, which should help to balance out the blows of increased speculative inventory.
OTHER MARKETS
Austin: Has been on the downslide of an economic roller coaster for more than a year. In contrast to office landlords, industrial owners realized the plight they were in right from the start. R & D; and flex-tech occupancy has plunged 16.2% to 65% since its peak occupancy in the second quarter of 2000. Total vacancy for the industrial market increased only 1% in the second quarter this year, mostly due to new construction coming online vacant and just 381,724 square feet of negative absorption. While it will take at least six months to begin its upward slope, the Austin industrial market should be in recovery by 2003 with the possible exception of R & D; and flex-tech properties …
Bakersfield: The industrial market remains stable for both land and facilities. Large warehouse distribution users are interested in the market because of its central location, available worker base and favorable rental rates …
Colorado Springs: The industrial vacancy rate is 10.5%. We recently started to see landlords cutting their offering rates to “secure the next deal.” GEQ controls about 50% of all vacant industrial space in the COS market …
Dallas-Fort Worth: The Metroplex industrial market is the bright spot in an otherwise dreary local leasing market. User demand for industrial product is particularly strong, posting 975,106 square feet of growth during the second quarter. The area’s strong transportation infrastructure is the driving force behind significant absorption. Growing tenant demand for industrial space pulled down vacancy by 20 basis points to 8.6% …
El Paso: Expansion of existing tenants continues to drive occupancy rates up in all industrial submarkets. An above-average percentage of existing tenant leases have been renewed during the first half of this year. With the shift of certain types of manufacturing operations from the El Paso and Juarez, Mexico, area to China, there has been strong interest in the area from high-tech companies …
Eugene: Vacancy continues to increase; users are few and far between. Leasing is very slow; sales are somewhat better only when product is available. Buyers continue to look for opportunities in the marketplace …
Fresno: The Fresno market had an increase in vacancy rate coupled with negative net absorption. New projects have not exhibited much activity: 650,000 square feet of vacant speculative space was added to the market, with no preleasing …
Honolulu: The industrial market had its first quarter of negative net absorption since the nation’s economy turned down. Despite one quarter of negative net absorption, Honolulu is positioned to hold asking rates at current levels and tame rising vacancy pressures …
Houston: In light of the nation’s weak economy, corporate consolidations and accounting scandals, Houston’s industrial market continues to perform over others in Texas. During the second quarter, Houston posted a healthy absorption gain of nearly 1.1 million square feet. As industrial leasing activity gained momentum recently, Houston saw its vacancy decline by 20 basis points to 8%, after reaching a three-year high during the previous quarter. Meanwhile, overall asking rents showed surprising resiliency: R & D; and flex-tech space rents grew 24 cents to $6.36 per square foot vs. the prior year. Rents will stabilize by year-end as the construction pipeline diminishes and space demands hold steady …
Las Vegas: Faced with an uncertain economy, corporations have been focusing on evaluating and streamlining internal operations and have been putting expansion plans on hold. One consequence of this trend has been an influx of available sublease space, most notably on new product that has been occupied for only a short period of time …
Phoenix: Overall conditions for the metro Phoenix Industrial market remained relatively unchanged during the second quarter 2002. Negative trends include an abundant supply of sublease space, a decreasing volume of speculative construction, increased vacancy rates and negative net absorption. Despite these trends, hints of recovery remained throughout the quarter, evidenced by increased levels of tenant activity as users surveyed the market looking for value-driven deals. Other positive trends were stabilized rental rates, continued build-to-suit construction and reports of optimistic economic indicators …
Salt Lake City: Although leasing activity seems to be increasing, new construction has all but ceased. Lease rates on second- and third-generation space are dropping. Owners are using free rent to maintain proforma face rates …
San Antonio: The industrial market is near the bottom with small amounts of negative absorption in the major submarkets. Lease rates continue to be relatively stable. Kelly USA, the realigned Air Force base, posted positive absorption bringing the rest of the market into positive absorption for the second quarter as well as for year-to-date … San Jose: Rates continued to drop and space continued to be vacated in the second quarter, but at a much slower rate than the previous one. Fewer new construction buildings are coming online, and some landlords are pulling their properties off the market. Landlords are anticipating an painful blow when a considerable number of the five- to seven-year leases signed during the height of the dot-com boom begin to expire in the next 12 to 24 months …
Seattle: The Puget Sound industrial vacancy rate fell slightly to 8% in the second quarter, down from 8.1% in the first quarter. There is very little leasing activity for 10,000- to 15,000-square-foot users and smaller manufacturers are reluctant to make space commitments, concerned with corporate profits. However, larger industrial users are taking advantage of the soft market and the South-end witnessed some major big box deals in the second quarter.
