Portland Demand Exceeds Supply in Office and Industrial Product

PORTLAND, OR—Industrial continues its reign in cities big and small across the country. No more is this evident than in the Portland metro, where the overall vacancy rate for the three combined industrial products was 3.7% at the end of the third quarter.

This was up 20 bps from 3.5% in the second quarter and up 30 bps from 3.4% recorded one year ago, according to the latest report by Cushman & Wakefield. During the third quarter, flex was up 20 bps to 7.3%, warehouse was up 20 bps to 3.8% and manufacturing remained level with a 1.2% vacancy rate.

Total new leasing activity in the third quarter was 1.25 million square feet, below the adjusted second quarter figure of 1.45 million square feet. Year-to-date, there has been slightly more than 4.3 million square feet of leasing across the high tech, manufacturing and warehouse product types, a bit higher than the 4.2 million square feet at this time last year.

Total net absorption across all products for the third quarter was negative 709,309 square feet compared to the positive 2.4 million square feet for the third quarter of 2018. All three property types are in the red thus far in 2019. A significant reason for both the rise in vacancy and the slide into negative absorption has been the solid development pipeline for industrial product with more than 3.4 million square feet delivered in 2018 and another 1.1 million square feet delivered thus far in 2019. Portland recorded an uptick in deliveries during the third quarter with one flex project in the Vancouver submarket at 78,945 square feet and fully available, and four warehouse projects totaling 455,758 square feet with 25% leased upon completion.

“Strong rent growth in the industrial sector resulting from limited land supply and a population influx remains a theme in Portland,” Keegan Clay, Cushman & Wakefield director, tells GlobeSt.com. “With industrial cap rates ranging between 4.5% to 5.25%, Portland continues to attract new to market and existing capital. We expect further demand within this market over the next year, guided by a few 500,000-plus-square-foot portfolios expected to change hands in Portland within the next six months.”

The overall vacancy rate for the Portland office market closed the third quarter of 2019 at 10.2%, down 10 basis points from the reported second quarter figure of 10.3%. During the third quarter, the overall vacancy rate was up by 10 bps in the central business district to 11.4%, while the suburban market experienced a decrease in the overall vacancy rate, down 20 bps to 9%.

There is currently a total of 5.3 million square feet of direct vacancy market wide, up by almost 200,000 square feet in the quarter while sublease vacancy remained essentially flat. Year-to-date, net absorption remained in the black for Portland at 220,540 square feet, with the third quarter figure at 63,035 square feet, reversing the negative figure of 34,295 square feet in the second quarter.

“Office vacancy has seen a steady decline during the past year from 11.4% to 10.2%, but we are also tracking a healthy level of new construction on the horizon likely to freeze or temporarily nudge vacancy back up as these projects deliver—though also boosting activity,” Dan Swift, Cushman & Wakefield managing director, tells GlobeSt.com. “As of now, there is another 730,000 square feet of office space slated to deliver by the end of 2020 or roughly half upcoming in the fourth quarter of 2019 and primarily in the CBD. Of the total square footage we expect to deliver ahead between Q4 2019 and year-end 2020 in Portland, more than 35% has already been preleased, which is considered a reasonable level.”

New leasing activity for the third quarter was 559,006 square feet, matching the figure for the second quarter and taking the year-to-date total to 1.78 million square feet, slightly above the 1.64 million square feet at the same time last year. The central core of the CBD has been the driving force in new leasing, responsible for 49% of the activity for the entire Portland market in the third quarter. Like other major markets, technology companies are responsible for much of the new leasing.

“Portland’s office sector remains steadily in growth mode with over 220,000 square feet of occupancy gains through the first three quarters of 2019,” Lana Baldock, Cushman & Wakefield managing director, tells GlobeSt.com. “Year-to-date new leasing activity is nearly 1.8 million square feet, narrowly edging out 2017’s amount of 1.7 million square feet for the same period. The central core of Portland’s central business district has been a hot spot here, accounting for half of all new leasing activity during the third quarter.”

A key reason was Google’s leasing 80,000 square feet at the Meier and Frank building. Like other major markets, tech companies are responsible for much of the new activity happening in Portland, as companies from the tech-heavy Bay Area continue to enter or grow in this market together with home-grown company expansion.

“Notably, earlier this year, we also helped negotiate a pair of new full floor leases at the newly renovated PACWEST tower in downtown, one involving a tech-focused company and the other in financial services,” Baldock adds.