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PORTLAND-The Industrial vacancy rate ended the third quarter at 7.8%, one-tenth of a percentage point lower than it started the year, according to the latest report from the Portland office of the commercial brokerage firm Grubb & Ellis. Net absorption has also remained consistent throughout the year, with net absorption levels averaging around 500,000 square feet per quarter.

The one trouble spot in the market is the industrial flex market in the tech-heavy Sunset Corridor. But the overall stability amid the economic skid is attributable to developers using a less risky strategy in recent years, focusing on build-to-suit projects as opposed to speculative ones, concludes the report. “In short, the construction pipeline empties faster,” states the report. “Couple this quickly moving pipeline with almost non-existent speculative warehouse construction and industrial vacancy should continue to hold throughout the remainder of the year, if not the entirety of the economic slowdown.”

Between now and then, Grubb & Ellis is predicting “continued reservation on the part of companies when it comes to making decisions about capital expenditures, at least until the picture is clearer as to how badly the events of September 11th impacted our already slowing economy.”

The warehouse sector posted 734,582 sf of net absorption in the second quarter, the vast majority of which was build-to-suit and owner-occupied space. In the third quarter, it saw only half that number, including the 180,000-sf build-to-suit for Honda at the Columbia Gorge Corporate Center.

The commitment to pre-commitments appears to be continuing, as several such projects are currently under construction and slated for delivery between Thanksgiving and Easter. “Add to these deliveries the lack of speculative construction on a broad scale and the Portland industrial market could be setting itself up for a modest to impressive recovery late 2002,” states the report.

Three build to suit projects are under construction at Southshore Corporate Park — One for Alexander Moving & Storage at 110,000, another for Frito Lay at 80,000 sf and Harry’s Fresh Foods will soon break ground on their 80,000 square foot plant, according to the report.

The only speculative industrial construction to speak of, states the report, is at Southshore Corporate Park, where Catellus Development has broken ground for two buildings totaling about 180,000 sf. Grubb & Ellis’ Tom Talbot is marketing the space, and the report says the buildings have already begun to see interest. Of the existing Catellus-owned buildings, Fuji Photo Film recently backfilled 27,000 sf of 80,000-sf vacated by Centric Corp.

In the I-5 South region, Specht Properties is expected to deliver a 260,000-sf build-to-suit (23% office) for Precision Interconnect by the end of the year, and in the second quarter of 2002 Novellus Systems is expected to deliver the 495,000-sf first phase of its development on SW Leveton Drive.

“The slowdown in the manufacturing sector of the economy has taken its toll on the tech- heavy Sunset Corridor this year,” states the report, but it was not the key driver of the corridor’s rising vacancy rate in the third quarter, states the report. The driver was 182,635 sf of new flex product delivered to the Sunset Corridor only 19% occupied.

Sunset flex vacancy rose over one full point from the first to the second quarter, but rose by only half that in the third quarter. Following 20,000-sf of negative absorption in the quarter, the industrial vacancy rate now stands at 9%. But no new construction will arrive until the first quarter of 2002; and that will be pre-committed product. Flex activity in the Sunset Corridor in the third quarter included Poorman Douglas taking 28,013 sf at Millikan Business Center and Network Elements taking 40,000 sf at Woodside Corporate Park, according to the report.

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