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PORTLAND-The region’s industrial market continued its backslide in the second quarter and will not likely turn the corner in the third quarter, as most activity is from existing tenants vacating older buildings in favor of new ones, according to the latest market report from Grubb & Ellis.

Vacancy in the 90-million-sf warehouse, manufacturing and distribution market rose to 11.7%, or about 10 million sf, at the end of June from 10.4% at the end of March, according to Grubb & Ellis. New vacancies hitting the market during the second quarter included Food Services of America’s 330,000-sf sublease at Heleco Distribution Center and the delivery of the new 250,000-sf Wilsonville Distribution Center.

Another 500,000 sf is expected to hit the market in the fourth quarter, when Georgia Pacific relocates from Kelley Point Distribution Center to its new 400,000-sf digs at Rivergate Corporate Center. The good news, according to local brokers, is that there are two or three “very large new users” currently looking for space in the market.

The question is whether they will be able to find existing space to meet their needs, as much of the current available inventory is older space with smaller ceiling heights than are being sought by modern warehouse/distribution operations. Approximately 75% of the 1.55 million sf of construction completed second quarter was owner-user or built-to-suit, according to the report.

“Increased inventories of functionally obsolete space are becoming increasingly problematic for the manufacturing and warehouse sectors, particularly as down market conditions continue to make it favorable for users to consolidate or upgrade into modern facilities,” states the report. “Submarkets with higher concentrations of modern product –such as the I-5 and Columbia corridor submarkets — will fare much better going into 2004 as elevated vacancy in the long term will likely be attributed to inefficiency rather than oversupply.”

In the region’s 33.8-million-sf tilt-up office market, where new construction is almost non-existent, vacancy rose just 20 basis points to 13% and saw more space leased than let go for the first time since 2001, which has people predicting stabilization has begun, if not in earnest. Big leases in the quarter included Unicru taking 65,000 sf and Sahri’s Management Group taking 23,000 sf, all at Nimbus Corporate Center.

The I-5 and Columbia submarkets, both of which hold mostly traditional industrial space, posted vacancy rates below 10% in the second quarter, while the tech heavy submarkets of 217/Beaverton and the Sunset Corridor posted vacancies of 21.1% and 13.4%, respectively. Average lease rates at the end of the second quarter were $0.32 per sf per month for warehouse, manufacturing and distribution space and $0.77 per sf per month for tilt-up office space.

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