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PORTLAND, OR-This month’s return of container service by the Tokyo-based “K” Line to the Port of Portland comes at an auspicious time for the Portland industrial market. In the midyear rankings by Marcus & Millichap Real Estate Investment Services, the city, generally considered a secondary if not tertiary market, moved up six places to become the nation’s fifth best industrial investment market. In addition to its overall ranking, the market shows up as ninth for projected 2008 completions, eighth for both occupancy and absorption levels and seventh for projected employment growth.

As Marcus & Millichap duly notes, the port is a major contributor to the city’s current luster. According to local officials, the port handled a record-breaking 15 million tons of marine cargo in the fiscal year ending June 30. The entire Portland harbor, including both the port and private enterprise along the Columbia and Willamette rivers, handled an estimated 21 million tons, roughly equivalent to figures for the larger ports of Oakland, CA and Seattle. But the Portland figure does not include data for the Port of Vancouver, WA, which lies directly across the Columbia River from the city and is considered part of the Portland market. Inclusion of that data would likely push the Portland area above Oakland and Seattle.

Historically, the Port of Portland has relied on exports more than imports, shipping farm and forest products to Asia. But last year for the first time imports nearly equaled exports, and planned dredging of the Columbia to allow passage of larger container vessels promises to further shift the balance, as it will enable the city to become more of a distribution center. For the present, however, the dependence on exports has no doubt helped keep the agency solvent, as the declining value of the dollar boosts demand for US output overseas.

Unlike some West Coasts ports that are struggling with financial difficulties due to overexpansion or a decline in business, the Port of Portland appears generally healthy. Fitch Ratings assigned AA+ and F1+ ratings to $138.9 million of revenue bonds issued by the agency last month. The regional economy also appears to be faring well. The 2008 Greater Portland Prosperity Index issued in July by Greenlight Greater Portland, a local consortium of representatives from major private employers, forecasts the metro area will add 100,000 jobs and see its gross regional product grow 29.1% to $144.1 billion in the next five years.

Which isn’t to say everything’s rosy for the self-proclaimed City of Roses. As a Q2 report from Grubb & Ellis points out, while long-term employment growth is promising, economists predict the area will lose jobs this year, with current 5.3% unemployment rate up 50 basis points from a year ago. But the impact on the industrial market has been more to stall improvement than cause a noticeable backslide. According to Grubb, industrial vacancies rose a bare 10 basis points to 6.7% from April through June despite the addition of over 1.1 million sf of new space. The market registered 850,000 sf of absorption for the quarter, allowing monthly rents to rise a few cents to $0.43 a sf for warehouse/distribution space and $0.83 a sf for flex space. Furthermore, the brokerage expects vacancies to fall from this point because only 400,000 sf is in construction.

On the investment front, Marcus & Millichap says improving fundamentals and the limited new supply have sustained the interest of large, national buyers, with the median sales price having climbed 10% since ’06 to $80 a sf and the average cap rate dropping 50 basis points to the mid- to high-6% range. Nonetheless, Grubb says market activity has decreased substantially, with first-half numbers down 40% to 50% from last year in terms of dollar volume, building area and average deal size. Significantly, Grubb attributes the decline not to the overall slowdown that has affected markets everywhere but to the fact that institutional-grade industrial real estate remains a relatively tightly held commodity in Portland. Prior to the past few years, the market had almost no institutional-grade product, so only a limited amount has been built.

Probably the year’s most important sale occurred in January, when the port sold 78 acres of a 700-acre industrial site in Reynolds, OR to FedEx Corp. for development of a $102 million distribution center. The port of Portland purchased the full 700 acres, located north of Portland International Airport near Interstate 84, in December for $17.25 million. It plans to use half the acreage for development of an industrial park and preserve the remaining half as wetlands.

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