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11
Industrial Market
Analysis
COMMERCIAL MARKET
Chris Reeves
Portland State University
Christopher Reeves is a graduate student in the Master of Real
Estate Development (MRED) program and a TigerStop Real Estate
Student Fellow. He has a Bachelor’s degree in Economics and Social
Sciences from the University of Sydney, Australia.Portland’s industrial market experienced robust growth
in 2020, shrugging off any pandemic related lethargy and
providing strong returns for investors and developers alike.
E-commerce’s ascendancy accelerated throughout 2020,
spiking demand for logistics and distribution space. Other
drivers include; companies seeking to increase safety stock
levels in the wake of supply chain disruptions, cold storage
gains due to grocery delivery becoming commonplace,
computer and electronic goods manufacturing growth, and
the cannabis industry expanding its footprint as legalization
rolls out across the United States. Additionally, as CBRE
Americas Logistics and Retail leader John Morris remarks,
logistics has been a “fundamental part of helping with the
pandemic” providing important supplies to consumers and
businesses and looks set to have increased importance during
2021 with a vaccine roll out underway. In turn, industrial
growth outlook and preferable risk traits continues to be
a magnet for the capital that has been freed up by current
bond rates and decreasing interest in alternative investment
sectors. Accordingly, average cap rates close out the fourth
quarter of 2020 with a record low of 6%. The price per
square foot of industrial space has doubled in Portland over
the last decade, and the increasing premium on industrial
assets is not deterring investors given the broader economic
volatility. Along with growing demand, the healthiness of
this mid-expansionary phase Industrial market is also being
maintained by a moderated development pipeline, with most
of the speculative supply having been delivered by the fourth
quarter, and 2021 deliveries mainly built to suit and owner
operated developments.
E-commerce grew more in 2020 than it did in the last
decade, bringing along for the ride a few growing pains for
the logistics and distribution companies trying to capture
the market. The biggest risk factor is the labor shortage and
labor retention. Third party logistics (3PL), and in particular
reverse 3PL (returns) are highly demanding on a labor front,
and companies are making calculated trade-offs between labor
availability, location and automation. An immediate driver of
the labor shortage is people devaluing a return to work due to
temporarily enhanced unemployment benefits as Scott Weiss
from Port Logistics Group stated “the average warehouse pay
rate is $15 to $18 per hour, but with the additional $600 in
unemployment insurance provided by the federal Coronavirus
Aid, Relief, and Economic Security (CARES) Act, recipients
are receiving what equates to between $22 and $25 per hour,
based on a 40-hour work week”. A more sustained issue is
attracting talent, as Stephen Fleetwood of CBRE remarks
“let’s face it, the perception is that a warehouse isn’t the most
fun place to work, and we need to change that perception!”.
C h r i s R e e v e s | Industrial Market Analysis 2Additionally, the increased level of education that millennial
and Gen Z demographics are receiving, lure prospective
workers towards the service industries. And logistics positions
can require significant training and development making on
boarding and retention a complicated and expensive challenge.
A more macro factor is diminishing immigration and national
population growth slowing. The labor shortage also includes
getting the goods to the warehouse and in particular, truck
drivers. The American Trucking Association is expecting
the estimated 70,000 truck driver shortage in 2019 to grow
to 175,000 by 2026, citing issues with recruiting younger
millennials, Amazon pushing up wages, drug and DUI arrests
eliminating 50% of the candidate pool, and rapidly retiring
demographics. The panacea of driver-less vehicles remaining a
somewhat distant hope.
Increased automation appears as a logical response to such
labor shortages, and it will be a vital component of most
warehouses in the future, but a deeper look reveals several
tricky obstacles to replacing humans with machines in the
short-term. Indeed, automated storage and retrieval systems,
palletizers and depalletizers, conveyors, order picking and
putting hardware and software, sortation solutions, drones,
robots, 3D printing and voice direction provide warehouse
operators with a suite of options for fine tuning their
operational efficiency. However, the costs of automating
are significant, and carry a variety of risks. E-commerce
companies have leverage over logistics companies keeping
competition fierce and prices of services low. Amazon (the 5th
largest logistics company in the world) deploys their in-house
logistics for the more profitable corners of the logistics trades
– last mile parcel delivery – forcing other logistics companies
towards lower margin activities.
The seasonality of consumer demand presents massive
fluctuations in requirements of space. Additionally, no
one wants to end up with last season’s toys; with the rapid
acceleration in robotization, today’s best technology could put
you at a competitive disadvantage next year when newer, more
efficient models enter the market. With retailers scrambling
to present their most realized omni-channel experience to the
customer, business to consumer (B2C) can involve in-store
pickup, delivery at home, or picking up your items at a locker
at Whole Foods. These models are quickly diversifying and
evolving, creating a moving target for logistics companies.
A simple practical problem also exists when you compare
logistics contract terms (averaging 3 to 5 years), and the
return horizon on the equipment required for automating.
And lastly, the jobs being automated will not necessarily free
up additional labor. The majority of jobs being phased out by
C h r i s R e e v e s | Industrial Market Analysis 3automation are unskilled, leaving the available skilled positions
unfilled and presenting up-skilling and re skilling challenges to
companies and communities. This does present an opportunity
to cities, and companies who have the wherewithal to pair a
massive unemployed population with a burgeoning industry
requiring a skilled workforce. Additionally, logistics companies
will be determining which markets to target based on labor
availability, so cities who adopt a synergistic mindset with
industry, successfully creating a pipeline of appropriate talent,
will get the prize. Housing affordability also plays a role
in labor force availability, as the ability of workers to find
appropriately configured and priced housing options is a key
factor in attracting and retaining labor.
With all that 2020 had to offer, labor shortages and uneasy
automation integration constitute good problems for a sector
to have, and present significant opportunities for astutely
minded logistics companies who can strike a balance between
advancement, and consolidation. All the while, in Portland,
the fourth quarter of 2020 has wrapped another bumper year
for industrial, recording over 1.5 Million year-to-date square
feet of positive absorption that include slew of new speculative
deliveries, on average structural vacancy levels, and average
asking rates continuing to grow 3% year over year.
SUPPLY
Preceding the onset of Coronavirus, a combination of vacancy
rate compression, tight land supply, strong demand and rental
growth had resulted in an immense amount of construction
starts in 2019, with almost 6 million square feet breaking
ground. Subsequently, the first quarter of 2020 had the highest
quarterly amount of under construction space as of this real
estate cycle. This dropped dramatically in the second and
third quarters, potentially due to some anticipated absorption
delays, a diminishing supply of developable land, or tightening
of the lending markets due to ensuing recession. Construction
starts have picked up in the fourth quarter with 483,550
square feet initiated, possibly a sign of optimism moving
into 2021 (CoStar)(Table 1). However, only 20% of the 1.7
Million square feet of speculative space under construction is
pre-leased which will test demand, and influence vacancy and
price dynamics.
Despite the fourth quarter showing more manufacturing
space under construction than in warehouse and distribution,
all 1,774,548 square feet of the manufacturing space under
construction is confined to the Sunset Corridor, where Intel’s
multi-billion-dollar 1.5 million square feet expansion of its
DIX Fab is ongoing, plus Hitachi’s new High Tech campus
C h r i s R e e v e s | Industrial Market Analysis 4TABLE 1 and JSR Micro’s new campus are getting built. Attracting
substantial new supply of warehouse and distribution
Construction Starts space is the North/Northeast submarket with 831,808
Millions
3.5 square feet and Clark County with 325,824 square feet.
3
Hayden Island/Swan Island, Close-in Eastside, Outer
2.5
SE, Clackamas/Milwaukie, CBD/NW/Guilds Lake, 217
Corridor/Beaverton and the I-5 Corridor South have no
2
new construction scheduled.
1.5
1
2020 has seen a total of 2,697,965 square feet of
0.5
space delivered to the Portland market, an increase
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020
0 in total inventory of 1.1%. This represents a 20 basis
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 point increase from 2019’s addition of 0.9%, and the
fourth highest yearly contribution of new supply this
real estate cycle. In line with the growing narrative of
e-commerce’s expansion, logistics space grew sizably
more than specialized and flex, with a 1.5% bump in
overall inventory in 2020 compared to 0.5% and 0.2%
respectively. New deliveries to market include the built-
to-suit Columbia Distributing facility in the SE Outlying
Submarket, with developers Trammell Crow, and CBRE
Global Investors Ltd delivering earlier than the Q1 2021
estimate, providing 531,148 square feet for the beverage
distributor. In the strongly performing Rivergate
submarket, the Georgia Pacific Warehouse added
500,000 square feet of space, with a heavily automated
facility designed to provide paper goods, and building
supplies. Home Depot added space in the East Columbia
Corridor with 154,240 square feet of built to suit space.
Portland Industrial Park was also delivered in the fourth
quarter, adding 192,424 square feet of speculative space
to the West Vancouver / CBD market.
DEMAND
3PL, reverse 3PL, cold storage facilities, cannabis
facilities, computer and electronic product
manufacturing continue to drive strong demand for
industrial space. Grocery and non-seasonal goods grew
the fastest with heavier items taking longer to adapt to
the E-commerce platform. In-demand logistics facilities
are somewhat flexible with the class and age of facility,
but flat floors, column spacing, and 26 ft high ceiling
minimums, and proximity to target demographics
are required. Certain nation-wide developers and
e-commerce companies such as Amazon are eying
distressed retail such as malls as potential micro-
fulfillment hubs with same-day delivery and hyper-local
facilities part of the emerging value proposition. This will
be an interesting but challenging space due to particular
C h r i s R e e v e s | Industrial Market Analysis 5TABLE 2 variables, including; zoning, easement agreements, and
community response.
Vacancy Rate
14%
Focusing in on the Portland metro, market-wide vacancy
Forecast
12%
rates drifted 30 basis points higher in Q4, reaching
10% 4.8%. Logistics experienced the biggest increase in
8%
vacancies with an 80 basis point jump to 5.7%. It is
6%
4%
worth noting that the elevated vacancy rate can be
2% credited to the vacating of half a million square feet of
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2021 2022 2023 2024 2025
0% logistics space when Unified Grocers exited the 224
YTD EST
Logistics Park. Flex increased 20 basis points to 6.7%
Specialized Logistics Flex Portland United States
and Specialized moved up to 2.3%. These modest
escalations in Flex and Specialized could be interpreted
as a softening in demand for the office component of
flex, and a drop in demand for certain goods courtesy
of the current recession. Taking a step back and viewing
these metrics within the context of 10 years of vacancy
rate compression, these rates signal the overall strength
of the market, and largely constitute structural vacancy
levels (Table 2). Continuing from the third quarter,
availability rates have continued to rise; there was a
noticeable jump from the fourth quarter of 2019 with
5.6% to the fourth quarter of 2020 with 6.9%, driven
largely by Logistics and Flex products. This could be
reflecting the possibility of tenants being unable to exit
leases, tenants possessing space surplus to requirements,
seasonality, or simply a byproduct of a rapidly expanding
sector which is attempting to optimize operations amidst
fluctuating demand.
Examining submarket trends, Central City saw a sizable
1% increase in vacancy rates during the fourth quarter,
largely attributable to a 140 basis point gain in vacancies
in Flex space, and 100 basis point increase in Warehouse/
Distribution space. This was without the upward
pressure of new supply. The Westside submarket received
235,775 square feet of new supply this quarter, which
contributed to the 30 basis point uptick in vacancy
rates. Yet, demand for logistics kept net absorption
for the Westside positive this quarter, recovering from
almost 0.5 million square feet of negative absorption
in the third quarter. The North/Northeast submarket
saw the market for flex space tighten while logistics and
manufacturing both experienced increased vacancies.
Southeast had a 180 basis point gain in vacancy rate
despite absorbing 531,148 square feet of space from the
built to suit Columbia Distributing facility. This jump
in vacancies was driven by the aforementioned exiting
of 224 Logistics Park and pinpoints a major cause of the
increase in market wide vacancy rates. Clark County was
C h r i s R e e v e s | Industrial Market Analysis 6TABLE 3 the only submarket where vacancies tightened, with a 20
basis point reduction led by a pickup in logistics leasing.
Market Rent Growth (YOY)
9% Absorption metrics for the fourth quarter are reflective
Forecast
8% of the vacancy rate data with a market-wide negative
7%
absorption of 1.3 million square feet. In addition to the
6%
Unified Grocer vacancy, this represents an anticipated
absorption delay which was caused by the delivery of
5%
4%
3%
significant square footage of speculative logistics space.
2%
This new space is expected to turn into a mid-term
1% positive absorption trend from the first quarter of 2021
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2021 2022 2023 2024 2025
0% through to 2025, signaling the significant demand
YTD EST -1%
underscoring the industrial market. Beyond the growth
Specialized Logistics Flex Portland United States
of computer and electronic product manufacturing
in the Sunset Corridor, in line with national trends,
Portland’s demand for manufacturing has declined over
the last 12 months, with a 4.98% decline.
RATES / COSTS
Industrial rents were largely insulated from the influence
of the pandemic and absorption delays due to the
inelasticity of pricing in industrial. In line with national
trends, the rapid growth in rental rates that has been
accelerating since the start of the real estate cycle has
been dropping off in recent quarters, and this is expected
to continue until an inversion point mid-2021. At this
point, rent growth is expected to recover quickly reaching
quarterly growth of 8.5% in 2022, before plateauing
to a more standard 2 to 3% range from 2023 to 2025.
Explaining this immediate trend of lower rent growth
could be landlords losing bargaining power due to the
influx of new deliveries over 2019 and 2020, some older
facilities becoming less appealing to the requirements
of modern fulfillment, and the financial limitations of
the local tenant market. Industrial is still outperforming
other commercial real estate products this cycle, with a
remarkable 52% cumulative increase to rents.
As deliveries flooded the market, logistics space registered
a stable 4% rental growth, a 130 basis point drop from
the third quarter and the lowest percentage growth since
the fourth quarter of 2012. As the office component of
flex space experienced a short-term demand drop off,
rent growth has decelerated from a high of 6.1% in the
second quarter of 2015 to 2% in the fourth quarter
of 2020 as seen in Table 3. Surveying the submarkets,
river and logistic node access is the key determinant,
with Rivergate, East Columbia Corridor, Clackamas/
Milwaukie, Hayden Island/Swan Island, St Johns/Central
C h r i s R e e v e s | Industrial Market Analysis 7TABLE 4 Vancouver, Clark County Outlying, and I-5 Corridor
Outlying all registered average annual rent growth of
over 4%.
Market Cap Rate
9% SALES LEASING
8%
7%
6% Posited between the strong fundamentals of the
5%
4%
industrial market, and the economic uncertainty caused
3% by coronavirus, a presidential election, and trade issues,
2%
1%
the fourth quarter of 2020 saw investor sentiment
0% persisting as the dominant variable in valuation. Lending
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2021 2022 2023 2024 2025
YTD EST institutions and buyers have adopted more caution
Specialized Logistics Flex Portland United States position over recent quarters represented by the subdued
$1.2Bn of annual sales in 2020, a marked decline from
the robust pace in 2019, which posted yearly sales figure
of $1.8Bn. Land shortages and the associated limits
to growth, and overall difficulty of bringing an asset
to market is possibly complicating investor interest in
Portland as discussed in the third quarter 2020 report.
Supply dynamics are also significant with the Portland
market attempting to absorb sizable amounts of
speculative space in 2020, with the likely possibility of
exceeding demand temporarily. That said, cap rates have
continued to remain stable throughout 2020 as seen in
Table 4. Perhaps contributing to this is developer and
investor knowledge that the limited land supply will
ultimately prevail in terms of capital appreciation and
rent growth, so potential delays in leasing, or lowered
pricing power are short-term considerations outweighed
by the long-term gains. Further, given legislative and
public support of industrial is slow moving, and land
supply is limited due to the Urban Growth Boundary,
it is foreseeable that local and national players further
invest in land banking efforts where possible.
Through comparing 2020’s buyer composition data with
the ten-year average, certain trends are noticeable about
the type of investor active in the Portland market. The
ten-year average shows institutional investors shifting
from 14% to 27% of buyer activity in 2020, assuming
over 10% of REIT investor activity. This alludes to the
exposure REITs have to stock market pressures and
institutional investors shifting funds towards industrial
due to fewer risk attributes than other investment
opportunities. The East Columbia Corridor continues
to dominate transactions in 2020 with $174M traded,
followed by the Sunset Corridor/Hillsboro, Airport Way,
Clackamas/Milwaukie, Rivergate submarkets.
Notable transactions include Colony Capital’s
C h r i s R e e v e s | Industrial Market Analysis 8divestment of a 523,934 square foot, 21-year old logistics
center in the Rivergate Submarket as part of a portfolio sale.
The property was 100% leased at the time of sale and sold
for $39.2M ($147/SF), and was purchased as an investment
by Dermody Properties Inc. In the East Columbia Corridor,
Southshore Corporate Park was sold to NFI Industries, Inc.
for $32.2M, or $85/SF. The building was also 100% leased
and built 21 years ago. A cannabis marijuana grow facility
was sold in December in the Sunset Corridor/Hillsboro
Submarket for $24M or $140/SF. It was 78% leased at the
time of sale. Panattoni Development Company sold their
brand new, 100% leased Commerce Center in Ridgefield to
Exeter Property Group (Pictured) for $17.3M or $147/SF
after holding for 9 months.
Bob’s Red Mill inked a new lease for 404,126 square feet in
Clackamas County in November, with Bob Moore citing a
35% jump in overall sales as the reason for the expansion. The
lease spans 11 years, with the full occupancy of the facility
expected in July 2021. In Gresham, Hawthorne Hydroponics,
LLC signed a lease in October for 378,000 of newly built
Class A space at Trammell Crow’s Blue Lake Corporate Park.
Scott Siber, Principal at Trammell Crow stated “We designed
Blue Lake Corporate Park with top-of-market features that
would appeal and suit a variety of warehouse users, while
also selecting an ideal location in Portland’s highest velocity
market. As the fourth-largest city in Oregon and the second
largest in Portland’s metropolitan area, Gresham benefits
from business-friendly demographics, strong transportation
connections for commuters and freight and a high quality of
life. The city also boasts access to a skilled labor force.”
C h r i s R e e v e s | Industrial Market Analysis 9RESOURCES
1. NAIOP, Industrial Real Estate Demand on the Rise in the U.S. https://blog.naiop.
org/2020/10/industrial-real-estate-demand-on-the-rise-in-the-u-s/. 2020
2. John Morris, CBRE, The Weekly Take Podcast, “Return to Sender: Reverse Logistics
and the Art of Sending Purchases Back” https://open.spotify.com/episode/2eUg3JrX-
dwhnhE0H2fhsHh?si=twUf30i6R3OFcepvjvmPOA. 2020
3. CoStar Analytics
4. Viewpoint, 2021 Annual Viewpoint Market Cycle Chart, Industrial
5. John Morris, CBRE, The Weekly Take Podcast, “Return to Sender: Reverse Logistics
and the Art of Sending Purchases Back” https://open.spotify.com/episode/2eUg3JrX-
dwhnhE0H2fhsHh?si=twUf30i6R3OFcepvjvmPOA. 2020
6. JOC, https://www.joc.com/port-news/us-ports/warehouse-worker-scarcity-crimp-
ing-us-transloading-capacity_20200813.html?page=1. 2020
7. Georgina Power, MIPIM World. https://blog.mipimworld.com/development/the-lo-
gistics-labour-shortage-how-do-we-solve-it/. 2019
8. Robert Hanfield Ph.D., NC State University, https://scm.ncsu.edu/scm-articles/arti-
cle/workshop-addressing-labor-shortages-in-warehouse-and-dc-operations. 2020
9. Honeywell, https://sps.honeywell.com/us/en/products/productivity/. 2020
10. Dekhne, Hastings, Murnane and Neuhaus. McKinsey & Company, https://www.
mckinsey.com/industries/travel-logistics-and-transport-infrastructure/our-insights/auto-
mation-in-logistics-big-opportunity-bigger-uncertainty. 2019
11. Dekhne, Hastings, Murnane and Neuhaus. McKinsey & Company, https://www.
mckinsey.com/industries/travel-logistics-and-transport-infrastructure/our-insights/auto-
mation-in-logistics-big-opportunity-bigger-uncertainty. 2019
12. CoStar Analytics
13. CoStar Analytics
14. JLL Industrial Insight Q4 2020, Portland Metro
15. JLL Industrial Insight Q4 2020, Portland Metro
16. CoStar Analytics
17. Colliers Q4, 2020 Industrial Report
18. Andrea Himmel, NAIOP Webinar, January 2021 “The Transformation of Retail and
its Direct Influence on Industrial’s Boom”
19. CoStar Analytics
20. Colliers Q4, 2020 Industrial Report
21. CoStar Analytics
22. CoStar Analytics
23. CoStar Analytics
24. Jonathan Bach, Biz Journals https://www.bizjournals.com/portland/
news/2021/01/26/bobs-red-mill-leases-milwaukie-oregon.html. 2021
25. Cushman and Wakefield, https://www.cushmanwakefield.com/en/united-states/
news/2020/10/portland-blue-lake-corporate-park-378000-lease 2020
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