— By Keegan Clay, Executive Director, Cushman & Wakefield —
The Portland metro industrial market is well poised for investment and rent growth into 2024, despite an increase in sublease space coming to market.
Portland has experienced many great trends, particularly in the past few years, including year-over-year double-digit rent growth, compressed cap rates, positive net absorption (occupancy growth), strong tenant demand, all-time low vacancy at 2.5 percent and land prices tripling in a short timespan. Such movement has led to increased competition and investment in the Portland region.
We have seen an increase in sublease space hitting the market over the past five months to the tune of more than 2 million square feet. The majority of this relinquished space has stemmed from just a few users. Many of these subleases are a result of acquisitions with companies looking to increase efficiencies by eliminating redundancies. Some industrial users have consolidated out of market, including a major home goods business (648,000 square feet), while others have grown their real estate position in Portland. This includes a leading B2B electrical and industrial distribution company (293,000 square feet).
Year to date, we have yet to see any of the larger 80,000-square-foot-plus spaces lease, although overall activity is good. We do expect a portion of the larger availabilities to lease up by the end of the year as long as the space is functional, well-located product.
Despite an increase in sublease availabilities coming to market, rental rates for sublease and new construction spaces remain high for Class A space. Many listings are asking north of $0.80 per square foot, per month net on the shell. We believe these elevated rents are a function of low market vacancy, coupled with increased construction costs. The result is new construction shell rates that often have to be higher than $0.90 per square foot to pencil. Rising construction costs rising and debt placement challenges have also caused many developers to hit pause on new speculative construction. Some are pivoting to build-to-suit development causing limited supply.
All in all, there continues to be healthy demand in the Portland industrial market. Users are seeking well-located, functional product and have not been rate sensitive when identifying these locations. Tenants who choose to remain in the market are renewing at record lease rates for all asset classes.
Looking ahead, the potential addition of even a few million square feet of sublease space online — which would raise vacancy by 200 basis points — would still put Portland’s industrial market at an overall vacancy rate of sub-5 percent. This scenario would simply result in a normalizing industrial market with healthy competition and limited product in metro Portland, thanks to our current low vacancy, healthy occupier demand and minimal spec development.