— By Kenny Houser and Mike Hale, Principals, Capacity Commercial —
The industrial real estate sector has experienced a noticeable deceleration with a decline in leasing and sales activities. This trend is particularly evident in Portland where commercial property sales transactions have been steadily decreasing. There was a quarter-over-quarter decline of almost 29 percent in the second quarter of 2023, resulting in a sales volume of $3.4 billion, the lowest recorded since late 2014.
The Federal Reserve’s decision to pause its rate hike campaign in response to inflation concerns has impacted the market. With borrowing costs fluctuating, the disparity between buyer and seller expectations has created challenges in determining agreeable property valuations. Simultaneously, leasing activity has also slowed, indicating a return to normalcy in Portland’s industrial market. Total deal volume in the first quarter of this year reached about 1.7 million square feet, a 35 percent decrease compared to the average of 2.6 million square feet per quarter over the previous two years.
Despite the slowdown in leasing, the limited amount of industrial space under construction in Portland is expected to maintain a balance between supply and demand. The current construction activity accounts for 1.1 percent of the total inventory, less than half of the national average. Developers are cautiously selecting sites due to factors like geographical constraints, resulting in a 20 percent decrease in construction starts during the first quarter of 2023 compared to the 10-year quarterly average.
Consequently, vacancy rates are projected to remain relatively stable, ranging from 3 percent to 4 percent. This is well below the metro area’s historical average of 6.5 percent. Certain submarkets on Portland’s westside, such as Sherwood, Tualatin, Sunset Corridor and Hillsboro, are expected to remain particularly tight. This is driven by the favorability of owner-occupied data centers and the strong presence of Intel, which contributes to demand for specialty components manufacturing and employment opportunities.
Rent growth in Portland is anticipated to be around 6 percent annually, lower than the recent peak but comparable to the 10-year average. However, the cooling U.S. economy may further temper rent growth in the upcoming quarters. Unlike other major U.S. markets with significant speculative construction pipelines, Portland faces minimal risk of a sharp decline in rent growth due to its consistently low vacancy rate, providing stability and favorable conditions for investors and tenants.