Latest / Industrial Advisors / Portland Industrial Market Update: Vacancy, Vancouver Growth & The 2027 Outlook

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Portland Industrial Market Update: Vacancy, Vancouver Growth & The 2027 Outlook · Industrial Advisors

• 0:00
  You get someone on the phone from New York or, or out of market, and you're
• 0:02
  not even really talking about the asset.
• 0:04
  You're more just defending Portland and explaining to them it's not on fire.
• 0:08
  It's not, it's not, there's not protests everywhere.
• 0:11
  The, I think the further we get from COVID and the riots and, and
• 0:15
  protests, the better we are positioned.
• 0:17
  But part of it is, is defending Portland as opposed to the asset class
• 0:36
  Welcome to our Industrial Advisors podcast.
• 0:39
  You have Bill Condon and Kyle Bach today hosting.
• 0:42
  We have a great guest, Tom Knecht, out of our Colliers Portland office.
• 0:46
  Tom's a leading broker in our Portland office.
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  Been in the business a little over 10 years and, and doing great things.
• 0:51
  And we're doing a new kind of podcast format these next few sessions, where
• 0:56
  we're gonna be doing an update over the different West Coast markets.
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  And the first one we're gonna start with is Portland, and just kinda giving
• 1:03
  an update of state of the market, what's going on, some of the trends.
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  And so Tom, appreciate you, uh, being our first market that we're gonna
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  cover in Portland and, uh, thanks for joining us today Absolutely.
• 1:14
  Thanks for, for having me on.
• 1:16
  Big fan of the podcast and, uh, happy to join.
• 1:19
  Before we jump into some of the questions, just maybe give a quick
• 1:22
  background on your career- Yeah … what you focus on, and then we'll, we'll
• 1:25
  jump into a few questions for you.
• 1:27
  Yeah, absolutely.
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  So been working as an industrial broker in Portland for 10-plus years.
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  Worked at a smaller boutique shop for about six years, and then
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  came over to Colliers in 2022, and work on a team with Jerry Matson
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  and Brian Yocum here in Portland.
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  Small enough market to cover kind of the, the whole Portland metro area, but have
• 1:44
  a big focus in north, northeast Portland.
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  We do a lot of landlord leasing work, um, a lot of development, but
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  also tenant rep, owner user sales.
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  So we kinda do it all here in the, in the Portland metro.
• 1:55
  Awesome.
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  Well, let's start with, like, how Portland is doing today.
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  You know, the industrial market in, up and down the West Coast is different
• 2:03
  for each market, but certainly we've seen a shift over the last few years.
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  So talk- Yeah … a little bit about where the market is today, and compare
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  that to where it was a year ago and maybe even, like, five years ago when we were
• 2:13
  right in the middle of the pandemic.
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  Yeah, definitely.
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  I would say we're starting to have some more conviction in the
• 2:17
  market, which is, which is good.
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  I think some people are finally starting to return to the leasing activity.
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  We're sitting at 8% vacant today, and five years ago we were at 3.5% vacant.
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  So I think everybody was sort of in the same boat there post-COVID
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  with you couldn't build buildings fast enough to meet the demand.
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  You know, we were 3.5% vacant.
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  The capital market sales were, you know, 5.5 caps or less.
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  Developers were turning away 10-year deals to do a three-year deal to get to
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  a, a, a closer walk and a better exit cap.
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  So it's quite a different market today.
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  But I think we're normalizing now, um, sort of around the, the
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  pre-COVID levels of absorption and leasing activity, and sort of a
• 2:56
  normalization around rental rates.
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  I think it took some time for a lot of, uh, sellers and landlords to realize
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  that those numbers post-COVID were not necessarily realistic, and we're kind
• 3:07
  of finding a, a common ground now, I think, uh, around some of the rental
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  rates and some of the market concessions.
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  Um, it, it's interesting.
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  It's probably the biggest spread in my career that I've seen from, say,
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  Class B, C Northeast Portland product to Class A Southwest Washington.
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  I mean, you could see a delta of maybe 20 or 25% spread in rental rate there.
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  So, uh, you're sifting through a lot of products, and depending on what the
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  requirement is, that can be a very wide array of supply or it can be a fairly
• 3:36
  small window that you're trying to hit.
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  So there's certain pockets that still feel supply-constrained, but overall, um,
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  you know, I would say our, our commodity space is still kind of at 150 to 300.
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  That's probably where you're gonna have the most options on the tenant side.
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  But I would say generally speaking right now, tenant's market, lots
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  of leverage on the tenant side.
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  And being on the landlord side, you have to get creative, you have
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  to be accommodative to tenants in order to, to get some of the,
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  the deals in the marketplace.
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  So I'd say from six months ago, there's a noticeable uptick in
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  activity, uh, even for the summer usually being the slower months.
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  We've seen more tenants in the market, more requirements.
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  I mean, that's all the way down to iOS, to Big Box, to kind of the Middle
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  Bay, which Portland is known for, that 30 to 80, 80,000 square foot space.
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  Um, those guys were some of the slowest to return from the sidelines.
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  So seeing some of those guys back in the market now is good to,
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  to have a little bit of momentum and, and get some leases signed.
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  So there's enough comps in the market now to sort of have a real
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  market and sort of, kind of build from there, I would say Yeah.
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  Would you say that the institutional demand from a capital standpoint ha-
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  is, is starting to, you know, increase?
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  Yeah, I would say.
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  I would say it's still pretty short on the bid sheet.
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  You know, buyers- Yeah … are, are focused probably on bigger
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  core markets right now as, as we return from the slowness.
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  Seattle, IE being at the top of the list.
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  The capital markets data points have just been very thin
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  the past two or three years.
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  We just haven't had too many transactions to point to.
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  A lot of the, the deals that have come to the market just haven't hit the pricing
• 5:08
  and been pulled from the markets, or maybe sold to their capital partner.
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  But we're starting to see some, some activity, and we used
• 5:14
  to have to, to not even…
• 5:16
  You get someone on the phone from New York or, or out of market, and you're
• 5:19
  not even really talking about the asset.
• 5:21
  You're more just defending Portland and explaining to them it's not on fire.
• 5:25
  It's not, it's not, there's not protests everywhere.
• 5:27
  The, I think the further we get from COVID and the riots and, and
• 5:31
  protests, the better we are positioned.
• 5:34
  But part of it is, is defending Portland as opposed to the asset class.
• 5:38
  But I still think that there's, there's, there's investment committees out there.
• 5:41
  There's capital partners that have sort of red lined Portland and said, "That's
• 5:45
  not a market we're going to invest in." But those who are willing to right
• 5:49
  now, I think are getting a good basis.
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  They're met with less competition, and if they like the market
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  fundamentals, then they're having good success right now winning deals.
• 5:57
  So TK, as you look at the leasing market, you've mentioned you're
• 5:59
  kind of heading back towards an equilibrium, which is great.
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  I think a lot of West Coast markets have.
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  But then you mentioned, I think it was the one to 300,000 square foot size
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  range is still pretty soft, which again is a common theme along the West Coast.
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  Yeah.
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  So a soft size segment there.
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  Are there some sub-markets that are performing better than others?
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  Like still some that are soft and s- and maybe some that are, like,
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  really leading the charge in terms of bringing the market back to equilibrium?
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  Yeah.
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  I would say, I would say Southwest Washington is probably our best
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  performing sub-market right now, and it has the most class A new construction.
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  Panattoni's been the bell cow there with new projects.
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  Um, and they have been driving rental rates.
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  You know, we're, we're getting 95 to a dollar a square foot on the shell,
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  whereas North Northeast Portland much more second generation class B, C products.
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  Lower basis, but you're doing deals in the 70, 75 cent range on the shell.
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  So I would say you look at na- the national map and
• 6:53
  who has strong rent growth.
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  Portland is usually still in the positive rent growth s- side of
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  things, but I think once you look with a magnifying glass and you look
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  at the sub-markets, there's certain sub-markets that are driving rental
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  rates and there's certain sub-markets that are probably going backwards.
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  So similar to, to Seattle's probably Kent Valley, where it's a lot of
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  your 3PL logistics tenants that have a lot of that class B, C product.
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  That's where we're seeing rent plateauing or, or going backwards in some case.
• 7:19
  But I'd s- I'd say the new construction in Washington County You know, Hillsboro area
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  out by Intel and Clark County, Washington and Vancouver, those sub-markets are still
• 7:30
  driving rental rates, and we're seeing, seeing good rent growth in those areas.
• 7:34
  So talk to us a little bit about just Portland in general.
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  You know, it has a bit of a reputation for be- being a, like, kind of a
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  challenging place to do business.
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  How is Portland from a business-friendly standpoint?
• 7:48
  Yeah.
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  I think, I think that's probably the biggest question for folks.
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  And I think the, the confusion comes from city of Portland, Multnomah County
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  versus the three county area around the city of Portland, Multnomah County.
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  You know, our office, office vacancy downtown is one of
• 8:02
  the highest in the country.
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  We're 35, 40%.
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  I think we have been one of the losers in the work from home era.
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  And I think given our lifestyle here and probably the more laid back
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  nature, a lot of those companies have not returned to the office.
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  So that's been unfortunate for the urban core.
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  But our, our, our tax structure is one of the highest rates in the country.
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  And so it's, it's, it's a challenging place to do business, but that's
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  much different than the three county area around the city of
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  Portland where taxes are less.
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  You're still able to benefit from a top 25, you know, metro.
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  People are still buying goods.
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  They need medical supplies.
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  They need food and bev, construction supplies.
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  You know, you're still able to benefit from being in this market
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  without actually occupying real estate in the city of Portland.
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  So, it's too bad.
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  I get, I get FOMO.
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  I'm sure you guys get FOMO from our friends down in Texas or
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  Tennessee that are They're rolling out the red carpet- Yeah, for sure
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  for these manufacturing companies, and I wish we would do the same
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  thing, but unfortunately that's just not the way we're geared.
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  So it takes strategy when you're looking at a new market, e-
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  especially when you're, when you're a new to market requirement.
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  That's really where it's gonna be, "Okay, let's maybe find an area in the
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  three county area around Portland."
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  Whereas the folks who are here in Portland, they know the
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  challenges of doing business here.
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  Maybe they have to be here for, for some reason, to have a flag.
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  Maybe it's near, near the ports or the airport or, uh, a main thoroughfare.
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  Obviously suppliers, customers come into that equation.
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  But new to market requirements more than likely are trying to locate
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  themselves outside Multnomah County.
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  Yeah.
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  So actually to build, uh, to build off that, when you guys are talking to
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  corporate occupiers who, I guess if you zoom in, are looking between Portland
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  and Vancouver, Washington, or maybe as you zoom out and they're just considering
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  a West Coast hub, what are the reasons that somebody would choose maybe either
• 9:52
  Vancouver over Portland or vice versa?
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  And then as you zoom out and look at the West Coast, why are they
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  choosing Portland over, say, Seattle or San Francisco, if that, if you've
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  heard that or had that conversation?
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  Yeah, I think it's really interesting.
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  I think usually a lot of times people are Portland or Seattle.
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  Sometimes you'll see people that need DCs in, in both locations.
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  And so, yeah, I would say when you're looking at the market, being in Southwest
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  Washington is, is beneficial from a tax standpoint, still a good labor, um,
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  story there, and you're still able to access the Portland metro pretty easily.
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  So it's not like you need to be in Portland proper, unless for some reason
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  there's, you know, a good land basis or a good rental rate story, or maybe you
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  need to be next to a customer or supplier.
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  But if there's no driving factor like that and you're just looking kind of
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  macro level, the taxes are really gonna be a big issue, I guess, or deterrent
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  for companies wanting to locate here.
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  So there still will be companies that need to be here in Portland proper,
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  but it's certainly becoming very appealing to jump across the river or
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  go to, you know, one of the suburbs.
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  Yeah, that's, that's interesting.
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  You know, when I got into this business 20-plus years ago, Sumner was getting
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  developed, Puyallup, Fife, Tacoma.
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  And then As my career has gone on, everything's just continued to push
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  further and further south, right?
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  And you went into Lacey and DuPont, and now we're seeing, you know, Windlock,
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  Centralia, Chehalis, Vancouver, all these markets being built out basically,
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  you know, from Seattle to Portland.
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  Mm-hmm.
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  What's the activity… Are you guys seeing a lot… 'Cause I know you guys
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  come over into Washington, you know, as we get near the, the Oregon border-
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  Yeah … and know those markets well.
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  So talk a little bit about the activity that you're seeing a little
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  bit further on, you know, as you cross the border and get into the
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  Washington side, into Vancouver- Yeah
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  Centralia, Chehalis.
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  Yeah, absolutely.
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  It's really interesting.
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  When I entered the business in 2015, all the development was
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  happening in Northeast Portland.
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  You know, that was where the spec market was.
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  It was great.
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  Airport Way.
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  And, um, you know, I think a lot of the large chunks of land have been developed.
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  Obviously, the tax, uh, structure has changed, but I think anything
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  along the I-5 corridor is viable, especially if you can get good land
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  basis and build a big box, right?
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  We're seeing, obviously Vancouver is the closest sub-market to Portland,
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  but you're seeing Ridgefield and now Woodland and now Kelso.
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  I mean, Trammell Crow just built 1.2 million spec, as you guys know.
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  They were very reluctant to demise that building.
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  They said, "Let's build 1.2, we'll be one of one on the West Coast." And their
• 12:26
  thesis worked, Amazon leased the building.
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  So I think, I think it's very interesting.
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  We don't see as much the corporate client saying, "We want to be in
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  the middle of Seattle and Portland."
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  I still think it's quite a bit of a drive time to service both
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  markets from that location.
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  I think you'll probably see more folks want to have a regional DC in
• 12:43
  both markets or maybe a bigger DC in Seattle and a smaller one in Portland,
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  just based on the drive times.
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  So it will be very interesting to see, but I mean, if you can build a million
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  square feet along I-5 and you have a jurisdiction who's maybe more open to
• 12:59
  development and easier to deal with, I think you'll continue to see that.
• 13:02
  There haven't been too many data points, but I think Trammell Crow with a big
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  behemoth like Amazon maybe can support.
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  And, and obviously Kelso is more on the Portland side, so they're
• 13:10
  probably servicing more of Portland.
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  Um, Windlock, you get to be kind of more centrally located.
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  So it'll be interesting to see what happens over the next, you know, five,
• 13:18
  10 years from a development standpoint.
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  I also think- The midpoint between Portland and San Francisco is kind
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  of an interesting thesis as well.
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  You look at that, like Grants Pass, Medford area along I-5 South,
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  that's kind of a middle point from a drive time standpoint too.
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  So you can get a good land basis down there, you know, a
• 13:35
  tax-friendly environment, and you can build a million square feet.
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  You, you might see a build-to-suit down that direction as well.
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  Um, you know, Salem is about 45 minutes south of Portland.
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  You've seen some build-to-suits down there with Dollar General
• 13:47
  and GENSCO, and we're seeing some data center activity down there.
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  So I think proximity to I-5 is key.
• 13:53
  You know, if you can find land along I-5, that's gonna be a big driver.
• 13:56
  Yeah, it's interesting.
• 13:57
  Us in Seattle, we haven't probably heard too much about that midpoint between
• 14:00
  Portland and San Francisco, so that's an interesting topic to think about.
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  But so, and last question, great job, TK, as always.
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  Um, but looking at the rest of the year and into 2027, what are you guys kind
• 14:11
  of forecasting for the next 18 months?
• 14:14
  I'm, I'm sure, you know, we're brokers, so we're gonna be positive
• 14:17
  and, and, and forecast improvement.
• 14:19
  But if, if that is your forecast, then give us some reason why and,
• 14:22
  and some, some kind of, you know, reasons for optimism for Portland.
• 14:26
  Yeah, definitely.
• 14:27
  I, I think, you know, there's hardly any new construction starts.
• 14:30
  Like, similar to across the country, spec construction has really tampered down.
• 14:34
  We're not seeing as many new starts.
• 14:36
  Pannatoni's still active and, and looking at new deals in Southwest
• 14:39
  Washington and other sub-markets.
• 14:41
  So you'll continue to see, you know, good real estate, good locations.
• 14:44
  You'll still see developers wanna move forward.
• 14:46
  Um, but our construction supply has turned down quite a bit.
• 14:49
  It's almost off right now, which is good because we have a lot
• 14:52
  of supply to churn through.
• 14:53
  So I don't think you need necessarily booming demand to get
• 14:57
  our market back to equilibrium.
• 14:58
  I think you need to, to have some returning demand to,
• 15:01
  to return to equilibrium.
• 15:02
  But I think it will help just to not be building so much product.
• 15:06
  And also from, like, a capital market standpoint, again, I think the farther
• 15:09
  we get from COVID era and the protests and sort of the negative spotlight
• 15:14
  that you're reading about in the Wall Street Journal and New York Times,
• 15:16
  the better image Portland becomes.
• 15:18
  And we've had, you know, clients come to town recently or over the past year,
• 15:22
  and they're like, "Oh my God, it looks so much better here. I'm not seeing any
• 15:25
  tents. I'm not seeing any issues." I'm like, you know, it, it's great to be
• 15:28
  two or three years removed from 2023 when a lot of those issues were … It
• 15:32
  was hard to a, it was hard to avoid it.
• 15:34
  It was, uh, the elephant in the room.
• 15:36
  Now you come here, there's activity downtown, there's people
• 15:39
  going to lunch and happy hour.
• 15:40
  I think we'll still be probably one of the, the last markets to get some of that
• 15:46
  investment, that capital, um, investment.
• 15:48
  But, um, like I said earlier, those who are willing to buy in Portland
• 15:53
  are met with less competition, pretty good basis, and overall
• 15:56
  pretty good market fundamentals from rent growth, vacancy standpoint.
• 16:01
  So I think, you know, I'm, like you said, cautiously
• 16:03
  optimistic moving into next year.
• 16:05
  I don't think we're gonna go back to, to '21, '22, but I think we'll
• 16:09
  find a good equilibrium and start to have a little bit more activity, so.
• 16:14
  Well, once… I mean, I think you nailed it.
• 16:16
  Once happy hour comes back- Yes
• 16:18
  everything's back.
• 16:18
  You know what I mean?
• 16:19
  Exactly.
• 16:19
  Like, everyone's… Yeah, yeah.
• 16:21
  Yeah, exactly.
• 16:21
  That makes life better for everyone.
• 16:22
  Give me, give me a rooftop, a rooftop bar somewhere.
• 16:24
  It helps when the weather's nice, you know?
• 16:26
  For sure.
• 16:26
  The, the, the Portland, uh, the rain doesn't, doesn't help.
• 16:30
  But, you know, I think also, too, Portland's a low-cost, low-cost
• 16:33
  alternative on the West Coast.
• 16:35
  You can buy a house here, you can raise a family.
• 16:37
  Most people in our industry live outside of city of Portland,
• 16:40
  Multnomah County, in the suburbs, but it's only a 15, 20-minute drive.
• 16:44
  So it's a pretty accessible metro, and I think it's still, still a good place
• 16:48
  to live, place we wanna be long term.
• 16:49
  And I think the people that are in Portland now are part of the reason.
• 16:54
  They want to see it succeed.
• 16:55
  They wanna see it get back to its heyday.
• 16:57
  The people that were pessimistic and didn't believe in the story
• 17:00
  I think have already left.
• 17:01
  And so we're banding together.
• 17:03
  We're, we're, we're constantly defending it, but you come here,
• 17:06
  it's a great place to live.
• 17:07
  We'd have a great time.
• 17:08
  I welcome anybody to come out here, have a weekend.
• 17:11
  We'll go out to dinner, show you around a little bit, and you'll see
• 17:14
  kind of the natural beauty out here.
• 17:16
  As you guys know, Pacific Northwest is a great part of the country.
• 17:20
  For sure.
• 17:20
  My pleasure.
• 17:20
  Well, that, that is, uh, a phenomenal overview.
• 17:24
  And, uh, I do think there's reason for optimism there overall just in the sector
• 17:29
  and in, and in Portland and Seattle.
• 17:31
  So- Yeah … thanks for that overview.
• 17:33
  Great job, Tom.
• 17:34
  You bet.
• 17:34
  Appreciate you joining us, man.
• 17:35
  Good job.
• 17:36
  For sure.
• 17:36
  Thanks, Bill.
• 17:37
  Thanks, Kyle.
• 17:38
  Thanks, Tom.