Industrial Keeps on Truckin'
"Ain't nothin' holdin' me back, nothin'
I'll keep right on, right on truckin'
Ain't nothin' holdin' me back, nothin'
I'll keep right on, right on truckin'
Ooh truckin' " -Eddie Kendricks
Ain't nothin' holding back industrial as we cruise through the first quarter of 2021...well except for perhaps some global supply chain issues, cargo ship blockages and some manufacturing sector stumbles. Either way, industrial real estate continues to be the darling of the disco as investors chase limited supply and increasing rental rates across the country. Time to fire up the engines on this quarterly report!
In terms of the four major asset classes in commercial real estate, industrial has been the most resilient during the Covid crisis and still has incredible growth potential as e-commerce trends are here to stay. There is no doubt that the outbreak and subsequent lockdown had major implications for supply chain demands, changes in technology, and long-term structural growth needs. These changes are forever altering how we obtain our goods and services for both industrial and the 'brick-and-mortar' retail markets. Consumers long for quicker delivery times and more access to a wide range of products, which means industrial has had to change how it supplies and delivers those products. Supply chain issues continue to be sticky, however major investments in infrastructure and technology are creating paths for continued growth in the sector. One of the big shifts started a couple of years ago as companies began to reduce warehousing supply, moving more towards a "just-in-time" logistics model in an effort to shave overhead costs and be more nimble to changes in consumer habits. This has put a premium on warehousing that is close in to urban centers and core consumer areas. Yet with that model came some supply chain issues, including limited inventory to adapt to changing consumer demands, more sensitivity to supply chain issues (natural disasters, blockages, etc.), and subsequent long lead times, which negated the concept of getting consumer's things quickly. Companies are now moving to a "just-in-case" model which means a higher need for additional warehousing in the range of 5-10%. A recent Prologis report stated that this change could mean an additional 50-100 million square feet of additional space needed in the next five years nationally. The report also noted that companies are more willing to take on this additional cost if it means having easier access to consumers, since commercial rent only equates to about 5% of total supply chain costs as opposed to 50% of total costs on transportation. These elements coming together mean that there should continue to be steady rent growth nationally and aggressive demand for industrial in strategic locations.
Source: NCREIF Property Index (West Coast Industrial)
Much like the rest of the nation, Portland industrial has risen on the e-commerce high tide with demand continuing to be robust, despite a slight increase in vacancy. Vacancy has steadily increased since the 4th quarter of 2019, but that is mostly due to construction deliveries that were finally catching up to demand.
Absorption was back in the black again posting approximately 250,000 sq feet for the first quarter after having a negative dip in the fourth quarter of last year. Construction is down slightly with about 2.7 million sq feet total in the pipeline. Between absorption and pent up demand, we should begin to see rental rates begin to rise again after a plateau in the previous year. Rental rates on a weighted average posted at about $0.73 /psf/mo on a triple net basis, which are mostly unchanged.
The good news for industrial investors locally is that demand is forecast to increase significantly in the next 12-24 months as the US pulls out of the recession. The bad news is that is becoming increasingly difficult to find many deals that make sense due to the amount of investor interest. Keep on truckin'!
About the author:
Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty specializing in commercial real estate investment portfolios for high net worth clients and institutions, focusing on market, financial and risk analysis. He is also a faculty instructor for the CCIM Institute, teaching professionals globally in the CI-102 Market Analysis Core Course.
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