Q2 2021 Portland MSA Industrial Report

Olympics version of our regular report features podium winners and losers

"If you fail to prepare, you're prepared to fail." - Mark Spitz, 9-time Olympic Champion.


With the backdrop of the spirit of the Olympics around us, we've put together this report to highlight the second quarter industrial market report. Industrial real estate nationally has been the winning team since Covid decided to interrupt our lives. Yet like all things, there are nuances to the asset type that warrant further discussion. So in honor of the Olympic athletes, here is our podium in the Industrial asset class!


Bronze metal - Manufacturing


It is said that high tides raise all ships, but sometimes those ships get stuck sideways in canals. The sight of the Evergreen container ship blocking the Suez Canal was a visual taste of what is occurring around the world with supply chain issues. Increasing costs for transportation, raw materials, and labor shortages have put a damper on the manufacturing sector's rebound despite increased consumer spending on durable and non-durable goods.

The Institute of Supply Management's Manufacturing Index fell to 59.5 in July of 2021, the weakest in 6 months, and below forecasts of 60.9 (shown above). This continued a two month slide as labor challenges, along with inefficiencies in supply chain and infrastructure, were cited as major disruptors in the sector. Whether these issues correct themselves in the short-term are hard to determine, but infrastructure problems are hard to correct overnight. Locally, manufacturing hiring has slowed and showed a weaker response to the Covid pandemic than transportation and warehousing despite record job openings. The graph below shows the weakness in the manufacturing sector hiring to date compared with job changes during the Great Recession. There appears to be a long runway for manufacturing jobs to return to pre-Covid levels.


Despite the challenges on the business side, manufacturing facilities remain coveted targets for investors, especially with established tenants, strong amenities and access to transportation routes. With manufacturers absorbing additional costs in raw goods and labor, it will be interesting to see how much more tenants can take in terms of rental increases. Overall, however, this subcategory remains on the podium and hopes to surge ahead in the future.


Silver medal - Warehousing/Distribution


We talked about the resilience of the warehousing and distribution sector in last quarter's report, and many of the same truths apply to the new data. E-commerce is driving the truck (so to speak) with sales increasing 39% in the first quarter of the year compared to the same quarter in 2020. Now every 1 in 5 dollars spent in retail is online purchasing. This trend is unlikely to reverse and only shows the underlying strength in both large logistics factories and smaller last-mile facilities. Even supply chain issues are driving square footage growth as companies move to "just-in-case" demand to ensure that consumer products aren't delayed. All of this culminates in strong labor and rental growth in the sector. Here's a chart to compare to the manufacturing sector above:

The job growth in transportation, warehousing and utilities stands in stark contrast to the anemic manufacturing growth. These strong fundamentals are driving investment returns, based upon demand-side fundamentals. NCREIF's Property Index (NPI) returns for the western region took off in the second quarter and show healthy returns in the sector:

Furthermore, a recent report by JLL stated that there is currently need for an additional 664 million square feet of warehouse space nationally, which by my calculation means that industrial isn't going anywhere soon. Locally, news broke that Amazon is about to begin construction on a 3.8 million(!) square foot facility in Woodburn and be completed by 2023 adding approximately 1,500 new jobs to the area. Woodburn and Salem should benefit greatly from this investment. Industrial is here to stay for a while...but good luck finding deals! Compression in capitalization rates and voracious competition remain barriers to entry.


Gold Medal - Cold Storage Facilities


It could be said that cold storage should be included in with warehousing and distribution, but much like manufacturing, the buildings and attributes are much different than traditional logistics buildings. Cold storage requires increases in power, floor drains, and differing height/sprinkler requirements. Additionally, some storage facilities, particularly those dealing with frozen storage, require thicker foundation pours and specialized docking. This means scarcity!


Cold storage does benefit from some of the same e-commerce drivers that have propelled traditional retail as consumers begin to shop for groceries online, and general disruption has changed supply chain. Add into the fact that cold storage facilities were called upon to house vaccines that were very susceptible to temperature changes and you can see how the subsector took off at the beginning of the year. According to a recent report, the global cold chain is expected to grow at nearly 13% in 2021 compared to 2020. There are headwinds for the market including rising operational costs in utilities, labor and real estate, but the US remains undersupplied in this product type overall.


Congratulations to all of the medalists on a great year which continues to grow and attract investors from all over the world! Before we go, some local Portland MSA stats:


  • Rentals increased approximately 2.8% from the previous quarter and sit at approximately $0.74/psf/mo NNN on a weighted average.

  • Vacancy decreased from the previous quarter to around 4.5%. This is still higher than compared to Q2 in 2020, but that is mostly due to new deliveries.

  • Notable sale: 5858 NE 87th Ave, Portland. The Dannon-YoCream production and cold storage facility traded for around $160/psf.


About the author:


Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty Advisors specializing in portfolio and asset management for high net worth clients and institutions. He is also a faculty instructor for the CCIM Institute, teaching professionals globally in the CI-102 Market Analysis Core Course.


For more information, reach out to michael@duckridgerealty.com.

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