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Industrial land shortage looms

Industrial development is big business

Capstone Partners’ five-building PDX Logistics Center near Portland International Airport has entered its third phase of construction. (Rendering courtesy of Capstone Partners)

Capstone Partners’ five-building PDX Logistics Center near Portland International Airport has entered its third phase of construction. (Rendering courtesy of Capstone Partners)

As residential development begins to show signs of slowing in Portland, industrial development is booming with no end in sight.

Projects totaling more than 3.5 million square feet of industrial space are under construction, according to Jones Lang LaSalle. That will be a major addition, as only 1.1 million square feet were delivered between January and September 2016.

Portland’s vacancy rate for industrial properties fell to only 3.4 percent during the third quarter of 2016, according to JLL.

Users are seeking space in the northeast Columbia corridor, with its proximity to interstate highways and Portland International Airport, as well as the Sunset Highway corridor near Hillsboro and along Interstate 5 south of Portland.

Average rents for Portland-area industrial space grew 16 percent annually at the end of the third quarter, to $0.58 per square foot, according to JLL.

As online shopping has gained popularity, the need for shipping has exploded. To reduce shipping times, fulfillment centers must be located close to consumers. Developers are busy meeting the demand.

Tenants including Amazon, Bunzl, UPS, Logistics Insights Corp., OnTrac and Wymore Transfer signed leases for at least 100,000 square feet in 2016.

PDX Logistics Center III, from Capstone Partners, is under construction near the airport. The third phase consists of two buildings. The first is 134,400 square feet and is scheduled for delivery in early September. The second will be 122,747 square feet, with delivery set for mid-October.

“I wish it was up now, because I think there’s good demand now,” said Chris Nelson, co-founder of Capstone Partners.

The project is in a pre-loading phase on the last building pad.

“The more conspicuous construction will resume again in March,” Nelson said.

Interest has been strong for the space, but leasing remains in discussions for now.

“We’ve had proposals going back to a few users, but we don’t have anything leased,” Nelson said.

A previous phase, PDX Logistics Center II, sold in November to Clarion Partners of New York for $36.2 million. The 355,200-square-foot industrial building was fully leased with tenants UPS and Cummins Inc.

Capstone is in no rush to sell PDX Logistics Center III, Nelson said.

“We aren’t 100 percent committed to holding or to selling it, necessarily,” he said.

A fourth phase, geared toward a large industrial user, is in the design phase, Nelson said. Capstone plans to start on that project in the spring.

The initial phase attracted tenants Gateway Express, a Singapore-based online shipping company; packaging company Ernest Packaging and KeHE Distributors, a food distributor for New Seasons Market and other customers.

Perlo Construction and Mackenzie have been engaged on the PDX Logistics Center projects.

For all of the recent activity, rising labor costs could prove a threat to future industrial projects. Construction employment in the Portland-metro area jumped 10.6 percent for the 12-month period ending in November, according to a report from Christian Kaylor of the Oregon Employment Department. Portland’s construction industry gained 6,100 jobs during the 12-month period.

Competition for construction services is driving costs up too.

“I think there’s going to be more of a challenge making projects work just because costs are up so much,” Nelson said.

The boom in industrial development comes as residential development shows some signs of easing, with rent growth slowing and vacancies rising.

Other industrial developers are busy as well.

Crews are building Vista Logistics Park for Specht Development in Gresham. The business park will have three buildings totaling 732,824 square feet on a 37.42-acre site at Southeast 223rd Avenue and Stark Street.

The largest building will be 494,464 square feet. Two smaller buildings will be 124,420 and 112,940 square feet, respectively.

Perlo Construction is at work on the $61 million project, which was backed financially by New York Life Real Estate Investors, a limited liability company.

Specht purchased the property from the Port of Portland last year for $9.28 million. Capacity Commercial Group is representing the property.

Vista Logistics Park is set to be constructed in one phase and completed in late summer.

In Hood River, Key Development is at work on two industrial projects at the Port of Hood River. Sheppard’s, a tractor and industrial equipment dealer, is building a new dealership on the waterfront that will be completed in spring 2017.

“There’s a lot going on,” said Anne Medenbach, development and property manager at the Port of Hood River.

The port offers easy access to Interstate 84 and shipping on the Columbia River.

Much of the demand is driven by the continued rise of online shopping.

“It’s definitely a driver of demand,” Nelson said. “More and more customers are buying on the Internet. There’s just more demand coming through the system for handling and shipping.”

Amazon raised eyebrows last spring when it signed on for 303,000 square feet at Hillsboro’s Majestic Brookwood Business Park. The online retailer moved into the building on Nov. 1 so that it could operate during the holiday shopping season.

Since then, D.B. Schenker, a German logistics company that works with Intel, has signed on for an approximately 138,000-square-foot lease. Also, an as-yet-unannounced company has taken a 90,000-square-foot space, said Phillip Brown, executive vice president of Majestic Realty.

“The size requirements are increasing,” he said.

Some new tenants are bringing more employees than typical for industrial space.

“Even in some other parts of the Portland-metro market, that’s been a nice bright spot,” Brown said.

Multistory warehouses are a newly emerging trend in the U.S. market that hasn’t yet showed up in Portland.

In November, Prologis Inc. announced that it would build the nation’s first multistory warehouse in Seattle, the Wall Street Journal reported. The three-story, 580,000-square-foot warehouse is scheduled for completion in 2018.

A Prologis spokeswoman did not return messages seeking comment.

Multistory warehouses are common in Asia, and could make sense in dense urban environments as industrial space becomes scarcer. That is the case in Portland, Nelson said.

“There’s not a lot of land,” he said. “There’s a pretty decent limit to the amount of high-quality sites that are available.”

Original Daily Journal of Commerce article