Report: Industrial Recovery Slows Down in Q3

PORTLAND-The overall metro-area industrial market recovery slowed down in the third quarter but still posted its fourth consecutive quarter of declining vacancy, according to the latest market report from Grubb & Ellis. Net absorption region-wide fell to 460,000 sf in the third quarter, the lowest total since vacancy peaked at 12.2% this time last year, according to the report. The good news is that half of that absorption occurred in the R&D/Flex-heavy Sunset Corridor, marking the second quarter of relatively strong net absorption for the submarket and affirming belief that the submarket–and the R&D/Flex market in general–is turning the corner.Overall vacancy in the region’s 126.2 million sf of industrial space fell three tenths of one percent to 9.6%. Of the region’s 460,000 sf of net absorption, 217,000 sf occurred in the R&D/Flex market, which comprises some 32.3 million sf, dropping vacancy in the sector from 12.8% at the end of the second quarter to 12.2% at the end of the third quarter. The remaining absorption occurred in the 93.8-million-sf Warehouse/Distribution market, dropping vacancy in that sector from 8.9% to 8.7%.The best performing submarket was the 21.7-million-sf Sunset Corridor, where 208,000 sf of net absorption pushed vacancy down to 12.3% at the end of September from 13.3% at the end of June. Year-to-date net absorption in the submarket is 361,331 sf, the third highest total in the region. However, the submarket still has 2.6 million sf of vacant space to soak up, which is at least one million sf more than nearly every other major submarket. The worst performing submarket was the 8.4-million-sf Beaverton/217 Corridor, which gave back more than 77,000 sf in the third quarter as its vacancy rate jumped from 14.5% to 15.4%. For the year, however, the submarket has posted 308,000 sf of net absorption.The region’s largest industrial submarket, the 22.6-million-sf NE/Columbia Corridor had about 40,000 sf of positive net absorption but, because of new additions to the market, still saw its vacancy rate tick up two tenths of one percent to 8.6%.Rental rates have stabilized in most submarkets, according to the report, but concessions remain generous in high-vacancy submarkets. “It may be several quarters before asking shell rates begin to see any increases,” according to the report.Looking ahead with regard to vacancy, G&E forecasts that the region is on track to close out the year with over three million sf of net absorption and a vacancy rate of 9%. If true, it would be the first time since early 2002 that region-wide vacancy has been so low.On the development front, G&E says 2004 will end up being one of the lightest construction years on record, with just about 1.2 million sf expected to have been delivered by the end of the year. The development pipeline, meanwhile, is beginning to show some activity, with over 900,000 sf now under construction. It is cautious construction, however, as at least 66% of this space has already been spoken for in the form of build-to-suit and owner-built projects.