FEATURE ARTICLE, MAY 2006

WESTERN INDUSTRIAL UPDATE
Declining industrial vacancies seem to be a constant across the region.
compiled by Brian A. Lee

PORTLAND’S PUSH

Will development pipeline keep things moving?

Momentum. That is the word on the minds of industrial market participants and players in northern Oregon/southwestern Washington as 2006 progresses. With 2005 a record-breaking year for brokers and developers, the market entered this year with a full head of steam. New product is needed in abundance to continue the growth, and therein lies the problem with maintaining the market’s momentum. The development pipeline is relatively dry despite high demand; so the premium on existing product is going up, as are rents.

Trends to watch here are not much different than in every major West Coast market — i.e., tight industrial land supply, high cost of new construction and declining vacancy. The combination is a “perfect storm” that will undoubtedly result in ever higher prices of industrial sales with rents following closely behind. Demand remains high with firms showing a distinct preference for owning versus renting.

Major developers in the market include national firms Opus Northwest, Panatonni Development, Trammell Crow Company and Prologis Corp. Local developers include Specht Development, Wells Development and Pactrust. Prologis increased its holdings during the year with the acquisition of Catellus Development, which had substantial Portland airport holdings like Southshore Business Center. Currently, these firms report high levels of activity, but there is little new product scheduled for completion in 2006.

Led by developers Hinton, Gordon and Panatonni, industrial condominiums are finding some success in this market. Sales prices approximating $100 per square foot make it an intriguing development scheme, especially when fueled by low borrowing rates. Expect to see more industrial condo projects sprout up as the concept becomes known and the resale market gets established.

Rents for industrial shell are returning to 36 cents per square foot per month, after falling during the 2000-2003 period. New construction will require rents to rise to 40 cents for shell, assuming developers maintain their return expectations. Brokers report rising rental rates, especially close-in and in the airport submarket. Sales prices of existing buildings are trending upwards, as demand creates competition for better properties. Investment sales of high-quality industrial buildings price off at a cap rate of 6 percent.

Schnitzer Investment Corp. is selling its Columbia Business Center, a 2.3 million-square-foot industrial center. Located on the Columbia River in Vancouver, Washington, it is ideally situated on rail and water between two freeways. The property is currently 97 percent leased to manufacturing and distribution tenants and has been the subject of real buyer competition at a cap rate of about 6.3 percent. Columbia Business Center has been the beneficiary of several Portland firms leaving Oregon for the tax benefits of Washington.

H.Roger Qualman is an executive vice president and partner at Norris, Beggs & Simpson Companies in Portland.

DIVERSE DENVER

A diverse industrial market piques investor interest.

A number of positive trends are emerging in the Denver industrial market this year, thanks to improving fundamentals, a diverse industrial economy and a labor pool located in close proximity to the city’s industrial submarkets. As a result, investors will look at opportunities to acquire smaller flex buildings and light distribution/warehouse facilities near the urban core, while major institutional investors will continue to acquire large, regional distribution centers near the airport, where more than 224 million square feet of inventory is currently located.

Overall, vacancies have started to decline, absorption is improving and rents have started to rise. However, there are some submarkets, including parts of the northwest Denver metro area, where vacancies are expected to soar above 25 percent. The industrial market’s fourth quarter 2005 vacancy rate stood at 8.9 percent, but is expected to drop to 8.4 percent by the end of this year. At the end of 2005, net absorption totaled 1.58 million square feet, an increase of nearly 25 percent compared to 2004. In 2006, net absorption is anticipated to reach nearly 1.66 million square feet. Overall, rents average in excess of $6 per square foot NNN, but flex space draws an even higher price.

The most active submarket will be East Interstate-70/Montbello, where demand is being spurred by corporations searching for large properties ranging from 50,000 to 200,000 square feet. In particular, these large industrial users will be searching for and developing new ground-up distribution centers close to the airport. Also, REITs and institutional owners, such as Prologis Corp. and First Industrial Trust, will continue to construct similar build-to-suit properties that are elephantine in size, with 24-foot clear ceilings in the 200,000-square-foot range. When the airport was built 10 years ago, it was approximately 15 miles from virtually anything. In the past decade though, the city has continued to grow in a sprawling fashion toward the airport. As a result of this development activity moving eastward, a healthy amount of mixed-use, residential and commercial development has sprung up closer to the airport.

Despite the desire among institutional owners to build big in the East I-70/Montbello submarket, there is significant activity in the marketplace for deals priced in the $1 million to $10 million range, making for a diverse industrial climate. For instance, in the northwest submarket, there is a mix of larger, tilt-up concrete buildings and smaller, office/flex properties. One trend is that office owners are increasingly making the switch to multi-tenant industrial.

Another dynamic is that these industrial areas are fairly close to downtown and residential areas, so they serve as pockets where service industries can thrive. Typically, they are zoned for medium, light or heavy industrial uses, ranging from machine shops to plumbers to call centers.

Brian McKernan and Adiel Brasov are broker associates in the Denver office of Marcus & Millichap.

BIG DEVELOPMENT COMING TO FRESNO

The joint venture of G3 Development and ExTerra Realty Partners LLC recently broke ground on North Pointe Business Park, a 4 million-square-foot, master-planned business and industrial complex in Fresno, California. Located within Fresno’s Southwest Industrial Area and having easy access to state highways 99 and 41, the 230-acre project will offer a range of industrial product, including warehouse, distribution, light-manufacturing and sales-service uses.

 North Pointe’s first phase will cover approximately 70 acres, totaling 1.1 million square feet. Omaha, Nebraska-based Corporate Express Document & Print Management Inc. has become the development’s first tenant, signing a lease for a 110,500-square-foot build-to-suit facility.

Ware Malcomb is designing the massive project, with Target Constructors serving as the general contractor.

— Brian A. Lee

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