A Tale of Two Markets – Industrial

Posted In — Market Research | Trend Article

The first quarter of 2020 is a story about two vastly different commercial real estate markets. There was the growth market that basked in the grandeur of 11 years of U.S. economic expansion. Overnight that rosy time was followed by the shock of a disruptive black swan event that virtually halted all market activity as the onset of the COVID-19 pandemic struck in early March.

The impacts were felt immediately, reflected in the reports from across key West Coast markets. Here is a glance of the Q1 2020 numbers, how these markets and asset types fared, and an overview of market statistics, including transaction volume, sales, pricing, cap rates, absorption, construction, rental rates, and reported deals.



The Puget Sound region’s industrial market first quarter results saw the vacancy rate decrease from 4.8% to 4.6% as net absorption hit 943,215 square feet, outpacing deliveries of 251,523 square feet. There was a decrease in sales activity from $179.6 million in Q1 2019 to $98.2 million in Q1 2020, which was primarily due to the increase in the excise tax rate that went into effect on January 1st. There was more than 7.1 million square feet of industrial construction activity in Seattle in the first quarter, with nearly 32% of that space pre-leased and 251,523 square feet was delivered.

The institutional capital market has ground to a halt for Seattle industrial assets. Properties listed for sale have been pulled from the market, and efforts to sell have been placed on hold. Properties under contract have had their due diligence period extended, as the buyers attempt to find some clarity on the situation. Underwriting will be challenged since lenders will want to know where the market rents stand, and at the close of the first quarter, that remained an elusive factor due to the pandemic. Although debt is cheap, borrowers also will be challenged to tap into this source of capital unless the property has a bulletproof rent roll.

Expect to see real estate investors and real estate capital adopt a patient approach relative to their Seattle industrial strategies and focus more on extended views that will likely bridge the effects of the current disruptions.


The Portland industrial market remained active through the first quarter, with a strong development pipeline and demand stemming from a variety of tenants. Rental rates averaged $0.68 per square foot NNN on a blended basis at the end of the first quarter. Additionally, just over 6.24 million square feet of industrial product is under construction, of which 76% is expected to deliver this year. Investment activity decreased in Q1 reaching $217 million in volume, a 54% reduction from the prior quarter.

The Portland industrial market dipped into negative absorption territory in the first quarter, recording a loss of 410,854 square feet. Meanwhile, direct vacancy rates increased 40 basis points year-over-year, ending the first quarter at 3.50%.

Leasing activity in the Portland industrial market dipped from the prior year by 60%, ending the first quarter with a total of 1.5 million square feet signed.

Bay Area

Demand for prime industrial properties continued to rise in the East Bay, driven by a strong overall Bay Area economy. Direct rental rates averaged $1.06 per square-foot NNN, a drop of 5% year-over-year, and vacancy rates rose slightly (50 basis points) from the prior quarter to 5.2%. Development activity remained active in the East Bay, with more than 1.8 million square feet of industrial and flex product under construction, of which 80% is expected to deliver by year-end, and 440,568 square feet of Q1 deliveries.

Industrial absorption fell further in the negative territory in the first quarter, recording a loss of just over 645,000 square feet among all submarkets. Meanwhile, the East Bay industrial market experienced an uptick in leasing activity, ending at 3.09 million square feet. Compared to the previous quarter, activity jumped 28% and increased 45% year-over-year.

Investment activity slipped slightly in Q1 to $157 million in volume, down 50% from the prior quarter and 36% year-over-year. The average price per square foot fell minimally (2%) from Q4 2019 to $181 per square foot, with average cap rates rising 80 basis points to 4.8%.

Inland Empire

The Inland Empire industrial market did not show any slowing as market fundamentals held steady in the first quarter. Tenant movement across the metro reported positive once again as Inland Empire remained one of the most sought after industrial markets in the country. Additionally, steady demand contributed to the rise of e-commerce and 3PL company expansions throughout the market have continued to push rental rates above post-recession highs.

More than 5.2 million square feet was delivered in Q1, with an additional 20.7 million square feet under construction. Big box warehouses account for more than 64% of the construction pipeline, as some companies continue to expand their warehouse footprint and refine their logistics channels.

Despite the steady inflow of new supply entering the market, direct vacancies have not experienced any major increases. In fact, vacancies fell 20 basis points from the previous quarter to conclude at 4%. Direct vacancy levels in Inland Empire West continue to be the lowest, ending the quarter at 2.2%. Conversely, Inland Empire East reported direct vacancies levels at 6.2%, primarily attributed to an abundance of land and new developments continuing to enter the market. Spaces below 50,000 square feet remain constricted as vacancy levels have not surpassed 3% since 1Q 2015.

Net absorption, a measure of market strength, ended the quarter on a high note with 6,116,819 square feet of direct positive absorption. Inland Empire industrial leasing activity experienced a cooling off in Q1 with 228 transactions and a total volume of 8,185,546 square feet. That is down nearly 38% from a year before the market reported 313 transactions and a deal volume exceeding 13.1 million square feet. Regardless, it has not immediately affected rental rates as direct rental rates continued to record post-recession highs but are likely to decline in the coming quarters. Average direct rental rates in the first quarter concluded at $0.73 per square foot on a triple net basis.

At the end of March, more than 2.5 million square feet of industrial space traded hands equating to more than $330 million in deal volume. Currently, buildings are trading at $140.38 per square foot, with cap rates settling at a rate of 5.5%, which are likely to increase moving forward.

Overall, expect the Inland Empire industrial market to remain relatively stable among a more limited group of competing tenants.

Los Angeles

The Los Angeles industrial market continued to improve in the first quarter, reporting low vacancies and average asking rental rates continued to record all-time highs. The quarter also marked 23 straight quarters in which vacancies have not surpassed 3.0%. A remarkable feat as Q1 2020 reported the most construction deliveries in terms of square feet since Q1 2006. More than 2.2 million square feet was completed the first quarter, with an additional two million square feet under construction.

Leasing activity managed to record a strong first quarter with 517 transactions and a total volume of 8,248,388 square feet. This was an increase of 1.44% from a year prior when the market reported 8,131,434 square feet of volume.

Despite the substantial increase in new supply coming online in the first quarter, direct vacancies did not experience significant growth. Direct vacancies market wide concluded the quarter at 2.8%, an increase of 60 basis points from the prior quarter.

More than three million square feet of industrial space traded hands, totaling more than $593.6 million in deal volume at the end of the first quarter. Buildings are currently trading at $203.11 per square foot, with cap rates remaining stagnant at 4.4%.


The first quarter commercial real estate industrial market performance played out against the perplexing health pandemic that inflicted an immense economic and emotional toll on the nation. It will require innovative leaders with a calm head and the vision to see through a time of enormous uncertainty to rise to the challenge. While the remarkable turn of events was unexpected, savvy commercial real estate professionals understand, despite the current uncertainty and damage, that long-term prospects present opportunities. Experts know the disruption caused by stay-at-home orders and the heart-wrenching loss of lives was not brought on by a fundamental market flaw, financial crisis, housing bubble burst, or a dot.com bomb. Thus, markets are expected to rebound since many of the drivers remain. Smart players recognize now is a time to build a strategy that is ready to capture future value.

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