Ted Aadland was looking to retire.
He owns 18 acres on Northeast 88th Street in Vancouver, and it was his hope to build an industrial park there that would support him and his wife into old age.
Aadland, who co-founded Vancouver bridge-building company F.E. Ward Inc. and now is president of Portland-based Aadland Evans Constructors Inc., drew up a plan for a nine-building light industrial complex near St. Johns Road.
That was then.
“The process takes a tremendous amount of time and money,” Aadland said. “When I first looked at it and started talking about it, everything penciled out.”
But in the last few years, the cost of construction has skyrocketed.
Construction alone averages more than a dollar per square foot on top of land, entitlement and permitting costs.
But regionally, lease rates for industrial space have not increased enough to justify new construction for many developers despite extremely limited vacancy.
In general, new spaces smaller than 10,000 square feet lease for 50 cents on the shell per square foot and 70 cents per square foot of office space.
Larger spaces garner 42 cents to 45 cents on the shell plus 70 cents per square foot for office space.
Depending on the type of industrial space and who you ask, vacancy is less than 3 percent or 4 percent. Second-generation spaces may lease for much lower.
“This is the tightest market I’ve seen since I came here in 1991,” said Dave Brown of Columbia Commercial Properties. “There aren’t a lot of options out there for tenants.”
For this reason, construction of owner-occupied buildings has been far more popular than speculative construction in Clark County for the past decade, said Bill Connelly of Eric Fuller & Assoc.
Aadland is waiting to get his development review application back from the county and is unsure where he’ll go from here.
Because he’s invested so much in the project already, he could sit on it until construction rates stabilize. On the other hand, he could get it over with before costs escalate further.
Martin Russell, owner of Westside Concrete Accessories, which has locations across Oregon and in Vancouver, is in the same boat.
Along with adding a larger warehouse for the company to occupy at the Vancouver location, 11412 N.E. 76th St., Russell planned to add a nearly 12,000-square-foot speculative warehouse to the property.
Now those plans are on hold.
“We’re being optimistically cautious,” Russell said. “We’re going to wait and see what the market does. Just like everybody else.”
Proceed with caution
Bryan Halbert, vice president of Schlecht Construction, has backed away from a few speculative building projects because of lagging lease rates.
“The cost to build exceeds the ability to pay for it in the current rents,” he said. “Unless you have a lot of cash to build with or you’re willing to risk that the rates are going to go up, it’s hard to make the numbers pencil.”
Owner-occupied projects, however, are ideal because the mortgage is just a small fraction of a company’s entire operating costs, Halbert said.
“For long-term thinkers who want to hold onto a building for five or 10 years, it makes sense,” he said. “But with spec, you can figure you’ll lose money for about five years before lease rates will make it profitable.”
Halbert said he needs rates between 55 cents and 65 cents per square foot to make projects pencil, and said tenants looking to come to this market aren’t willing to pay that yet.
“I get a lot of calls from people wanting to build, but we don’t spend much time on the project because financially, it doesn’t make sense,” he said.
Although it is a slow process, lease rates are edging up, said Garret Harper of NAI Norris, Beggs & Simpson.
Renewal rates are starting to bump up as they come due, and as that happens, overall lease rates will follow.
Unique to this market, many owners of second-generation spaces are willing to lease at below market value, which tends to keep lease rates low, Harper said.
Clark County’s market is small enough that institutional players with deep pockets tend to stay away, leaving it open for local investors – who in this market, tend to lay low.
“When institutional investors look at Clark County, they see it as a distinct submarket,” Harper said. “They’re not as comfortable with this market as they as they may be with others in Portland proper. In Clark County, we tend to see smaller-scale projects with local owners who recognize the dynamics of the market and are comfortable with it.”
Taking the risk
Despite the risks of speculative construction, there are some developers starting to build.
Construction is under way at the Barberton Industrial Park, near Northeast 72nd Avenue and Northeast St. Johns Road.
Barberton – a more than 150,000-square-foot warehouse with two smaller light industrial buildings – is being developed by Portland-based Andersen Construction.
Vice President Bob Durgan said the company bought the 16 acres the park will sit on several years ago at half what the land would cost today.
There are no tenants yet, but market inquiries indicate a significant number of users looking for spaces of at least 25,000 square feet, which are especially hard to come by in this area, he said.
“The economic question still is embedded in the rent-shift paradigm question,” Durgan said in an e-mail. “If the market conditions remain strong, our outlook looks good. If vacancies increase, we may need to make certain adjustments.
“Currently, we feel we have a perfect location for a long-term distribution center location.”
A third building is under construction at Salmon Creek Industrial Park, at Northeast 10th Avenue and Northeast 144th Street. In the future, developers Westland LLC hope to have four buildings.
The developers had to be creative in hopes of making the project pencil with current rates, said Brown of Columbia Commercial Properties, which handles the park.
They have added a second mezzanine level to the building, which will have space for four tenants, to add square footage – and rent – to the building.
Brown said the project is risky in terms of profitability.
“We’re not planning on losing money, but the margin is very thin,” he said. “The risk is there, but it’s quantifiable.”
Prime time
“Vancouver is out of prime industrial land,” Halbert said. “Vacancy rates are extremely low, but what’s left over on the market doesn’t fit most tenants’ needs. It’s not prime.”
All of the land at Ridgefield’s Union Ridge is now under contract, although a few of the potential buyers of the last parcels have yet to close, said John Crist, a partner in Union Ridge.
United Foods International, a distributor of organic food products, has a building currently under construction, as does Ideal Foods. Vancouver Sign Co. and ABC Trucking Co. now own parcels there but have yet to start construction, Crist said.
Filling the park has been slower than he expected, but activity there has ramped up quickly because of the availability of shovel-ready dirt, which is a precious commodity south of Exit 14.
About 75 percent of the tenants there are owner-users and 25 percent is speculative. Three parcels are ready to close for speculative space, Crist said.
Parcels have sold for between $4 and $5 per square foot.
There are five shovel-ready parcels available at Commerce East Industrial Park in Battle Ground. Trail Tech built and is occupying one building there, and there are no speculative buildings planned for the park, said Linda Thomas of The Management Group.
The park sits about one block southeast of Battle Ground Village, and land sells for between $4.50 and $5.50 per square foot.
“When there are fewer choices, we risk turning business away, and I believe that is already happening,” Halbert said.
Clark County commissioners are in the final stages of considering changes to the county’s urban growth boundaries, which could add industrial land. But Harper said just calling land industrial doesn’t make it marketable.
“It’s got to have transport access and a utility structure, and there are costs on both the land and the full development – permitting, entitlement work and construction costs, which are going up,” he said.
As for whether there is a market for added industrial, Durgan said this:
“There’s always a market for it, but you have to be able to stand up and do it. It’s a staying-power issue. This is not a market for a one-time player who wants to do it one piece at a time.”
ON DECK
Despite the risks of speculative construction in the current market, several projects are under way in Clark County:
Sifton Industrial Park
85,000 square feet
9317 N.E. 131st Ave., Vancouver
Barberton Industrial Park
Approx. 200,000 square feet
Off Northeast 72nd Avenue near St. Johns Road,
Vancouver
Salmon Creek Industrial Park
Adding more than 30,000 square feet
Intersection of Northeast 10th Avenue and Northeast 144th Street, Vancouver
There are also two owner-occupied projects under construction at Northeast 127th Avenue Business Park, south of Fourth Plain Road on Northeast 127th Avenue, and several at Union Ridge in Ridgefield.
