91ÊÓƵ

The first large speculative industrial development in the Portland area in six years is taking off.

Capstone Partners LLC’s 833,360-square-foot PDX Logistics Center, now under construction near Portland International Airport, at first will include two buildings totaling 491,200 square feet. No specific tenants are lined up; however, the market has few large, Class A industrial facilities, and Capstone officials believe demand for such spaces will increase.

“There’s very little high-quality, state-of-the-art industrial space in the whole region over 250,000 square feet,” said Chris Nelson, a principal at Capstone Partners. “… There will be other projects coming to market, and our belief is that this will be the first one out.”

In 2003, Nelson almost fully negotiated a ground lease with the Port of Portland to develop the 26-acre property where phase one of the PDX Logistics Center is being built; however, other businesses got in the way. At one point, Bechtel Corp. proposed a retail development for the site; at another, the U.S. Postal Service considered moving its headquarters there. Neither possibility panned out.

Meanwhile, Nelson kept a watchful eye on the property and eventually approached the port again about a potential industrial development. The two parties signed a ground lease contract last year, and Capstone last week made the first $1.86 million payment on that 50-year lease (it will make the remaining 25 percent payment next year).

On Friday, Capstone also received its $17.25 million construction loan from Key Bank Real Estate Capital. Equity for the approximately $30 million project is coming from San Francisco-based PCCP LLC, the same group Capstone is partnering with on its Grant Park Village development in Northeast Portland.

Nelson said debt and equity providers are ready and willing to invest in well-located industrial projects, but those with capital are pickier about location. The PDX Logistics Center is being built near Portland International Airport, TriMet‘s MAX line and Cascade Station.

“If there’s a better site out there you’d be hard-pressed to find it,” Nelson said.

Paul Breuer, a senior vice president at Colliers International, and colleague Jerry Matson are handling leasing for the development. Breuer said early interest from prospective tenants has been positive – some companies could absorb the space three to four times over.

“The market has changed a lot and you really need to know what’s going on,” he said. “That’s why I’m saying that we’re in a critical shortage of good quality, larger spaces.”

According to a Colliers report, industrial vacancy in the Portland market increased from 6.4 percent to 6.8 percent in the second quarter of 2013. Class A vacancy in particular jumped from 8.4 to 12.9 percent.

Breuer said that is because numerous transactions in the works weren’t finalized before the end of the quarter. For instance, DHL‘s renewal of a 109,000-square-foot space on Airport Way was signed on July 1. Also, although Georgia-Pacific reduced the size of its space at the Rivergate Corporate Center II from roughly 600,000 square feet to 400,000 square feet, Bridgestone-Firestone leased the approximately 200,000 square feet left over after the quarter closed.

Colliers reported that year over year, industrial vacancy decreased two percent, while rents increased 9 percent. In the previous year, rents increased just 1.6 percent.

“The market is improving, rent is going up, the amount of pre-rent is going down, and the number of choices if you want 150,000 square feet of good quality space is absolutely minimal,” Breuer said.

Meanwhile, greater shipping activity is creating a need for distribution centers. Notwithstanding a labor dispute that slowed shipments, the Port of Portland has seen a steady increase in the number of containers it imports.

Nelson said Home Depot recently opened a distribution center in Salem, but there’s no reason it couldn’t have been in Portland. He added that he expects the development of millions of speculative square feet in Seattle to spill over here. Capstone is familiar with such projects. In 2007 the company completed its speculative, 729,150-square-foot Bybee Lake Logistics Center; it’s now 100 percent leased.

Joe Mollusky, real estate program manager for the Port of Portland, said Capstone’s PDX Logistics Center is just the tip of the iceberg.

“We have seen more activity from some of the larger users that are circling our market and the northwest,” he said. “So really Capstone will be ahead of the market and ready to provide early, state-of-the-art space for distribution or manufacturing users … Certainly, this is the first large spec project we’ve had in some time; however, we have interest from other developers in our properties. I can’t say more than that now, but we expect to see more activity in the future.”