Many users of industrial space have delayed making long-term decisions about their space needs amid the economic uncertainty of the past few years. However, companies these days are generally feeling more confident about their future. Many brokers believe now is a perfect time for tenants to assess their commercial real estate situation and rightsize because they can obtain flexibility and options in negotiations.

Nationally, the manufacturing industry has seen strong improvement in recent months. Manufacturing production rose 0.7 percent in January, and December showed the fastest growth in orders in five years. Portland’s industrial market is beginning to reflect this positive trend, with vacancy falling in many submarkets and absorption increasing.

A few submarkets have shown considerable improvement. Tualatin has shown strong growth and an approximate 4 percent vacancy rate, and very few available spaces greater than 25,000 square feet.

Northwest Portland has also stabilized, and with lease rates escalating and absorption trending positively, a clear shift in negotiating leverage from tenants to landlords has begun. The Rivergate and Airport Way areas in North/Northeast Portland are improving as well. The lack of development in the past few years has limited supply, and we’ve seen positive absorption, steady lease rates and landlords sensing a resurgence in activity and demand.

However, some submarkets are still feeling the lingering impact of the recession. Wilsonville, which formerly was the darling of the industrial market because of its proximity to I-5, has continued to struggle. Users have choices of large spaces in the former Nike facility and old Hollywood Video and G.I. Joe’s warehouses, and Wilsonville Distribution Center. Spaces from 40,000 to 400,000 square feet are available, and are in some of the best locations in the metro area from a transportation standpoint.

While the economy was poor, many industrial space users downsized, subleased space or took a “wait and see” approach to see where the economy was going before making any significant decisions. Now that they have weathered the downturn, they can assess their commercial real estate position.

Tenants should contact a commercial real estate broker – especially one with a respected industry designation such as CCIM or SIOR – who can help them with analysis to reduce occupancy costs and overhead and create efficiencies, or rightsize.

So, how does one rightsize? A good first step is to assess space needs. Hire a good broker who will take you through the marketplace in an effort to ascertain whether current space is at a market rate, comparing it to the competition and like kind spaces. This approach allows tenants to assess all options, making informed decisions based on economics and market conditions.

Many companies want the flexibility to expand, and they tend to over-commit to leasing additional space to meet expected future growth. But this approach can have serious consequences, as we saw during the recession. Companies had expected and planned for an upward swing in business, but many had to try to sublease extra space or terminate leases.

A quality broker will advise tenants to use existing facilities as long as they can until they are bursting at the seams. Though it can be tough, they should weather growing pains until they absolutely must commit to higher occupancy costs. It’s a safe, prudent approach to expansion.

Some tenants need additional space. One cautious approach is to secure more space in an existing facility on a month-to-month basis. Industrial orders are still volatile, and inventory management can change dramatically from one month to the next, so this is a smart approach for businesses that don’t want to sign a long-term lease. A broker can negotiate a fair price and terms.

Expanding in an existing facility can be attractive and convenient, but it may not be the most cost-effective strategy. If a tenant needs more assembly and warehousing space, for instance, it could lease less expensive space in a warehouse a block away, which wouldn’t increase fuel costs significantly.

Access to transportation is important to manufacturers, but they also should consider other factors. A company should look for a location that meshes with its corporate culture, and take into account factors like access to mass transit and support services, which impact employee happiness and retention.

It’s never too early for industrial businesses to assess their commercial real estate needs and evaluate whether they need more or less space. While landlords are beginning to gain negotiating clout, tenants still have considerable bargaining power. And an experienced broker can help them rightsize their space.

Senior Vice President Michael Merino specializes in industrial leasing and sales at NAI Norris, Beggs & Simpson. Contact him at 503-223-7181 or mmerino@nai-nbs.com.

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Industrial tenants looking to renew a lease or sign a new one during the recession had a wide variety of spaces to choose from, and attractive lease terms. Landlords were motivated to secure tenants, so they offered low lease rates and provided concessions such as abated rent, generous tenant improvement budgets, phased-in occupancy and flexibility that included termination clauses, options to renew and expansion options.

Portland’s industrial market is on the mend but has yet to see significant recovery; it is lagging behind the national recovery significantly. In time the market will turn around, and we will see a shift where negotiating leverage will favor landlords. Tenants need to anticipate the upswing, and if leases are expiring anytime in the next 18 to 24 months, they should take action by contacting a broker. If today’s market is more favorable, they should leverage it and lock in advantageous lease terms, which in the long run will add to the bottom line by reducing occupancy costs.

Portland is a secondary market, and tends to lag behind other major American markets in terms of real estate trends. So while the CoStar Group reports that the national industrial market has seen positive absorption in each of the past four quarters, and rising rents in many markets, Portland is still essentially plodding along the bottom.

Overall industrial vacancy in the Portland metropolitan area rose to 15.94 percent during the first quarter, according to an NAI Norris, Beggs & Simpson report, which tracks multi-tenanted buildings with more than 25,000 square feet. Even more discouraging was the return of more than 500,000 square feet of industrial space to the market. Although these statistics are discouraging, they do provide opportunity.

Tenants have leverage in a down market, and many are choosing to “blend and extend,” or to renew early to take advantage of advantageous terms, before the market returns to low vacancy, higher lease rates, fewer concessions, less flexibility and little leverage.

For example, consider a tenant that signed a five-year lease in 2007. The tenant may think that because a lease doesn’t expire until the end of 2012, it doesn’t have to worry about it until the middle of that year. But the fact is that no one knows what the market will look like at the end of next year, and it could be vastly improved, so it’s important to take advantage of the current market.

Occupancy costs are one of a business owner’s biggest expenses, usually second only to personnel/labor costs, so leasing decisions have a major impact on a business’ bottom line. That’s why it’s important to hire a commercial real estate broker with expertise in industrial property in the particular submarket where a building is located. Brokers have expertise and extensive knowledge of the market and overall commercial real estate trends, and some have certifications that indicate additional knowledge in the field.

Though we don’t know where the industrial market will go or when recovery will truly take hold, we are beginning to see some positive signs. Tenants feeling more confident about the economy are beginning to make moves. Subaru’s recent 20-acre build-to-suit lease at Rivergate Corporate Center is a good example of one of the many investments in the region by global companies. The area continues to attract industrial tenants in renewable energy, especially solar-panel manufacturing.

Industrial investment sales are beginning to pick up; well-capitalized institutional buyers are seeking quality investments, primarily because of pent-up demand because they have cash to overcome strict lending criteria. Sellers who have held onto the notion that their buildings are worth what they were several years ago, pre-recession, are beginning to realize the adjusted values of their properties, and those buildings that have been priced and reflect today’s market have prompted buyers to write offers.

Title companies are confirming this increase in sales activity. An escrow officer with a national title company recently reported that she opened 15 files for commercial sales transactions in a week, which is a significant uptick from a year ago.

For the market for industrial space to improve significantly, we need to see a decrease in unemployment and an increase in new job creation. Overall, Oregon unemployment has improved in recent months, falling to 10 percent. But the manufacturing industry continues to struggle; 167,400 Oregonians were employed in manufacturing in March 2011, as opposed to 207,900 people in March 2006, according to the Oregon Employment Department. Manufacturing jobs are being added, but not as quickly as many had hoped.

Industrial tenants, take heed: Don’t wait too long to renew a lease. Even if an agreement isn’t scheduled to end for months, call a real estate broker to get advice and explore all options.

Senior Vice President Michael Merino specializes in industrial/land leasing and sales at NAI Norris, Beggs & Simpson. Contact him at 503-223-7181 or mmerino@nai-nbs.com.

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In today’s market, pursuing a commercial lease, whether for office, retail or industrial space, requires consideration of all the applicable business terms, expenses and future obligations. Tenants with experience renting commercial space know that finding a property and negotiating lease terms is very serious business.

The process of acquiring space can be complicated and challenging for both new and experienced tenants. But tenants can make the process smoother by taking steps, such as asking themselves some questions beforehand.

There are a number of factors to weigh when choosing a broker. A firm should first seek a broker who focuses solely on the type of property it is pursuing. Also, if a firm is especially interested in space in a certain submarket, like downtown or Beaverton, it should seek a broker who specializes in this area. A broker who has done many deals in a certain area will have extensive knowledge of what space is available and can work to find the best fit and most financially suitable space.

Also, work with a broker who fits the right profile in terms of a tenant’s space needs. A broker who works on large-scale spaces may not be as qualified to help a client seeking 1,200 square feet of space as one seeking 50,000 square feet.

Designations from recognized real estate associations also reveal whether a broker has gone the extra mile. Certified Commercial Investment Member (CCIM) and Society of Industrial and Office Realtors (SIOR) are two leading designations. Other brokers may have certifications such as Leadership in Energy and Environmental Design. Brokers with these designations have completed training and coursework to stay as up-to-date as possible on what’s going on in the industry.

Commercial real estate leases come in many forms, and ultimately, there is no standard lease agreement. Each lease is different and needs to be carefully reviewed by the broker and tenant, and typically also by legal counsel.

The length of a lease is an important consideration. Most short-term leases are for three to five years, while long-term leases generally range between seven and 10 years. Much can change even over the course of a year, so tenants need to anticipate future space needs when considering any length of lease. Taking into account whether a business will be growing (or potentially contracting) will impact how long a business can operate effectively in a space.

Anticipating lease length is important because a lease is a legally binding contract, and not something a tenant can break at will or easily change to suit their needs. Breaking a lease can result in serious penalties. Tenants can lose their security deposit, be denied access to the space, and even be subject to legal action. Making sure tenants are committed to the length of the lease and the location before signing is of key importance.

Once a firm finds a space that meets its needs, there are still other important factors to consider. These considerations include space planning, support services for employees and service providers such as telecom, data and Internet.

Space planning is critical to the process, and firms can benefit from working closely with their space planner and broker. In today’s environment, spending money up front for the right space can save money down the road. Many times tenants expect to be provided with the same utility provider that they were familiar with, only to find out that the provider is not available in the area and that they will have to use an alternative provider.

One additional factor to consider is support services, such as transit lines, restaurants and access; these are critical to retaining and attracting employees.

It’s also a good idea for firms to consider a potential facility’s tenant mix. Diversity can be a positive, but opposites don’t always attract when it comes to business. Firms should be cautious about leasing space in a building where the majority of the other tenants’ corporate cultures may be radically different from their own. In essence, leveraging synergy is a good thing when leasing space.

Leasing commercial space should not be an emotional decision. It comes down to obtaining a good broker to find space that meets budget and business requirements. Beware of settling for a space that is much too expensive or too large; pretty spaces don’t necessarily ensure success. If firms weigh their wants and needs prior to executing a lease document, they can avoid heartache down the road.

Michael Merino, CCIM and SIOR, is a vice president at NAI Norris, Beggs & Simpson. He specializes in industrial leasing and sales. Contact him at 503-223-7181 or mmerino@nbsrealtors.com.

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