Demand Presently Trumping Supply

Industrial land development: What is the situation along the I-205 corridor?

Tom Dechenne, Associate Vice President, NAI NBS

Many industrial land users face a quandary when searching for developable land in the Interstate 205 Corridor. Land is in short supply and various factors impact how it can be developed, leading to a crowded outlook at present and in the future.

The I-205 Industrial Corridor is generally considered to be the area along the I-205 freeway from the Columbia River south to Oregon City. The primary areas of most dense industrial development are the Airport Way/Columbia Boulevard area, and the Clackamas/Milwaukie area.

Supply and Demand
The age-old economic axiom of supply versus demand plays a central role in price determination, particularly as available land supply continues to diminish. When the Urban Growth Boundary was first enacted in the 1970s, industrial land was abundant. Through the economic downturn of the 1980s, the Portland Metropolitan area still had plenty available. However, beginning in the 1990s, ready-to-develop parcels have become exceedingly difficult to find, particularly 5 to 10 acres or larger, not only in the I-205 Corridor, but throughout the Portland Metropolitan region.

Numerous vacant land inventory studies have been performed over the past several years. The major challenge in trying to determine inventory is to determine what is, and/or what could be, available for development. Only recently has the estimated amount of vacant developable land become somewhat closer to the actual amount. Major land-use decisions have often missed the realistic calculation of inventory supply. Just because a parcel of land is unimproved without buildings does not mean the present owner, or a future owner, will develop or sell it.

Another aspect of potential available land is its development potential. Major factors such as topography, wetlands, and access to major and secondary freight corridors greatly affect whether a parcel can be developed at an economical cost. For instance, a 5-acre parcel might be identified as available. However, if any of the above factors limit or realistically prevent it from being developed, that parcel is, for all practical purposes, not available.

In today’s market, continuing strong demand over the past several years far outstrips the supply. For example, within two miles of I-205 (west or east), about 200 acres of privately held land appear to be available. While the majority of that land is currently not available, less than half is realistically developable due to wetlands, steep slopes or other limiting factors. The one significant land area that could be available for industrial development is the Port of Portland-owned property on the west side of I-205, near Airport Way.

As a result of these factors, it is difficult for an industrial user to find a vacant parcel. If found, development costs – such as dealing with slopes, wetlands mitigation and access roads – are prohibitive. For those few properties available, the limited supply drives up the price of the land. Due to short supply and continuing strong demand, prices range from $8 to $15 per square foot – in essence, double the value from a few years ago.

Future Growth Area
Areas of future growth exist where industrial land will be serviced with infrastructure, namely sewer, water and roads, but these are farther from I-205. Most notably, the Happy Valley/Damascus area is anticipated to add 200 to 300 acres of industrial land. It will be some years before the majority of these lands are ready for development. The present value of such land is discounted due to unknown time frames and lack of infrastructure, yet it is selling for $5 to $6 per square foot.

Type of Industrial Use
Another factor affecting industrial land is the type of use. Industrial buildings and property designed for warehouse distribution is much more sensitive to transportation infrastructure. Major distributors will not consider properties too far (i.e., four to five miles) from the I-205 freeway or its major feeders. Manufacturing users, while less dependent on highway infrastructure, require proportionately more land for parking, outside assembly, outside storage and related uses. Within the marketplace, the average user is in the 10,000- to 20,000-square-foot range, with a combination of distribution and manufacturing/assembly uses.

Future Trends
Given this limited supply, more in-fill redevelopment will likely occur. Of course, the cost of demolishing slightly dysfunctional buildings (i.e., those with low ceilings, unusable configuration, and multistory warehouses) has traditionally exceeded the cost of purchasing raw land. As available parcels become fewer and redevelopment is the only possibility, the net land cost will continue spiraling upward, despite the perception of today’s “softness” in the land market.
Perhaps the biggest challenges for future industrial growth and development along the I-205 Corridor will be funding for transportation infrastructure. This is no more evident than the future Sunrise Corridor plans to open the area east of I-205 in Clackamas. The plans call for an extension of Highway 224 north of Highway 212 and east of I-205. The other challenge will be to maintain present industrial areas as sanctuaries.

Compatibility
A less noticeable factor is the compatibility issue. Distribution centers and manufacturing facilities with noise from machinery, trucks, and railroads, such as those in Clackamas, Milwaukie and the Columbia corridor areas near I-205, are absolutely incompatible with residential neighborhoods.
Maintaining present uses, whether heavier industrial or more compatible light industrial/service uses, within mixed-use residential neighborhoods is critical. Therefore, it becomes imperative to maintain these industrial areas if, as a region, we expect growth to be in balance with a variety of employment within each of the various submarkets.