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Puget Sound Industrial Market Mostly Positive at Midpoint for 2015

7/17/15

Here’s an overview of the Puget Sound industrial market at the mid-year point for 2015. The report was provided to us by real estate services firm Kidder Mathews.


The Puget Sound’s industrial market continues to produce mostly positive news as we reach the midpoint of 2015. Year-to-date absorption is just under 1.9 msf. And, with new deliveries of nearly 1.9 msf, the region’s vacancy rate has held steady at just over 5.0%. We expect this trend of positive absorption to continue, as there are several tenants that have signed leases but have not yet taken occupancy. In addition, employment growth is still strong.

According to the Puget Sound economic forecasters, the forecast for 2015 is for a 3.3% increase in employment, up from the prior quarter’s projection of 2.6%. The region continues to outperform the overall U.S. employment growth, which is projected at 2.1%. The region’s growth is expected to be positive but lower in 2016, at 1.9%, compared to 1.7% for the U.S.

Those sectors relevant to the industrial market (trade, construction, aerospace, and manufacturing) represent about 38% of the new jobs projected to be added in 2015. While certain segments are paring down (Boeing and Microsoft), e-commerce, buoyed by Amazon, is picking up.

In 2015, construction is expected to add 11,600 jobs, followed by the trade sector (10,800 jobs), while manufacturing of durable and non-durable goods is expected to grow by 2,300 jobs and will offset anticipated losses of 1,900 jobs in the aerospace sector. Overall, there appears to be continued demand, which should keep absorption positive through 2015, with a slowdown in 2016 likely.

On the development side, construction activity remains strong. Nearly 1.9 msf of product was completed during the first half while another 3.3 msf is under construction. The majority of the new construction is located in South King and Pierce Counties. All of the projects under construction are expected to be delivered by the end of 2015. Roughly one-third of these projects are pre-leased. We would expect demand to hold steady but lag a little behind the delivery of the new product. Barring any unforeseen changes in the economy, we would expect the vacancy rate to inch up slightly by the end of the year, closer to 6.0%.

On the transportation side, the Seaport Alliance of both the Ports of Seattle and Tacoma report that container volumes grew modestly in May despite a drop in vessel calls. Cargo volumes have recovered from the backlog that occurred during the contract negotiations between the International Longshore and Warehouse Union and Pacific Maritime Association. Through May, containerized volume is up 1.6% year-over-year. While shipping volumes are rebounding, air cargo increased by 11.8% in 2014 and is also up 11.1% through April 2015.

Sales activity has been active through the first half of 2015. Through June 24th, there have been 108 transactions totaling $828.8 mil in the region ($116/sf average price). The overall average cap rate was 6.26%. One of the two most significant sales was Global Logistics Property’s acquisition of 1,048 properties throughout the U.S. for $8.1 bil. This included nine industrial parks in the Puget Sound, including Woodinville Corporate Center I-IV; Southcenter West Business Park; Mill Creek Distribution Center; West Valley Business Center; West Valley Freeway Business Center; and Tukwila Commerce Center. Combined, these properties sold for $246.4 mil, or $114/sf. The other notable acquisition was Prologis acquiring KTR for $5.9 bil. This transaction included 345 properties nationwide, including Northwest Corporate Park in Kent plus a truck terminal in Tukwila and Kent 167. This sale closed in June and the allocation of the price has not yet been provided.

Other notable sales over $20 mil in the region include Prologis’ acquisition of Seattle Logistics Center ($63.25 mil); Principal Global Investors purchase of Port Commerce Center ($57.2 mil); and West Willows Technology Center in Redmond, sold to Pine Forest Properties for $28.5 mil. In addition, Simpson Lumber sold their lumber mills in Tacoma and Longview to a Canadian forest products company called Interfor Corporation, which closed the Tacoma mill.

VACANT SPACE/VACANCY RATE

While there was nearly 1.9 msf of new product delivered during the first six months of 2015, the region’s supply only increased a net 1.7 msf as two markets, East King County and Seattle Close-In, continue to lose supply as older buildings are taken off market for eventual redevelopment to higher-intensity uses. With net absorption at 1.87 msf through the second quarter, the region’s vacancy is at 5.05% compared to 5.12% at the end of 2014.

NEW CONSTRUCTION ACTIVITY

Construction activity continues to remain strong with 15 projects totaling 3.35 msf underway. Both Pierce (5 projects totaling 1.15 msf) and South King County (five projects totaling 11.4 msf) are the most active markets followed by Snohomish County (four projects totaling 715k sf). The largest of these is Stryker Business Center’s third building (811k sf) which is 100% pre-leased to Amazon. A list of notable projects is included in the Development News section.

RENT FORECAST

Depending on the submarket, rental rates continue to remain flat to some increases in those markets that have tightened up.

MARKET DEMAND/ABSORPTION

Net absorption totaled 1.04 msf for the second quarter and 1.87 msf year-to-date. Five of the six submarkets had positive absorption for the first six months of the year. South King leads the way with 889.6k sf, followed by Pierce County (524.5k sf), East King (299.9k sf), Seattle (151.6k sf), and Thurston County (114.6k sf). Several leases have been signed with the tenants expected to take occupancy over the next six months, which should provide a continued boost to the market.

DEVELOPMENT NEWS

Notable projects under construction include:

• Stryker Business Center (811k sf build-to-suit for Amazon)is a JV between Clarion Partners and IDS.
• Panattoni is very active with Des Moines Creek Business Park (536k sf) and PowderMill Business Center (227.7k sf) in South Everett.
• Portside Industrial Center (485.1k sf) in Fife is a joint venture between Davis Property and LBA Realty.
• Underwood Gartland is well underway with their project in South Everett (450k sf).
• Northwest Building is under construction with Building 28 at Lakewood industrial Park (268.5k sf)
• Cascade Building (385.5k sf) at Sumner Corporate Park is underway. This is a joint venture between Michelson, Knapp Development and Washington Capital Management.

MARKET UP CLOSE

• Projects under construction are 33% pre-leased.
• Several notable larger leases signed with targeted move-in dates later in 2015 should provide additional boost to the market.
• The Alliance at the Ports of Seattle and Tacoma has cleared the backlog after reaching a settlement with the Longshore labor union. Cargo volumes are up in 2015.

Seattle Close-In Review

Leasing activity remains strong, although slightly off the pace we saw in 2014. That said, the vacancy rate is now at 1.93% with 151.6k sf of net absorption for the year. Prologis acquired the Seattle Logistics Center in South Seattle for $63.25 mil, or $158/sf. Another larger sale was West Waterway, Building 7-C that was acquired by CenterPoint Properties for $18.25 mil, or $107/sf. Vacancies are expected to remain low as there is little land for development.

The forecast for the Seattle Close-In market for the next six months is for lease rates to hold steady, ranging from $0.45 to $1.00/sf/mo, NNN for medium- and high-grade buildings. Asking rents seem to have leveled off for now. Demand for sale properties continues to remain high with a very limited supply. Better quality buildings will sell between $100 and $175/sf due to the scarcity of industrial space in this area. Yard spaces, when available and depending on size and whether it is paved, graveled, and fenced, have rates that will vary from $0.14 to $0.21/sf going south to north.

South King County Review

Washington State’s largest industrial market continues to perform at a steady pace. Through the first six months, three projects totaling 230.7k sf were delivered, while 1.4 msf is under construction. The largest is Stryker Business Center, Building 1, the 811k sf build-to-suit for Amazon which should be completed by the end of next quarter. Even with deliveries of 230.7k sf, net absorption during the second quarter totaled 457.1k sf, the highest among the submarkets for the second straight quarter. Year-to-date absorption is about 890k sf. Given the strong absorption, vacancy continues to move downward, now at 4.14%, compared to 4.77% at the end of 2014 and 9.06% in 2011.

The large sales in this submarket that have closed in 2015 include five of the regions nine industrial parks that were part of the $246.4 mil Global Logistics acquisition. The five parks sold were Southcenter West Business Park ($30.2 mil, or $101/sf); Mill Creek ($23.85 mil, or $108/sf); West Valley Business Center ($15 mil, or $98/sf); West Valley Freeway Business Center ($13.24 mil, or $100/sf); and Tukwila Commerce Center ($52.87 mil, or $110/sf). As mentioned above, the Prologis acquisition of KTR for $5.9 bil included Northwest Corporate Park, although the price has not yet been disclosed. Other sales of note include West Valley Corporate Park ($18.5 mil, or $86/sf); Algona II Distribution Center ($28.25 mil, or $107/sf); and West Valley Distribution Center ($11.2 mil, or $81/sf).

Asking rental rates have remained stable, with concessions still included. For smaller spaces (under 10k sf), shell rates range from $0.40 to $0.50/sf; $0.36 to $0.42/sf for spaces between 10k sf and 20k sf; and $0.28 to $0.35/sf for spaces larger than 20k sf. Office add-on rates vary from $0.60/sf to $0.85/sf, depending on age and quality of the build-out. Building sale prices are expected to range from $50/sf to $120/sf. Land values will range between $6.00/sf to $12.00/sf for fully improved sites.

East King County Review

East King County’s vacancy dipped below 6.0% for the first time since 2008 with positive absorption of nearly 300k sf during the first six months of 2015. The market continues to have steady leasing with the majority of spaces less than 10k sf in size and situated in flex buildings. Non-traditional users are still taking industrial space, effectively reducing total supply. One project, Snoqualmie Ridge Business Park (75k sf), was delivered earlier this year.

The largest sale transaction to occur was the Woodinville Commerce Center I, II, III and IV that was part of the Global Logistics nationwide acquisition. The sale closed in early March for $111 mil or $127/sf. In the second quarter, West Willows Technology Center sold for $28.5 mil ($171/sf).

East King County’s asking rental rates are higher on a blended basis because there is a higher proportion of flex space than in other markets, currently averaging $1.02/sf/mo. The forecast is for warehouse lease rates with high-bay warehouse manufacturing space to range between $0.60 and $0.70/sf/mo, with most in the $0.65 to $0.70/sf, NNN range, as rents are on the rise. Flex space rents range between $1.00 and $1.40/sf/mo, NNN. Building sale prices will range from $100 to $120/sf of building area for industrial and $140 to $170/sf for flex properties. Land prices will run from $10 to nearly $25/sf for a premium site, although there is a limited amount of available land ready for development.

Snohomish County Review

Snohomish County’s leasing activity rebounded during the second quarter with 35.3k sf of positive absorption. For the year, absorption is still negative with the vacancy rate at 6.03% compared to 5.80% at the end of 2014. Upon closer look, the leakage occurred in the outlying areas of Monroe and Snohomish and vacancy remains high in the north end, while the submarkets of South Everett/Mukilteo, Lynnwood/Edmonds, and Mill Creek/North Creek remain tight. Panattoni’s PowderMill project is underway with some pre-leasing in place. Underwood Gartland has secured two leases totaling nearly 197k sf on their Seaway project (450k sf) and just broke ground. Boeing moved into the 312k sf space they leased at the Everett Technology HQ building earlier in the year. The largest sale in this market was the Children’s Building at Canyon Park, selling for $7.8 mil ($142/sf).

Snohomish County’s forecast for the next six months is for warehouse lease rates to range between $0.50 to $0.65/sf/ mo, NNN in the closer-in submarkets and lower in the outlying markets. Office rents are $1.20 to $1.30/sf for second generation space and $1.30 to $1.35/sf for new space. Building sale prices are predicted to range from $140 to $160/sf for buildings in the 5k sf to 20k sf range and $115 to $135/sf for buildings in the 20k sf to 60k sf range. There is a lack of larger buildings offered for sale in the market. Land values should range from $5 to $12/sf with an ample supply of industrial-zoned sites.

Pierce County Review

Pierce County, at 67.9 msf, is the second largest market in the Puget Sound region. It saw deliveries totaling 1.56 msf during the first half of 2015. With another 1.2 msf under construction, total supply will top 69 msf by the end of the year. Most of the new construction has been in Sumner, but is now spreading out with projects in Fife (Portside Industrial Center) and Lakewood. While leasing activity has been steady (year-to-date absorption of 524.5k sf), it has not kept up with deliveries and vacancies in this market have been inching upward, now at 7.7%. The two markets with the most slippage have been the two with the most deliveries: Puyallup/South Hill (which includes Sumner) and Lakewood. The largest sale transaction was Simpson Lumber in the Port of Tacoma selling for $94.7 mil ($223/sf), which also included the business itself. The four- building Port Commerce Center sold during the second quarter for $57.2 mil ($56/sf). Lakewood Business Park also sold for $9.9 mil, or $75/sf.

Pierce County’s forecast is for shell rates to range between $0.30 to $0.45/sf./mo, NNN, plus add-on office rates of $0.55 to $0.85/sf/mo. Industrial building sale prices will range from $40/sf for older buildings to $100/sf for new or smaller buildings. Land values typically range between $6/sf and $12/sf.

Thurston County Review

Thurston County’s industrial market continues to do well with its second straight quarter of positive absorption. For the year, positive absorption stands at nearly 115k sf with vacancies dropping to 7.34% compared to 8.09% at year-end 2014. Leasing activity is steady with mostly smaller tenants. Larger spaces are still struggling, but there appears to be some uptick in inquiries with the lack of available large spaces up north causing some tenants to consider Thurston County.

This market, with its position along the I-5 corridor, is primed for the right build-to-suit opportunity. One notable land sale is the Kimmie Street site in Tumwater that sold for $2.38 mil ($119k/acre). Only about 20 acres of the 53-acre site are usable due to high ground water. The site will be used for a Department of Army Readiness Center. Further south in Centralia (Lewis County), Rogers Machinery is closing on a 44.2k sf facility from the Port of Centralia for $2 mil ($45/sf).

Warehouse rents are ranging between $0.30 to $0.50/sf and office add-on rates between $0.60 to $0.75/sf. Some leases to marijuana-related businesses are between $0.50 to $0.60/sf due to higher risk factors. Building sales are expected to range from $50 to $100/sf. Land values range between $4.00 to $7.00/sf.

NOTABLE SALE TRANSACTION

• Global Logistics acquired nine industrial parks in Woodinville, Kent and Tukwila as part of a nationwide package. Total sale price was $8.1 bil. The Puget Sound region's portion was $246 mil ($114/sf) The selling group includes Blackstone out of New York.
• Prologis acquired KTR, which totaled $5.9 bil nationwide, and included Northwest Corporate Park in Kent.
• Simpson Lumber sold their Tacoma mill for $94.7 mil ($223/sf). The buyer was Interfor out of
Vancouver, B.C.
• Port Commerce Center was acquired by Principal Global Investors from Northwest Building LLC.
for $57.2 mil ($56/sf).
• Pine Forest Properties out of Bellevue acquired West Willows Technology Center from Highbrook Investment Advisors, LLC for $28.5 mil ($171/sf).
• Algona II Distribution Center sold for $28.25 mil ($107/sf). The buyer was Primus International out of Portland and the seller was Clarion Partners out of Dallas.

NOTABLE LEASE TRANSACTIONS

Cooper Tire & Rubber, Prologis Park Sumner, 312k sf
Complete Office Installation, Seattle Business Center - Building H, Kent, 57.6k sf

Author: Randy Gilliam, MAI, Kidder Mathews Valuation Advisory Services
Source: CoStar Data





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