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4/08/19
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This report was provided to us by the Seattle office of real estate services firm Kidder Mathews
The Puget Sound region’s industrial market 1st quarter results are starting off in a pattern similar to a year ago. Last year, the region saw negative net absorption of just under 500k sf. According to the latest research from Kidder Mathews, this latest quarter the results were also negative, but at a lower amount of about 110k sf. Construction is very active at just over 5.8 msf. With the high volume of construction and the negative net absorption, is there reason for concern? The answer is no. We do expect some correction at some point in time, but there are several factors that point to a continued growth in the industrial market.
First, there are about 2.4 msf of leases signed, with the tenants moving into their new spaces over the next nine months. Second, 37% of the product under construction is leased, a good level of activity. Third, the region’s employment picture remains bright. In fact, the Puget Sound Economic Forecaster has revised its employment growth forecast for 2019. Previous projections in December indicated job growth of 1.9% in 2019. Its March forecast is now 2.6% and is projected to be 1.8% in 2020. The continued growth is due in part to the stimulus from federal tax cuts and locally, Amazon and other firms have continued to hire and construction employment is strong.
A look at year over year growth (February 2018 to February 2019) shows employment is up 38,800 jobs in the region (1.8%). The growth is below the Economic Forecaster’s projection, but the winter months typically have lower levels of employment. Among the key sectors that impact the industrial market, manufacturing, construction, transportation & warehousing are up 15,800 jobs or about 40% of the total growth in the region. Wholesale trade is the only sector to decline with 300 jobs lost. Looking ahead, all four sectors are expected to continue to grow over the next 12 months.
The Northwest Seaport Alliance February report indicates container volumes were down 4.1% with 269,199 TEUS (twenty-foot equivalent units). However, year-to-date volumes are up 10.9%. The lower results in February were impacted by an early Lunar New Year, resulting in shippers advancing orders ahead of the normal factory closures in Asia during the holidays. Year-to-date import volumes were up 10.9% and exports up 13.4%. Breakbulk cargo volume was up 15.5%, and auto volumes were surprisingly up 27.3%. The improvement is due to the new Taylor Way auto terminal that opened in late 2018.
The recent bad press for Boeing regarding the two plane crashes of the 737 Max jets will hurt in the short term, but they are working towards a software solution to alleviate any future issues. Despite some cancellations, the backlog of 737 is 4,708 jets. Plans are still to increase production from 52 to 57 planes per month.
Nationally, the political struggles in Washington DC, and the uncertainty around trade need to be watched as these could have an impact on our local economy, but negotiations with China are on-going.
Sales activity was steady this quarter. Nationally, Colony Capital acquired 54 industrial properties from Dermody in deals totaling $1.16 bil and which included LogistiCenter at Woodinville, Buildings A & B ($70 mil, or $171/sf), Meridian Campus Corporate Park (four buildings) in Lacey ($65.6 mil or $84/sf), LogistiCenter at 167 in Fife ($35.7 mil, or $158/sf) and LogistiCenter at I-5 in Lakewood ($26.2 mil, or $124/sf). Other notable sales include The Park at Woodinville sold for $47.2 mil, or $197/sf). The buyer was a local family group. Valley Distribution Center-Medline Building sold to Duke Realty for $36.1 mil ($158/sf). Total sales volume in 2018 was a record $2.3 bil (249 sales) for the region. The average cap rate was 6.00%. Through the first three months, there were 37 sales totaling nearly $180 mil. The average cap rate was 6.68%.
VACANT SPACE/VACANCY RATE
A total of 1.68 msf was delivered this quarter. With negative net absorption of 109.6k sf, the region’s vacancy increased from 3.6% to 4.1%. There are several leases signed (2.4 msf). The tenants have not yet moved in, but should take occupancy within the next nine months. This should move absorption back into the positive side.
NEW CONSTRUCTION ACTIVITY
Construction remains very active with 33 buildings totaling 5.82 msf underway. Pierce County is the most active with 3.66 msf (12 buildings), followed by South King (five buildings totaling 1.09 msf) and Snohomish County (14 buildings totaling 1.04 msf).
RENT FORECAST
Region wide, average asking rents rose in most submarkets. See individual markets for additional detail.
MARKET DEMAND/ABSORPTION
As noted above, absorption was negative at 109.6k sf for the quarter. Thurston County led the way with 1.17 msf, followed by Pierce County at 185.9k sf. All other submarkets were in the negative. A list of notable 1st quarter leases is included in the Significant Transactions section.
SEATTLE CLOSE-IN REVIEW
The Seattle Close-In market saw its vacancy rate climb from 2.6% to 3.3% with negative net absorption of -329.5k sf. The increase in vacancy is tied primarily to three properties. First, Georgetown Crossing (491.3k sf), which was completed in late 2018, is still in lease-up. Prologis Park Seattle (224.2k sf) had two big leases expire and those tenants relocated to Des Moines Creek Business Park down south.
Finally, SoDo Row (234k sf) has completed the majority of their renovations and is now ready for new tenants. All three just happened to line up around the same time and the consensus is that there is still good demand to absorb these spaces. In Seattle, 139.8k sf has been leased with those tenants planning to move in over the next nine months. There was one project delivered in the quarter-West Woodland Business Center (71.5k sf) that is 50% leased.
Despite the rise in vacancy, average asking rental rates on a blended basis (office/warehouse combined) decreased slightly by $0.01/sf/mo to $1.17/sf/mo. This is due entirely to a very tight market where many tenants have ended up relocating elsewhere. The forecast for the Seattle Close-In market for the next six months is for lease rates to range from $1.00/sf/mo to $2.00/sf/mo, NNN for medium- and high-grade buildings. When available, depending on size and whether it is paved, graveled, and fenced, yard rates will vary from $0.25/sf/mo to $0.35/sf/mo going south to north. The TRW Building in South Seattle sold for $4.8 mil ($240/sf). Seattle Arts Academy was the buyer. Walsh Construction purchased Mascios’s, also in South Seattle, for $3.25 mil ($302/sf).
SOUTH KING COUNTY REVIEW
The vacancy rate in South King County jumped 111 basis points to 5.35% as there was a negative -1.11 msf in net absorption for the quarter. Similar to what is happening in Seattle, it is just a matter of timing of several tenants vacating their space. Uline relocating to Thurston County is a good example. There are 38 leases signed totaling about 14 msf scheduled to move in over the next nine months, so we do expect this blip to be temporary. Two projects (144.9k sf) were completed this quarter, the largest is 234 Distribution Center-Phase II (125.4k sf). There are five projects totaling 1.09 msf under construction, with 35% of the space already leased. The three largest include IAC Commerce Center SeaTac (457.2k sf), DCT Hudson Distribution Center (287.8k sf), and Kent 192 Distribution Center (219.9k sf), IAC and DCT Hudson are nearly complete, while Kent 192 is targeted for delivery by the end of 2019.
There were 49 move-ins this quarter, the majority under 10k sf. Two notable sales this quarter include the Former Vectra Fitness Building for $12.7 mil ($130/sf) LBA Realty was the buyer. The other was Andover Park East, Buildings 1208, 1220 and 1230 selling to Lift Partners out of San Francisco for $11.3 mil ($143/sf).
Average asking rents (blended) increased $0.03/sf/mo to $0.75/sf/mo, as individual rates on newer product continue to increase. Shell rates on newly constructed buildings are in the mid $0.60s/sf/mo with office add-on now $1.00/sf/mo. Older existing buildings are achieving rents in the lower to mid $0.60s/sf/mo. Office add-on rates vary from $0.80/sf to $1.00/sf, depending on age and quality of the build-out. Building sale prices are expected to range from $135/sf to $200/sf. Land values will range between $25 to $30/sf for fully improved sites, with the higher prices further north.
EAST KING COUNTY REVIEW
East King County continued its slow and steady pace with a minor upward tick in vacancy from 3.12% to 3.18%. The submarket has a high concentration of flex space, and the typical tenant space on the move-ins this quarter was just under 5k sf. There were no deliveries and no projects presently under construction. There are two proposed projects (52k sf and 60k sf) in Snoqualmie Ridge. One of these is slated to start sometime in 2019. The other is unknown. There are few other projects in the pipeline. One sale was Digital Reprographics in Bellevue. This was a sale/leaseback and sold for $3.8 mil or $347/sf/mo.
Tenants continue to scramble to find spaces to rent and the blended asking rent increased to $1.39/sf/mo this quarter. The forecast is for NNN warehouse lease rates with high-bay warehouse manufacturing space to range between $0.80/sf/mo and $1.00/sf/mo, with most in the $0.85/sf/mo to $0.95/sf/mo range. In some markets such as Bellevue, the rate is already at $1.00/sf/mo and above. Office rates are in the $1.40/sf/mo to $2.00/sf/mo range. Flex space rents are forecast to range between $1.00/sf/mo and $1.50/sf/mo, NNN. Building sale prices are between $180/sf to $250/sf of building area for industrial (owner/users at the high end) and over $200/sf to close to $300/sf for flex properties. Land prices will run from $20/sf to nearly $40/sf for a premium site, although there is a limited amount of available land ready for development.
SNOHOMISH COUNTY REVIEW
Leasing activity in Snohomish County was steady, with the majority of the move-ins averaging less than 5k sf. Net absorption for the quarter was -9.2k sf with the vacancy rate holding at 2.9%. One small project (6.8k sf) was delivered. Construction is very active with 14 buildings totaling 1.04 msf. 57% of the space is already leased. The majority of these are in the Maltby area. There is over 6 msf in the pipeline. The majority of these projects are in the north part of the County in Arlington/Smokey Point/Marysville.
The Park at Woodinville sold for $47.2 mil ($197/sf) A local family group was the buyer. As discussed previously, The Colony Capital bulk acquisition of Dermody included Buildings A and B at the LogisiticCenter at Woodinville for $70 mil or $171/sf. Both buildings are still under construction, targeted to be completed next quarter.
The forecast over the next six months is for warehouse lease rates to range between $0.60/sf/mo to $0.70/sf/mo, NNN in the closer-in submarkets and lower ($0.50/sf/mo to $0.55/sf/mo) in the outlying markets. Office rents are $1.25/sf/mo to $1.35/sf/mo for second generation space and $1.35/sf/mo to $1.40/sf/mo for new space.
Building sale prices are predicted to range from $140/sf to $200/sf for buildings in the 5k sf to 20k sf range; $110/sf to $170/sf for buildings in the 20k sf to 60k sf range. Flex space will be higher (over $200/sf). There is a lack of larger buildings offered for sale in the market. Land values should range from $5/sf to $16/sf with an ample supply of industrial-zoned sites, particularly up north in Arlington and Marysville.
PIERCE COUNTY REVIEW
Pierce County’s vacancy rate remained unchanged at 4.1% as deliveries (217.1k sf) slightly outpaced net absorption of 187.9k sf. There is nearly 625k sf in leased space that will be occupied over the next nine months. Construction activity remains robust with over 60% of the region’s product under development in the County. The largest project is DuPont Corporate Center-Building A (1 msf), followed by DuPont Logistics Center Phase II (628.6k sf), Frederickson Pacific Industrial Park’s build-to-suit for Best Buy (450k sf), The Viking (438k sf) and DCT Blair Distribution Center, Building B (428.2k sf). All of these buildings will be delivered within the next two to six months. 32% of the space under construction is leased.
Stryder Motorfreight (100.4k sf) moved into their space at IPT Logistics Center, Building A in Tacoma. Article (154k sf) moved into 13605 52nd Street E-Building 1 in Sumner. On the sales side, Valley Distribution Center-Medline Building in Sumner sold for $36.1 mil ($158/sf). Duke Realty was the buyer. Also, as discussed, the Colony Capital acquisition from Dermody included two properties in Pierce County: LogstiCenter at 167-Fife ($35.75 mil or $158/sf) and LogistiCenter at I-5 in Lakewood ($26.2 mil or $124/sf).
Pierce County’s forecast is for shell rates to range between $0.55/sf/mo to $0.65/sf/mo, NNN, plus add-on office rates of $0.90/sf/mo to $1.00/sf/mo. Industrial building sale prices will range from $140/sf to $185/sf for new or smaller buildings. Second generation buildings will be lower in the $50/sf to $100/sf range, depending on condition. Land values typically range between $16/sf and $18/sf for premium sites.
THURSTON COUNTY REVIEW
Thurston County is the smallest of the six submarkets we track, but has been one of the very active ones. During the quarter, four buildings (1.24 msf) were completed including three in the Hogum Bay Logistics Center in Lacey. The largest was the build-to-suit for Uline (810.9k sf), who relocated from Auburn. The fourth building was the build-to-suit for Whole Foods (144.5k sf) in Hawks Prairie III. Total net absorption for the quarter was 1.17 msf.
With deliveries slightly outpacing leasing, the vacancy rate inched up to 4.1%, a 20 basis point increase over the prior quarter. Only 39k sf is still under construction, but given the ample amount of available land, there is about 5.2 msf in the pipeline. The challenge for some of the developments is the ongoing endangered gopher habitat issues. On the leasing front, three notable move-ins include Uline as mentioned above, Solo Cup (260.3k sf) at the Meridian Campus Corporate Park in Lacey, and Whole Foods (144.5k sf) as noted above in Hawks Prairie III. Sales activity included the 18-building Hill-Betti Business Park selling for $14.9 mil ($88/sf) by Seattle-based Slattery Properties and Meridian Campus Corporate Park ($65.6k sf or $84/sf) that was part of the Dermody-Colony Capital sale.
Rents inched up by $0.01/sf/mo on a blended rate to $0.48/sf/mo. Shell rents range between $0.40/sf/mo to $0.44/sf/mo on larger spaces and office add-on rates between $0.80/sf/mo to $1.00/sf/mo. Smaller spaces are $0.45/sf/mo up to $0.55/sf/mo on the shell with office add on at $0.90/sf to $1.00/sf. Building sales are expected to range from $80/sf to $150/sf. Land values range between $5.00/sf to $10.00/sf.
DEVELOPMENT NEWS
Notable projects under construction include:
• DuPont Corporate Center (1 msf) expected delivery 2nd quarter 2019
• Northwest Logistics Center Phase II (628.6k sf)-expected delivery 3rd quarter 2019
• IAC Commerce Center SeaTac (457.2k sf)-expected delivery 2nd quarter 2019
• Frederickson Pacific Industrial Park-Building 4 (450k sf)-expected delivery-2nd quarter 2019
• LogstiCenter @ Woodinville-Buildings A & B (275.5k sf and 134k sf)-expected delivery-
2nd quarter 2019.
• DCT Hudson in Auburn (287.8k sf)-delivery expected by 2nd quarter 2019
• The Viking in Pierce County (438k sf)-delivery expected by 3rd quarter 2019
Significant Transactions – 1st Quarter 2019
Notable Sales over $30 mil excluding the Colony Capital/Dermody bulk sale include:
• Park at Woodinville for $47.2 mil ($197/s.f.). Buyer is a local family group. Seller is KBS Realty Advisors.
• Valley Distribution Center-Medline Building in Sumner sold for $36.1 mil ($158/sf). Buyer is Duke Realty Corporation and seller is Exeter Property Group.
Notable leases include:
• Uline (810.9k sf) at Hogum Bay Logistics Center in Lacey
• Solo Cup (260.3k sf) at Meridian Campus Corporate Park
• Whole Foods (144.5k sf) at Hawks Prairie III in Lacey
• Article (154k sf) at 13605 52nd Street E-Building 1 in Sumner
• Stryder Motorfreight (100.4k sf) at IPT Logistics Center, Building A-Tacoma
Market Up Close:
• Over 5.8 msf currently under construction (37% pre-leased). Another 19.5 msf in the pipeline. The majority in the pipeline are in Pierce, Thurston, and Snohomish Counties.
• Negative 110k sf in net absorption in the quarter, but over 2.4 msf lease and not yet moved in.
• Rental rates continue to increase in most markets.
• The Northwest Seaport-Alliance reports February volumes were down, but year-to-date is up.
Author: Randy Gilliam, MAI, Kidder Mathews Valuation Advisory Services
Source: CoStar Data
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