Seattle Industrial CRE Market update – 1st Qtr. 2023

The Puget Sound economy is shaking off the Covid pandemic and working to find a new post-covid normal. Office vacancies are 11.2% in the Region with owners and brokers uncertain of what a remote workforce will require in terms of space. The industrial market remains stable, with vacancy below 5% in all but two submarkets. The Fed continues to raise interest rates, most recently in March to a 4.75% to 5.0% range with many market participants anticipating another increase in May. The Puget Sound continues to outpace the National figures in the CPI, core prices (excluding food and energy) and shelter. Seattle CPI was 8.4% for 2022, according to The Puget Sound Economic Forecaster. This is ahead of the US City Average at 6.4%. Food inflation in Seattle was 11.3%, but energy was 5.8% helped by a decline in crude oil pricing and a mild winter in Europe. Q1 2023, the industrial market saw negative absorption of one million sq ft and a rise in vacancy form 3.9% at YE 2022 to 4.6% YTD. Brokers across the region report that transaction velocity has slowed, but demand remains for modern product that is well-located. Rental rates have not seen rollback, continuing an upward trend, albeit at a slower pace. Shell rents continue an upward trend, partially due to rising construction costs and the higher clear heights and larger yard areas of the new construction. Office add-on rates also continue rising. Below are a few notable points:

• 1.95 million sq ft was added to the regional supply in Q1 2023, with the region totaling 368.2 million sq ft.
• Construction activity remains strong with 10.5 million sq ft under construction in 52 projects. Pre-leasing remains steady at 35.5%. Pierce County leads with 11 projects under way, totaling 4.0 million sq ft and 58.9% pre-leased. Panattoni Development’s FRED310 project in Frederickson has two buildings totaling 1.5 million sq ft underway.
• Regional vacancy has ticked up to 4.6%, on negative absorption of -1.0 million sq ft.
• Average asking rental rate jumped up 15.9% to $1.28/sq ft/month.
• Sales activity shows 48 properties closed this quarter, $232.7 million at an average of $214/sq ft, with a cap average of 4.96%.

As a whole, employment grew 4.0% over the four-county region, led by Leisure and Hospitality with a 9.9% increase, Construction with a 6.0% increase and Education and Health Services with a 5.5% increase. Leisure and Hospitality is regaining ground lost through the pandemic. The big news in employment have been tech layoffs, including announcements by Google, Amazon, Facebook and others. These layoffs are hard to quantify as the inclusion of severance delays the reporting of unemployment benefits and many workers are re-employed or start new businesses prior to being counted as unemployed. Employment in the four-county region added 87,100 jobs in the past year (February 2022 revised to February 2023 preliminary numbers). King and Snohomish Counties added 77,100 jobs, Pierce 4,200 and Thurston 5,800. Total regional employment now stands at 2,291,100, a 4.0% growth over the preceding year (February 2022 to February 2023). Manufacturing added 7,700 jobs over the last year. In November and December 2022, manufacturing added 200 jobs despite losing 600 in the aerospace segment. Information jobs decreased 0.5%, losing 700 positions in King and Snohomish Counties. Unemployment in Washington stands at 4.6%.

There are some concerns that we continue to monitor. These include:

• Inflation continues to be a concern but any recession that may come is expected to be mild.
• Additional potential layoffs in the tech sector.
• Construction costs continue to rise, leading to higher shell rents. Brokers report delays in permitting Tenant Improvements.
• Developers have pulled back from tertiary markets, and many planned projects are available as entitled (to varying degrees) sites.
• Cost of capital has remained elevated, increasing cap rates that sellers are loathe to accept.

The Northwest Seaport Alliance reports 2022 container volume as 3,384,018 TEUs (Twenty Foot Equivalent), a 9.4% decline from 2021 and a 1.9% increase over 2020. 2023 is off to a slow start, with Q1 being 32.6% below Q1 2022 and lower than each of the 1^st quarters in the previous five years. Some of this may be attributable to the ongoing negotiations between International Longshore and Warehouse Union and Pacific Maritime Association for a new labor contract. Negotiations began in May 2022, covering 22,000 dockworkers across 29 ports that saw the existing contract expire in July. As talks dragged on, many importers began to shift cargo to East and Gulf Coast ports to avoid delays or possible work slow-downs. Negotiations were underway last summer but appear to have broken down without a new contract up for discussion.

NOTABLE SALE TRANSACTIONS-1Q 2023

• SeaTac Packaging purchased the Astec Industries Building at 18425 50^th Ave. E in Tacoma from Astec Industries, Inc. for $150/sq ft, a sale between owner users.
• Foremost Fuji Corp purchased 905 80^th St. SW from MTorress America for $322/sq ft, closing January 9, 2023.
• Alco Investment Company purchased the Safeway Bottling Plant in the Bel-Red corridor for $179/sq ft of land for the ultimate redevelopment play.
• Twin City Foods sold its production facility in Stanwood, WA, a 198,487 sq ft plant to No Meat Factory for $98/sq ft, closing in March 2023.

NOTABLE LEASE TRANSACTIONS

The Kent Valley saw the most significant leasing activity this quarter.

• STG Logistics – Auburn 18 Business Park, Auburn – 1,552,720 sq ft
• Harbor Freight Tools – Fred310 Buildings E/F – 782,875 sq ft
• UPS Supply Chain Solutions – Auburn Logistics Center 662,693 sq ft
• GXO Logistics – BOMARC BP Bldg. 45-70 – 468,273 sq ft
• SeaGen Inc. – DP LogistiCenter – 307,200 sq ft
• Micro-Star International, Co. Ltd. – LogistiCenter at Pacific Gateway – 231,266 sq ft

SEATTLE CLOSE-IN

Vacancy increased 185 basis points over Q4 2022, at 6.3%. Absorption was -395,557 sq ft for the quarter, after a positive 240,582 for 2022. Brokers remain consistent in that the 10,000 sq ft spaces and below has steady demand, with the larger spaces remaining vacant with little activity. This has caused some shifts in representation of larger spaces as ownerships seek to solve vacancy issues.

Track Six and 65 S Horton are included as completed projects, with Track Six (212,576 sq ft) rumored to have signed its first lease for the first floor. 65 S Horton (130,492 sq ft) has completed the envelop and buildout is underway in the interior. The listing team for 65 S Horton has changed, as has the focus shifted to assembly type uses from R/D or lab type spaces. These are testing the SoDo market for high end space, multi-story projects.

Trammel Crow has demolished to former Hasbro distribution warehouse at Terminal 106. Pilings are being driven for the two story, 692,752 sq ft distribution facility. This project will have 30’ clear heights with market standard truck courts on both levels.

Sale volume was $46.1 million in seven closed transactions, averaging $319/sq ft. Notable sales include:

The Seattle School District purchased 640 S Spokane St. (27,933 sq ft) from Jeff Schoenfeld for $10,600,000, or $379/sq ft after it was vacated by an I-502 tenant.

Swickard Auto Group added to its portfolio with the purchase of 1709 Airport Wy. S (35,384 sq ft building, 100,800 sq ft land), spending $21,000,000, or $208/sq ft for the land play.

Buffalo Industries sold 3420 E Marginal Wy. S (48,864 sq ft) to investor Brendon Townshend for $7,133,000, or $146/sq ft.

Average asking rental rates on a blended basis (office/warehouse combined) slipped $0.02/sq ft from yearend 2022, to $1.34/sq ft, the first rollback in a six-year trend of escalation.

Yard rates have stabilized over the previous three quarters, vary from $0.40 to $0.65/sq ft, with the yards on the west side of the Duwamish Waterway at the lower end, along with functionally challenged sites in SoDo/Georgetown submarkets. The upper end is for paved, lit and secure sites of scale in SoDo and the Georgetown submarkets. There are yards with asking rates up to $0.75/sq ft, but no transactions have been done at that level.

SOUTHEND

Southend vacancy continues to creep up, from Q4 2022 of 5.2% to Q1 2023 of 5.3%. Absorption was 184,239 sq ft for Q1.

1.99 million sq ft of signed leases with expected occupancy over the next nine months should reduce vacancy but there are 11 projects are expected to deliver 3.36 million sq ft in the same nine-month timeframe. Pre-leasing of these projects is at 13.9%.

Currently, the total area under construction is 4.15 million sq ft that is 17.7% preleased.

Los Angeles Iron & Steel Company purchased the eight building, 137,359 sq ft Federal Way Business Park from BKM Capital Partners for $29,500,000, or $215/sq ft.

MCA Realty purchased the 56,320 sq ft Auburn Business Park from investor John Baumann for $9,000,000, or 160/sq ft. The park was 95% occupied with a capitalization rate of 6.0%.

Average asking rents (blended) were $1.07/sq ft in Q2 but have slipped to $0.99/sq ft in Q1 2023.

Shell rates on new construction are in the upper $0.95 to $1.20/sq ft for new generation, typically 30’ to 36’ clear heights with office add-on now $1.45/sq ft. Office construction costs are maintaining in the $200 to $250/sq ft range for first generation buildout.

There are 16 buildings under construction totaling 4.15 million sq ft. Seven of these projects are anticipated to deliver 2.36 million sq ft in Q2 2023 and are 12.5% preleased.

EASTSIDE

Vacancy continues to increase, moving up 110 basis points to 3.5% in Q1. Absorption was negative for the quarter, at -312,539 sq ft after a positive year of 106,828 sq ft absorbed in 2022. One 40,000 sq ft building was delivered with no pre-leasing.

One 31,211 sq ft building is under construction, with anticipated to complete in Q1 2024. This is an auto dealership building and is a build-to-suit.

Leasing activity shows 21 tenants totaling 292,494 sq ft to occupy in the next nine months. The median size is 3,601 sq ft, illustrating the trend of smaller tenants prevalent in this sub-market.

Asking rental rates continue to rise, up from $1.88/sq ft in Q4 2022 to $1.90/sq ft, NNN. Warehouse lease rates with high-bay warehouse manufacturing space range between $1.15 to $1.60/sq ft/mo, anticipated to continue increasing through 2023. Office rates are between $1.75/sq ft to $2.50/sq ft.

Doxa Church purchased the Oakridge Building 3 (18,289 sq ft) from Cynthia Barrett for $6,500,000, or $355/sq ft.

Alco Investment Company purchased the Safeway Bottling Plant (77,9.38 sq ft) from the Ann Seena Jacobsen Trust for $25,125,000, or $322/sq ft. The lease has eight years left and the cap was 3.4% on the site that will likely be rezoned to a mixed use zoning at four times the currently allowed density.

NORTHEND

Vacancy has increased over the yearend 3.45%, currently at 3.87%. Absorption for Q1 was 191,072 sq ft and the 2022 finished with 1.61 million sq ft absorbed.

32 leases are signed and expected to move in over the next 9 months totaling 811,564 sq ft, with Tesla being the largest, leasing 245,619 sq ft in Marysville. The median is 6,100 sq ft.

14 buildings (1.36 million sq ft) are under construction, the largest is Soundview Campus Building A at 278,937 sq ft and six more buildings over 120,000 sq ft.

Warehouse lease rates range $0.85-$1.30/sq ft/mo. depending on age and location. Office rents are $1.80-$2.00/sq ft for second generation space and $2.00-$2.50/sq ft for first generation.

Notable sales in Q4 include:

Foremost Fuji Corp buying the 80^th Street Center (65,344 sq ft) from M Torres America, Inc. for $21,050,000, or $322/sq ft. This is an owner user sale between equipment manufacturers, one in packaging (buyer) and the other in aeronautics (seller).

Twin City Foods sold its production facility in Stanwood, WA, a 198,487 sq ft plant to the Canadian company No Meat Factory for $98/sq ft, closing in March 2023.

14 buildings are under construction, totaling 1,357,773 sq ft to be delivered in the next six months. Preleasing is at 31.6%.

Three buildings were delivered in Q1, totaling 786,994, 100% pre-leased. 38 proposed projects projected to add 6,440,260 sq ft.

Land remains available in Marysville / Arlington with finished sites trading in the $18 to $25/sq ft range and raw sites, requiring fill, approaching $3 to $5/sq ft with ample supply of industrial-zoned sites.

PIERCE COUNTY

Q4 vacancy has climbed from 2.57% at YE 2022 to 3.76% as of Q1 2023. Absorption was negative, giving back 568,882 sq ft after 2022 totals of 5.68 million sq ft absorbed.

Construction activity remains strong with 11 projects underway totaling 4.02 million sq ft, with 58.9% preleased. Three projects delivered in Q1 2023, totaling 610,476 sq ft but no pre-leasing has been reported.

Leasing activity for tenants to occupy in the next nine months stands at 22 leases, totaling 2.32 million sq ft. This includes one, 1,118,480 sq ft lease Floor and Décor has signed in the new FRED 310 park Panattoni Development is building in Frederickson. Four remaining leases exceed 100,000 sq ft.

Sale activity includes:

Astec Industries, Inc. sold its 132,745 sq ft Frederickson industrial building to SeaTac Packaging for $19,900,000, or $150/sq ft. This is another sale between owner users.

Shell rates range $0.75-$1.00/sq ft/mo., NNN, plus add-on office rates of $1.00-$1.50/sq ft/mo. The average blended rate is $1.03/sq ft, a 5.1% increase over Q4 2022 of $0.98/sq ft.

Land values have been climbing but appear to have peaked and most brokers indicate a 20% discount from the peak pricing. There are two sites under contract but no indication on if or when these will close.

THURSTON COUNTY

Vacancy remains below the 2021 level of 4.18% and unchanged from Q4 2022, at 2.78%. The vacancy has remained very stable over the past four quarters. Absorption was negative, at (-107,720) sq ft with 439,202 sq ft delivered this quarter. This space was 80.2% preleased.

Eight projects are under construction, with Tumwater Corporate Park underway with Buildings 1 and 2. Building 1 is 199,917 sq ft and Building 2 is 199,950 sq ft. There has been no preleasing in either of these buildings that are scheduled to be delivered by mid-year 2023. The remaining six projects range from 22,000 sq ft to 55,250 sq ft.

Eleven leases commenced in Q1, with Electrolux leasing 300,000 sq ft in a building just delivered in Rochester. The next largest leases were 27,941 sq ft in Meridian Campus Business Park to Vision Wheels and 18,500 sq ft in Lacey Business Park Building 1. Four leases will commence in the next nine months, totaling 140,750 sq ft. However, 134,000 sq ft are leased by Sound Sleep in the Lacey micro-market.

The construction pipeline has 3.76 million sq ft proposed, with Tumwater Corporate Park proposing two buildings over 470,000 sq ft with completion anticipated in 2024. Also proposed is Parsons South Sound Logistics, a one or two building park capable of adding up to 1.37 million sq ft.

Average blended rents have increased slightly to $0.72/sq ft, from the yearend 2022 level of $0.71/sq ft. Shell rents range between $0.45-$0.60/sq ft on larger spaces and office add-on rates were $0.90-$1.20/sq ft. Smaller spaces are $0.50 - $0.70/sq ft on the shell with office add on at $0.95-$1.25/sq ft.