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October 12, 2017

On the Block: Prologis plans Emerald Gateway on 62-acre site

Seattle Daily Journal of Commerce

Brian Miller

Last November, Prologis paid Sabey $136 million for 62 acres at 3301 S. Norfolk St. At that time, Prologis said it might redevelop the site, which currently has about 963,000 square feet of older warehouse, office and distribution buildings.

Now Prologis has filed plans for about 1.5 million square feet in five new buildings and a parking garage. It also has a name: Emerald Gateway.

The main tenant there today is Supervalu. Most people still call the property the Associated Grocers site, but that company was acquired in 2007 by Unified Grocers, which this year was acquired by Supervalu.

Efforts to talk with Supervalu about possible relocation plans were unsuccessful. Prologis only shared a few details about its other projects.

The site straddles Seattle and Tukwila, meaning both will have to approve the project. The property is just east of the Duwamish River, west of Interstate 5 and south of Boeing Field. It is bounded by Norfolk, Airport Way South, the South Boeing Access Road and East Marginal Way South.

A drive-through Starbucks is on the northwest corner, in a temporary structure made from old shipping containers.

All the existing structures will be removed. In their place, Prologis intends to build:

  • A warehouse with offices and mezzanines totaling 735,963 square feet.
  • A warehouse with offices and mezzanines totaling 134,960 square feet.
  • A warehouse with offices and mezzanines totaling 350,845 square feet.
  • A two-story warehouse and office building totaling 268,120 square feet.
  • A small office building totaling 2,583 square feet.
  • A five-story parking garage with 1,324 parking spaces.

In addition, there will be surface parking for 2,955 vehicles and 219 tractor trailers.

Based in San Francisco, publicly traded Prologis says it's the world's biggest warehouse owner and the industry leader in logistics real estate. It has $72 billion in global assets under management, with 684 million square feet in 19 countries - about 381 million of that in the U.S.
Prologis says that about $1.3 trillion in goods pass through its buildings each year. The company has a current market capitalization of about $35 billion.

Ware Malcomb Architects of Irvine, California, is listed on plans for Emerald Gateway. Ware Malcomb has a regional office in Bellevue. Documents filed in both Seattle and Tukwila also name HPA Architecture of Irvine, California, as well as local firms Barghausen Consulting Engineers, Craft Architects and landscape architect WBLA.

The redevelopment plan won't surprise observers of the industrial and logistics market. In its fourth quarter 2016 Kent Valley Insider report, NAI Puget Sound Properties said Prologis paid "a whopping $136 million for the 963,000 square foot warehouse. Not bad pricing for a South Seattle building at $141 per square foot. However, those buildings are functionally limited, and this is ultimately a redevelopment play. Hence, Prologis really paid approximately $50 per square foot for 62 acres of prime South Seattle property."

"When you pay that much, it's gotta be redeveloped," says NAI's Taylor Hoff, who helped author that report. "It's a super attractive property from a logistics perspective."

Prologis is among his past clients, and Hoff says that other national players including Terreno, Clarion Partners, LBA Realty and CenterPoint Properties are also on the prowl for close-in Seattle industrial sites to redevelop, and the local firm Avenue55 is also looking.

"They will pay a premium to be that close," says Hoff. "I wouldn't say it's flipping. Repurposing is a better word."

And who besides Amazon are prospective tenants for new, close-in logistics center? Hoff mentions FedEx, XPO Logistics and UPS. Indeed, last year UPS leased a large amount of warehouse space from Prologis in SoDo, in the former K2 Sports building.

Prologis has about 16 million square feet and 112 buildings on 30 acres in the Seattle area. It is currently building the first multilevel logistics structure in the U.S.: a three-story warehouse/distribution center called Georgetown Crossroads, at 6050 E. Marginal Way S.

It will have 589,615 square feet, and is scheduled for completion in September 2018. Sierra is the general contractor and Craft Architects is the architect. Wilma Warshak of Washington Real Estate Advisors is representing the space. Prologis declined to say if any tenants have been signed.

Prologis is also planning a four-story warehouse, manufacturing and research building, called Seattle Six, at 646 S. Holgate St. in SoDo. That will have about 196,500 square feet. Craft Architects is also listed as the architect. No general contractor or start date has been announced. Evan Lugar and Jim Kidder of Kidder Mathews are representing the space, which may already be pre-leased.

Building logistics centers close to urban areas is central to the Prologis philosophy. CEO Hamid Moghadam wrote a recent op-ed in Fortune magazine that said, "Once goods leave the factory doors and begin the downstream journey to the end consumer, everything is changing. This is where we see the most dramatic transformation in the future flow of goods. While supply chains must continue to serve brick-and-mortar stores, e-commerce is disrupting retail markets, and urbanization is concentrating growth in major population centers. That's why demand is set to soar for distribution centers that are the last touch on goods before they reach the consumer."

Of course, Amazon exemplifies this trend.

The local industrial/logistics market is notoriously tight. Kidder Mathews' third quarter report says that the regional vacancy rate is 3.3 percent. KM estimates the Seattle close-in market - precisely where Prologis is building - is even tighter: 1.79 percent. Rents are rising, and KM writes, "Tenants are frustrated by a lack of product to choose from, a continuing trend."

CBRE's global logistics report, issued last month, says that Seattle led the nation in rent growth. Year over year for the first quarter, rents rose 16.9 percent. That figure also led CBRE's top-10 international list of high-growth hub markets, which includes Los Angeles/Orange County (sixth at 9.2 percent) and Suzhou, China (eighth at 8.7 percent). Second on the list was Pennsylvania's Lehigh Valley region, at 10 percent.

So where will the grocery operation go? Associated Grocers began operating at 3301 S. Norfolk in 1952. A 2015 SEC filing by Unified Grocers, before its sale to Supervalu, said its lease ran through April of 2018. Supervalu also has warehouse and distribution centers in Tacoma and Fife, which could make the Seattle facility redundant.

Or, brokers say, Supervalu may get pushed to Kent - and that may become a trend for longtime industrial/warehouse tenants accustomed to cheap rents in Georgetown and SoDo. Future logistics tenants are surely clamoring to claim the new space, so Prologis will want to build as soon as possible.

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