Doug Klein, SIOR, CCIM
Senior Vice President, Partner
South King County Industrial
2nd Quarter 2018
The South King County Industrial Market Review is provided by Doug Klein of Kidder Mathews. Kidder Mathews is the largest full service commercial real estate company in the Puget Sound. We provide the most extensive coverage in the Kent Valley and Pierce County Industrial Markets with over 29 industrial specialists. Doug Klein has over 30 years of experience dedicated to the Kent Valley and Pierce County Industrial Markets, and has completed well over $1 billion in transactions totaling over 40 million sq ft. Doug lists over 4.5 million square feet of industrial space on an on-going basis.
Seattle Close-In Review
The Seattle Close-In market is generally defined as the area from SoDo (just south of downtown Seattle), south to the intersection of I-5 and SR-599, which is about 1.5 miles north of I-405. It totals 58,222,992 sq ft of industrial space. The market consists of predominantly older and often functionally obsolete facilities, many of World War II era construction. Increasingly, the market is shifting towards a make-up of institutional ownership, but is still largely owned by owner/user, private and governmental entities.
During the 2nd quarter, the close-in market increased its vacancy level to 2.09% from 1.49% at the end of 2017, as a result of 322,746 sq ft of negative absorption during the 1st and 2nd quarters. The Close-In market is bouncing between 1.5 - 2% vacancy as some tenants more south for cheaper space. The previous peak market was mid-2008 reaching a low of 3.11% vacancy.
Three large, new developments are progressing in the Close-In market. Prologis began construction on Georgetown Crossings in April 2017, which is the first multi-story development of its kind in this market. The project will consist of 589,615 sq ft on three stories. It will also include a three story parking structure. The project will be complete in October 2018. Rumors on pricing are over $1.50 PSF, month. To date, no transactions have been reported. Secondly, the Desimone family had previously selected Trammel Crow for a long-term land lease on approximately 45 acres located along the Duwamish River in Tukwila. This will eventually lead to over 700,000 sq ft of new industrial space in the Close- In market, although the developer selection is now in question. Multi-story developments are a top consideration for future close-in developments. The Joregenson Forge site is now being considered for future development although it is early in the process.
Owner/user sales in the close-in market continue to rise dramatically in price and asking prices now often exceed $200 per sq ft, although quality and location impact the price considerably. Investors continue to purchase close-in buildings as well but velocity has slowed due to lack of availabilities and high prices. A new record price of $263 per sq ft was set in June for the sale of the 15,960 sq ft dock-served Ambiente Tile Building to a user. Ellis Building, a 18,000 sq ft grade-level served building, just sold for $220.83 per sq ft, to an investor although it was sold vacant. Lease rates typically exceed $1.10 PSF, NNN for most spaces and deals have slowed somewhat as a result. Some tenants are looking south to save money.
South King County Review
South King County consists of 111,377,876 sq ft of industrial space and is Washington State’s largest concentration of industrial space. It registered 360,955 sq ft of positive absorption in the 2nd quarter of 2018. The vacancy rate decreased to 3.66% at the end of the 2nd quarter compared to 3.98% at the end of the first quarter 2018 as a result. Vacancy is above the record of 2.24% at the end of the 1st quarter 2017, but below the previous historical low of 4.12% in 2008. Total absorption for 2018 is negative 32,908.
Market activity continues to be very strong during the 2nd quarter, with activity strong on all dock served spaces. Most sectors of the market are extremely tight especially dock served spaces from 5,000 - 20,000 sq ft. Since 2013, rates for 5,000 SF dock-served space has increased 70% ($0.44 PSF shell to $0.75 PSF shell) or 14% per year. Tenants can typically find a few suitable alternatives, but the number of choices is historically low. In South King County there are 16 existing spaces and under construction spaces between 100,000 and 375,000 sq ft on the market for lease. This is a significant increase of such space since the end of 2017, when there were only 12 such spaces. Most of the increase is due to new construction.
There are only 15 user type buildings over 10,000 sq ft available for sale in South King County, including South Seattle. This is a decrease from 21 in July of 2017. Prices vary widely given the construction type and availability of yard area. South Seattle buildings demand a higher price per square foot than more southerly locations, averaging $178 per sq ft, which is up from $155 in March 2016, but buildings vary widely in terms of quality and yard and dock door availability. The most recent close-in user sale was the Simco Building in Tukwila for $176.09 PSF.
Modern South King County owner/user buildings with dock-high loading and no yard area average $152.00 per sq ft asking. There are only 2 user buildings such as this on the market now. The Van Dorens Building #1 is 27,815 SF and the pricing guidance is $175 per sq ft. The sale of 1196 Industry Drive in Algona set a new high of $165 per sq ft for such buildings in South King County.
Click on the link below to access our sales comparables for this quarter.
Business Parks - South King County
We track 446 business park buildings totalling 41,111,000 sq ft in South King County. The chart below shows the results since year end 2011.
Average vacancy for business parks is 6.4% at the end of the 2nd quarter 2018. This is a rise from 3.7% at the end of 2016 and a drop from 7.0% at the end of Q1. Average blended rates are up to $0.64 per sq ft, NNN, which is a 25% increase since the end of 2016. The Average Time Vacant has dropped significantly from 10.7 months vacant per space in 2014 to only 4.7 months vacant at the end of 2nd quarter 2018, which is a new record low.
Pierce County Review
The Pierce County market totals 76,818,329 sq ft. Supply increased 1,488,000 so far this year, 1,983,000 sq ft during 2017 and 2,556,081 sq ft during all of 2016. The 2nd quarter resulted in 722,921 sq ft of absorption for the quarter as a result of new leasing in recently completed projects. Absorption for the year totals 693,207. Current vacancy is up to 3.18% compared to 2.2% at the end of 2017. Pierce County is the center of the new construction push with 2,226,813 sq ft currently under construction. Mostly, all of the new development is designed for tenants larger than 75,000 sq ft. Developers are signing numerous larger leases and many deals over 100,000 sq ft have been completed in the last four quarters. The vacancy rate fluctuates considerably as larger tenant leases commence and new developments complete construction. Although 3.18% is almost the lowest historical vacancy for this market, vacancy will rise in 2018 due to new deliveries of spec construction.
Rates & Concessions
Rental rates are rising quickly and fewer concessions are being offered. Strong credit tenants are no longer able to negotiate a month of free rent per year of lease term. Zero months of free rent on a new 36 month term is typical. However, many landlords demand a 5-year lease. One to three months of free base rent on a 61 – 63 month term is typical for new deals and less for renewals. However, credit strength, tenant improvement and scarcity of that particular product weigh on the free rent outcome.
Incubator and flex space are making significant improvements. Even the more functionally obsolete incubator parks are now seeing increased activity. The purchase of Tukwila Commerce Center and Andover Executive Center by BKM Capital has changed the market as they push rates and incubator tenants are seeing much increased rates as a result. Smaller spaces are seeing the greatest rate increases of any market sector at this time.
Asking rates continue to rise and quality spaces are typically able to secure rents at the asking rate. Annual base rental increases of 3% are the standard now. We have not seen any push beyond 3% just yet. Asking rates for new construction and newer generation spaces over 100,000 sq ft are moving upward significantly due to lack of supply as well as new product built on expensive land demands higher rents. By comparison of completed lease comparables, rates have increased 39% in the last 24 months for dock-served spaces in the 5,000 to 50,000 sq ft range and 33% for spaces 50,000 SF to 100,000 SF.
South King County Asking Lease Rates (Direct Deals)
* $0.85 - $0.95 per sq ft is for average existing office, $1.00 per sq ft is for new or built-to-suit office.
Under construction as of July 1, 2018 are the following projects:
Developers are very busy in the Puget Sound market right now. Multiple projects were completed in 2017 totalling 3,563,794 sq ft in the combined South King County and Pierce County markets.
As of July 1, 2018, 4,187,335 sq ft is currently under construction in both Pierce and South King County. Pierce County has 2,226,813 sq ft under construction and South King County makes up 1,960,522 sf which of the total which is a decrease from 1st quarter 2018 as some projects were completed. Most projects are just starting construction and will be completed by late 2018. There are a few additional projects that will also start construction this summer.
End of Year Industrial Vacancy by City
Notable sales that closed in this quarter include:
- American Legends Building at 149,921 SF sold to LBA as an unleased investment for $130.07 PSF
- Brekke Properties sold two assets in a portfolio at 102,882 SF to LBA as a leased investment for $140.94 PSF
- Black River Business Center at 37,503 SF sold to Ski’s Painting for $143.68 PSF as a owner user sale (half leased as an investment)
- Contour Cabinets at 60,140 SF sold to Jake Connell for $106.42 PSF intended as redevelopment to public storage, but recently put back on the market for possible lease to a new tenant
There were only 4 investment sales in the 2nd quarter due to lack of availability. Cap rates have stabalized at low 5.0% to low 4.0% cap rate levels for institutional grade, core properties. However, core asset with below market rates will dip below 4%. Other “non-core” investments may trade in the 5.5% - 7.0% cap range, depending on many factors. Many properties are trading off-market since buyers are extremely aggressive and have a seemingly endless supply of capital. Although interest rates rose in 2017 and 2018, we anticipate low cap rates to continue and stabilize at these low rates for at least the next 12 months. There is very little product currently on the market.
Investment Sale Comparables
Please click here for a list of investment sale comparables.
The South King County market has loosened a bit as a result of the addition of new inventory. However, in South King County, rates are being pushed upward quickly and fewer concessions are being offered for all spaces in all size categories. Few quality user buildings are on the market and sale prices for these user buildings are moving upwards rapidly. If you can find any raw land, the market continues to be bullish for any land parcels from developers. Land prices for industrial Kent Valley properties exceed $25.00 PSF. We continue to forecast increasing rents over the next 12-18 months for nearly all size ranges, along with fewer concessions such as free rent. Perhaps rates will stabilize later in 2018 after the tremendous increase in the last 24 months.
Pierce County has added and continues to add new product at a fierce rate. New development opportunities will add significantly more inventory in mid to late 2018. We anticipate vacancy rates to increase temporarily in 2018 while new inventory adds to the market.
Investor activity remains strong with many buyers chasing limited institutional product. Cap rates are expected to remain strong in the low 4% range to under 5.0% for quality, core product. Higher cap rates of 5.25%-6.75% will apply non-core, industrial product.