Doug Klein, SIOR, CCIM
Senior Vice President, Partner
South King County Industrial
1st 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 29 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 58,258,236 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 1st quarter, the close-in market increased its vacancy level to 1.59% from 1.49% at the end of 2017, as a result of 59,018 sq ft of negative absorption during the 1st quarter. The Close-In market has reached and is holding on to a historically low vacancy rate compared to the previous peak market of 3.11% obtained in mid-2008.
Two 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 $1.45 per sq ft, NNN. 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.
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, is currently on the market for $252.78 per sq ft, but has not yet sold. Lease rates exceed $1.00 PSF, NNN for most spaces and deals have slowed as a result. Some tenants are looking south to save money.
South King County Review
South King County consists of 111,366,888 sq ft of industrial space and is Washington State’s largest concentration of industrial space. It registered 393,863 sq ft of negative absorption in the 1st quarter of 2018. The vacancy rate increased to 3.98% at the end of the 1st quarter compared to 3.66% at the end of 2017 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. There is a beginning of a trend for slightly higher vacancy, but we anticipate this will be short lived as new construction is absorbed.
Market activity continues to be very strong during the 1st quarter, with activity strong on most dock served spaces. Flex space is improving quickly and incubator spaces are showing solid improvement both in terms of vacancy and rent appreciation. Some sectors of the market are extremely tight including dock served spaces from 5,000 - 20,000 sq ft. Rates have increased a shocking 42% since the beginning of 2013 in this size range. In South King County there are 17 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 13 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 $182 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.
Recently, modern South King County owner/user buildings with dock-high loading and no yard area averaged $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 although it had some cooler equipment.
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 41,167,000 sq ft in South King County. The chart below shows the results since year end 2011.
Average vacancy for business parks is 7.0% at the end of the 1st quarter 2018. This is a rise from 3.7% at the end of 2016 and a rise from 6.1% at the end of 2017. Average blended rates are up to $0.63 per sq ft, NNN, which is a 24% increase since the end of 2016. The Average Time Vacant has dropped significantly from 10.7 months vacant per space in 2014 to only 4.0 months vacant at the end of 1st quarter 2018, which is a new record low.
Pierce County Review
The Pierce County market totals 75,399,122 sq ft. Supply increased 1,983,000 sq ft during 2017 and 2,556,081 sq ft during all of 2016. The 1st quarter resulted in negative 79,714 sq ft of absorption for the quarter as a result of new projects completing and new leasing lagging behind a bit. Current vacancy is up to 2.72% compared to 2.2% at the end of 2017. Pierce County is the center of the new construction push with 3,581,393 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 2.72% is almost the lowest historical vacancy for this market, we expect vacancy to rise again by mid 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 March 31, 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 March 31,2018, 6,133,536 sq ft is currently under construction in both Pierce and South King County. Pierce County has 3,581,393 sq ft under construction and South King County makes up 2,552,143 sf of the total. Most projects are mid way through the construction phase and will be completed by mid 2018. This is a record amount of construction for the combined market area. There are numerous additional projects that will also start construction this spring after the rain subsides.
End of Year Industrial Vacancy by City
Notable sales that closed in this quarter include:
- Olympic Industrial Park sold as an investment at 94,739 SF for $136.21 PSF (includes a 19,000 SF office building)
- Terreno purchased the 233,218 SF Sears Building in South Seattle for $180.09 PSF (price includes significant lease termination fee)
Notable lease transactions in this quarter include:
- Geodis Logistics leased 250,000 SF at Lakewood-Tacoma Logistics Center
- Clutter leased 100,000 SF at Des Moines Creek Business Park
- Hozak renewed 27,000 SF at West Valley DC
- Cal Cartage leased 402,342 SF at Pacific Coast Corporate Park
There were only 2 investment sales in the 1st 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 new product at a fierce rate. New development opportunities will add significantly more inventory in early and mid 2018. We anticipate vacancy rates to increase temporarily by mid 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 upper 3% range to under 5.0% for quality, core product.