Doug Klein, SIOR, CCIM
Senior Vice President, Partner
South King County Industrial
3rd 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 32 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 58,187,748 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 3rd quarter, the close-in market decreased its vacancy level to 1.99% from 2.09% at the end of Q2 2018, as a result of 20,094 sq ft of absorption during the 3rd quarter. Absorption for the year is still negative 361,670 sq ft. 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.
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 is delayed but should be complete by the end of 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 regularly exceed $220 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. 5979 4th Ave S sold in September for $248.38 sq ft, further supporting prices over $220.00 PSF. 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. We expect rates to hold steady in the close-in market for the next 12 months.
South King County Review
South King County consists of 112,501,695 sq ft of industrial space and is Washington State’s largest concentration of industrial space. It registered 892,755 sq ft of positive absorption in the 3rd quarter of 2018. The vacancy rate decreased to 3.83% at the end of the 3rd 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 positive 859,847.
Market activity continues to be very strong during the 3rd 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 sq ft dockserved space have 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 14 existing and under construction spaces between 100,000 and 375,000 sq ft on the market for lease. This is a slight decrease from Q2 2018. The market has been generally steady at this amount for the last year. New construction is entirely suited for tenants over 50,000 sq ft. This constrains the market for smaller spaces. This trend will continue forward.
There are 21 user type buildings over 10,000 sq ft available for sale in South King County, including South Seattle. This is a significant increase from Q2 2018 when there were only 15. 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 $199 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 5979 4th Ave S for $248.38 PSF.
Modern South King County owner/user buildings average $158.43 per sq ft asking. There are only 3 user buildings with dock doors on the market now. The Van Dorens Building #1 is 27,815 sq ft and the pricing guidance is $175 per sq ft. The sale of 3001 East Valley Rd in Renton set a new high of $171.56 per sq ft for such buildings in South King County. Developers in South King County are quoting $200 PSF for the shell for new construction dock served space between 50,000-80,000 sq ft.
Click on the link below to access our sales comparables for this quarter.
Business Parks - South King County
We track 447 business park buildings totalling 41,382,000 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 3rd 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 2018. Average blended rates are up to $0.65 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 5.8 months vacant at the end of 3rd quarter 2018, which is up from the record low of 4.5 months at Q2 2018.
Pierce County Review
The Pierce County market totals 77,899,905 sq ft. Supply increased 2,570,000 so far this year, 1,983,000 sq ft during 2017 and 2,556,081 sq ft during all of 2016. The 3rd quarter resulted in 481,567 sq ft of absorption for the quarter as a result of new leasing in recently completed projects. Absorption for the year totals 1,174,774. Current vacancy is up to 3.91% compared to 2.2% at the end of 2017. Pierce County is the center of the new construction push with 3,039,000 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 3.91% is almost the lowest historical vacancy for this market, vacancy will rise in late 2018 and spring of 2019 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 two months of free base rent on a 61 – 62 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.
Office add-on rates are finally making a push upward. In the past, $0.85 PSF was the typical add-on rate for second generation office area. Now, $0.90 PSF is being charged on about 40% of all such offerings. Given the high cost of both construction and remodeling office area, we expect $0.90 to be more the rule than the exception by mid 2019. Rates for new office area recently at $1.00 PSF addon are now pushing $1.10 PSF/month.
In South King County and Pierce County asking rates continue to rise and quality spaces are typically able to secure rents at the asking rate. Rates for close-in Seattle however are stable having risen over 50% in the last 36 months. 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 to 100,000 sq ft.
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 October 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 October 1, 2018, 5,391,088 sq ft is currently under construction in both Pierce and South King County. Pierce County has 3,039,000 sq ft under construction. South King County makes up 2,351,308 sq ft of the total which is an increase of 1,203,000 sq ft from Q2 2018 since the 457,000 sq ft IAC SeaTac and the 161,000 sq ft Prologis monster road projects commenced construction. Most projects will be completed by late 2018 and the balance by Spring 2019. There are not many additional projects in South King County slated for 2019, so supply could be constrained.
End of Year Industrial Vacancy by City
Notable sales that closed in this quarter include:
- Sears Building at 294,912 PSF sold to Centerpoint Properties as a leased investment for $166.15 PSF.
- Pro Ampak at 206,472 sq ft (3 buildings) sold to EverWest as a 100% leased investment for $106.47 PSF.
- Russkak Portfolio at 342,869 sq ft sold to Centerpoint Properties as a 100% leased investment for $212.91 PSF.
- The Brady Building at 81,700 sq ft sold to LBA as a 1/3 leased investment for $138.31 PSF.
There were only 5 investment sales in the 3rd 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 continues to tighten at a moderate pace as vacancy bounces between 3.5 and 4%. 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 in 2019 after the tremendous increase in the last 36 months.
Pierce County has added and continues to add new product at a fierce rate. New development opportunities will add significantly more inventory in late 2018 and Spring of 2019. We anticipate vacancy rates to increase temporarily in 2018 and 2019 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 to non-core, industrial product.