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Lack of Industrial Inventory Points to Tightening Puget Sound Region Market in the Coming Year, According to JLL Report

Seattle, JLL, Goodman Real Estate, Bentall Kennedy, Bridge Development, JLL Capital Markets, Burien, Kent Valley, Northend
Image courtesy of JLL

By Jack Stubbs

Activity in the Puget Sound region’s industrial market continues to heat up, as tenant demand for industrial/warehouse space continues to drive construction of new product in the industry and net absorption figures continue increasing in most of the region’s submarkets. According to JLL’s 2018 “State of the Market Report”—in which the Capital Markets Team analyzes patterns in the office, retail and industrial markets—demand and subsequent robustness of the industrial sector in 2018 remains strong.

New deliveries in the pipeline indicate that the industrial market is on an upward trajectory from years passed. There were 3.3 million square feet delivered in 2017, according to the report, a figure that is down from the figure of 4.1 million posted in 2015 and 4.4 million posted in 2016. In the first quarter of 2018, however, one million square feet of space were delivered, with 6.1 million square feet under construction.

According to Sudarshan Sampath, research manager at JLL’s Seattle office, the expectation is that demand for industrial inventory will create a pressurized market in the months ahead as tenants continue to compete for the available space. “Demand is high, so speculative construction is high as developers seek to capture the demand for warehouse and distribution space,” he said. And although this demand will level off over the next several years, 2018 will see significant activity across the board. “The market is likely to stabilize in the next few years, but we anticipate that things will remain very tight for tenants and favorable for landlords through 2018 as those looking for space wait for new deliveries.” Ninety five percent of the upcoming projects are in the Southend market, with 39 percent of that figure occurring in the Tacoma/Fife submarket.

The net absorption rentable square foot (RSF) figures, also indicate the relative prospects for the region’s different submarkets. Generally, these figures reflect how most of the activity in the industrial market has been occurring outside of Seattle. According to the report, the net absorption RSF for Seattle was -127,501. This figure was dwarfed by the net absorption RSF figures posted in other submarkets: the net absorption RSF was 231,714 for Kent Valley; 3,354,022 for Pierce County; 263,846 for the Eastside; and 628,546 for the Northend.

Sampath thinks that this trend will continue in the year ahead. “A significant amount of square footage of the new deliveries and construction are taking place in Pierce County and Kent Valley, so the absorption numbers moving forward are expected to continue to be higher in these areas. Requirements in the market for large bulk warehouses in those areas are also strong. ” he said.

One of the factors contributing to this dynamic—where the majority of leasing and absorption activity is occurring in Pierce County and Kent Valley instead of downtown Seattle—is the fact that the latter is constrained geographically by a lack of space, according to Sampath. “There are fewer large blocks of space in the Seattle submarket, and it is less likely that a few large moves will impact absorption as with some of the larger leases in Pierce County and Kent Valley,” he said. Moreover, Seattle is also impacted by zoning and land-use changes, meaning that product types other than industrial have been more common there. “In the Seattle submarket, the highest and best use of land is changing, impacted by zoning changes and the economic climate for development of office and multifamily products,” Sampath said.

The average sales price per square foot for industrial buildings has risen significantly over the last few years, also indicating that demand for industrial inventory remains high and continues to increase. For the Seattle/Bellevue submarkets, this figure has increased by 43 percent over the last five years, according to the report: in 2012, the price/square foot average was $102, a figure that rose to $140 in 2016 and $159 in 2017. Looking ahead, Sampath predicts that this trajectory will hold true in the short-term due to the continued demand for industrial space across the board. “Over the next few years, we anticipate prices continue to increase in the short term, given that demand for both bulk warehouse/distribution space and smaller last-mile facilities is strong,” he said.

And given the limited amount of available industrial inventory in the region, Sampath also thinks that potential redevelopment opportunities will increasingly be driven by a consideration of the highest and best use for a given site. “There are limited properties available for greenfield development. Industrial land is also experiencing competition for redevelopment for the highest and best use of properties, which may not always be industrial,” he said. “There is potential for more density in industrial development in order to justify increasing land values.”

The average asking rental rate for 2017 was $0.68—an all-time high, according to the report—a figure up from the rate of $0.66 posted in 2016. The increasing demand for space is perhaps also in part reflected by the discrepancy in the number of sales (for $10 million-plus) year-over-year from 2016 to 2017: there were 33 sales in 2016 and 17 sales in 2017.

The highest price per square foot sale in 2017 was Kurt E. O’Brien’s acquisition of the 66,700 square foot Market Street Properties in Seattle in September 6th, 2017, for $24.9 million, or approximately $373 per square foot, from Goodman Real Estate. There were several other sizable transactions last year: also in September, Bentall Kennedy acquired the 241,140 square foot Western Distribution Services building in Burien from Bridge Development for $57.5 million, or approximately $239 per square foot. In June, Compact Information Systems purchased the North Creek Center, a 97,216 square foot building in Bothell, from Gerlicher Company for $26.75 million, or $275 per square foot.