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Report: Puget Sound Industrial Market Contends with Inflation, Construction Costs

Puget Sound, Kidder Mathews, Seattle Industrial CRE Market Update 4th Qtr 2022, Pierce County, King County, Snohomish County, Thurston County, Seattle, Pacific Gateway Industrial Park, Link Industrial Properties, Blackstone, Panattoni Development Company, Property Reserve Inc, The Church of Jesus Christ of Latter-day Saints, MCA Realty, Lakewood Business Park, Lakewood
Courtesy of Weston Norwood

By Kate Snyder

The Puget Sound’s industrial market is contending with increased inflation, potential layoffs and rising construction costs, according to a report recently released by Kidder Mathews. The Seattle Industrial CRE Market Update – 4th Qtr. 2022 also shows, however, that the region has seen increased employment – almost a quarter of which were in manufacturing and construction.

“The Puget Sound economy continues to face headwinds as we end 2022,” the report states.

In total, approximately 1.8 million square feet of industrial space was added to the regional supply in the fourth quarter, with the total for 2022 coming to 5.7 million square feet. The total for the region is now at 364.1 million square feet. The 53 projects currently under construction total about 10.7 million square feet with 36.4 percent of space pre-leased. 

The north end has 11 projects at 1.5 million square feet – 45 percent pre-leased – and Pierce County has 13 projects at 3.9 million square feet and 50 percent pre-leased. Pierce County also led the region in positive net absorption with 2.1 million square feet out of the total recorded square footage of about three million. The north end followed with 0.49 million square feet and then the south end with 0.25 million square feet.

The four-county region has continued to see growth in employment with the addition of 88,900 jobs in the past year, the report states. King and Snohomish counties saw the most growth with 77,800 new jobs while Pierce and Thurston added 11,100 jobs. Total regional employment now stands at 2.3 million jobs, which is a 4.1 percent growth over the preceding year. Manufacturing and construction together were responsible for 23.7 percent of the job growth in the past year, with the former adding 10,100 jobs and the latter adding 11,000.

“Information jobs increased by 6.4 percent over the past year but recently there have been hiring freezes, layoffs, and office closures from companies like Amazon, Google and Twitter,” the report states.

Area vacancy rates were varied, with Seattle remaining stable at 4.5 percent and both the eastside and northend increasing to 2.4 percent and 3.5 percent, respectively. The southend vacancy rate inched up to 5.2 percent in the fourth quarter from 5 percent in the previous quarter. In Pierce County, the vacancy rate dropped to 2.6 percent from 4.3 percent. Vacancy in Thurston County stayed at 2.8 percent, below the 2021 level of 4.2 percent and essentially unchanged over the past three quarters. 

Some concerns outlined in the report include the fact that inflation in the region has outpaced the national figures, potential layoffs in the tech sector and Boeing engineers and increased construction costs. Other concerns are that developers have pulled back from tertiary markets and many planned projects are available as entitled sites and that the cost of capital is well above levels of 18 to 24 months ago, which resets the feasibility analysis on many projects.

At the same time, demand remains for modern products that are well-located, and there were several notable sale transactions in the fourth quarter.

The sale of the Pacific Gateway Industrial Park for $260 million, or about $315 per square foot, was one of the most prominent. The seller was an entity affiliated with Link Industrial Properties, Blackstone’s industrial affiliate, which originally developed the property with Panattoni Development Company, an international development firm. The buyer was an entity affiliated with Property Reserve, Inc., which is the commercial real estate investment arm of The Church of Jesus Christ of Latter-day Saints. According to the report, the 823,606 square foot portfolio closed at a 4.22 percent cap rate.

In October 2022, MCA Realty sold the six-building Lakewood Business Park to Los Angeles-based Edward Urlik for $32.9 million, or approximately $241 per square foot. The business park is a 136,350 square foot multi-tenant industrial asset located in Lakewood. That deal closed with a 5.3 percent cap on existing income, according to the report.