By Meghan Hall
The Puget Sound’s industrial market is showing no signs of slowing down and has had another breaking quarter, according to industry reports. Rapid economic growth combined with land scarcity and limited development opportunities, developers are struggling to keep up with the rapid pace of absorption put forth by tenants.
“We’re seeing tremendous demand and upward pressure on market rents,” said CBRE Industrial Specialist and Executive Vice President Andrew Hitchcock. “We’re also seeing a shift in consumer demand and fundamentals relative to larger users entering the market to satiate that consumer demand. There is a larger base of reactivity to consumer demand.”
At the end of the third quarter, employment figures continued to improve, with unemployment decreasing to 5.1 percent. Volume through the Northwest SeaPort Alliance has also increased every month of 2021 thus far, with volume increasing more than 10 percent for every month, except for January and February.
Across the greater Puget Sound, there currently exists just over 304 million square feet of industrial space, and vacancy sits at just 5.4 percent. Total vacancy continued to decline, even as major projects were delivered and inventory rose. CBRE notes that competition for new product remains strong and tenant thirst for space is “unquenchable.” Absorption in the third quarter totaled 4.94 million square feet of space; net absorption totaled 4.47 million square feet.
A number of major deals closed this quarter. Costco leased 1.1 million square feet at Tumwater East, while Frederickson One’s Building Five–totaling 524,000 square feet–was snapped up by Ace Hardware. Spreetail signed up for 281,181 square feet at Fredrickson West 281, Unis took 273,816 square feet at Tacoma Gateway, and Helly Hanson signed up for 273,683 square feet at the Seaport Logistics Center. Many other tenants, according to CBRE, are working to break into the Puget Sound, driving demand even further.
“We will see more of those larger tenants entering the market trying to react to consumer demand and adjusted consumer expectations,” noted Hitchock. “…Two years ago we wouldn’t have had this level of demand.”
And, unlike other asset classes, dominated by subleases or renewals, almost all major leasing transactions in the Puget Sound’s industrial market were new deals. Only PCC Logistics was an expansion, as it moved to take 103,161 square feet of space. Boyd Corporation, in another unique deal, sold its facility in North Seattle for $27.8 million, and then subsequently leased back the building from New Mountain Capital.
As the local market struggles to keep pace with demand, prices–for both leasing and investment–continue to rise. At the end of Q3, rental rates sat at $0.91 per square foot per month, triple net. Markets closest to Seattle netted the highest rates, at about $1.30 per square foot per month, triple net. The Eastside’s rents reached $1.55 per square foot per month, triple net. The Kent Valley and Tacoma/Fife submarkets recorded rents of $0.75 per square foot ripple net, and $0.66 per square per month triple net, respectively. The Northend’s rents came to about $0.86 per square foot per month.
And, as tenants compete for space, new strategies are emerging in order to secure property. According to CBRE, concessions are dwindling and tenants are offering higher annual increases–in the range of 3.5 percent–in order to seal the deal.
Investments during the third quarter saw their highest average price per square foot in Puget Sound, with prices reaching $206 per square foot. Total year-to-date sales volume sat at $2.22 billion, exceeding the sales volume in any recent year. The largest deal was Investcorp’s acquisition of the Seattle Exchange @ Southcenter for $261 million.
Looking ahead, there is no sign that the market will slow down soon. As e-commerce remains critical amidst the pandemic and supply chain disruptions encourage companies to keep more product on-shore, demand for industrial assets will continue to rise.
“I think we’ll continue to see rent growth and tightening, especially in the closer-in markets, and I think the development that’s under construction will also see significant pre-leasing,” said “I think that we will see continued interest in larger sites by national developers further south.”