By Kate Snyder
With a drop in leasing activity and a projected rise in vacancy on the horizon, Seattle’s industrial market is contending with less urgency from tenants and a supply that is paced to outstrip demand, according to a recent report from Cushman & Wakefield. The report, “MarketBeat Seattle Industrial Q2 2023,” also highlighted increasing rental rates – although those rates are expected to level out later this year because of the forecasted rise in vacancy – and a particularly strong labor force despite the ongoing layoffs within the tech sector.
Though the Seattle industrial market reported a vacancy rate of 4.4 percent in the second quarter of 2023, which was a drop from last year by 0.7 percent, the report suggests that vacancy is projected to increase again as the year progresses. Out of the 7.4 million square feet set to deliver before 2023’s end, only 36.2 percent of that space is pre-leased, which leaves a large portion unclaimed. Because of that, estimations are that vacancy rates are expected to continue to increase in the coming quarters. Both the uptick in vacancy rates and more than 1.4 million square feet of vacant space delivered this quarter have contributed to an overall absorption rate of negative 390,000 square feet, a drop from the positive 2.6 million square feet reported a year ago.
“There is no sense of urgency from tenants with demand limited for high-quality space, thus absorption is likely to remain in the red during the second half of the year,” the report states.
More than 1.2 million square feet of new space was added to the Seattle industrial market in the second quarter, bringing the year-to-date total to 2.4 million square feet. While this did not match the 1.7 million square feet that delivered in the second quarter of 2022, it leaves plenty of reason to be optimistic, the report states. Out of the seven projects that delivered in the second quarter, two were fully pre-leased: the LogistiCenter at Pacific Gateway – Bldg 1, at 113,979 square feet, leased to Luban Cabinetry in the Kent submarket, and the Pacific 167 Logistics, at 159,055 square feet, leased to Toysmith in the Auburn submarket. Two of the most notable new leases also included Allen Distribution taking 293,000 square feet at Tarragon’s SeaPORT Logistics Center in Sumner and Infinity Global leasing 248,033 square feet at Tacoma Central Logistics.
Asking rents also increased to an average of $1.04 per square foot in the second quarter, a rise of 6.7 percent over last year, according to the report.
“Eclipsing the $1 mark, this is a tell-tale sign of the increase in new modern vacant space with more due to deliver in the second half,” the report states. “Long-term commitments from tenants are proving difficult to come by, resulting in an uptick in renewals. Following a decline of leasing activity, a plateau in rent growth is in store to finish out the year.”
Meanwhile, the Eastside is contending with some of its own challenges. That region is projected to fare better than the city when it comes to vacancy rates, though it did not deliver any new projects in the second quarter, according to Cushman & Wakefield’s “MarketBeat Puget Sound-Eastside Industrial Q2 2023.”
The Eastside industrial market reported a vacancy rate of 3.2 percent in the second quarter of 2023, down from last year. The Kirkland and Redmond (Overlake) submarkets recorded the lowest vacancy rates, both at 0.9 percent, whereas the highest vacancy rates were recorded in the Mukilteo and Issaquah/East I-90 submarkets, at 7.2 percent and 4.6 percent, respectively. Though overall absorption for the quarter was negative 309,000 square feet, representing a decrease from the positive 307,000 square feet reported a year ago, the report argues in favor of that data point as an aberration in an otherwise bullish outlook as major projects are set to deliver later in the year.
“The vacancy rate in the Eastside is expected to remain low with an underlining trajectory to decrease in the coming quarters,” the report states. “With a supply of buildings delivered this year and a healthy 87.9 percent of space accounted for, occupiers are looking to expand, making for a positive outlook in this market.”
Nearly 402,000 square feet of new space was leased on the Eastside in the second quarter, a 58.2 percent decrease from the year before, according to the report. No deals eclipsed the 100,000 square foot mark, with the largest being KONE’s 68,000 square foot direct deal at the PowderMill Business Center in the Everett submarket.
“Falling in line with the theme of the quarter, mid-size space has claimed the lion’s share of activity,” the report states. “With projected healthy rent growth and vacancy rates on the decline, anticipate the Eastside to continue to tighten with demand for premium space only growing.”
