Demand continues to outpace supply as Seattle’s industrial market continues to be one of the tightest markets in the country, reaching vacancy rates that are at a historical low. According to JLL’s Seattle-Bellevue 2016 first quarter Industrial Insight report, development is struggling to keep pace.
Scott Carter, a managing director for JLL, says that Seattle is seeing a constrained addition of new supply in the market and a surge in absorption, which is eating up the new space faster than it can be created. “We’re at a little bit of an imbalance, where we have a lot less supply historically than we have had in the past,” said Carter. “Developers aren’t building the space as fast as the demand is requiring at this point in time. One of the things that drives our industrial market, particularly in the warehousing and distribution side of the house, is population growth. We’ve seen this population increase in our area, which has caused a need for more food and beverage and more consumer goods.”
It’s kind of a perfect storm, Seattle is just an attractive investment
At just 3.7 percent, the vacancy rate for all of Everett south to Tacoma is down 40 basis points year-over-year, according to JLL’s report. Seattle’s rate has declined 20 basis points from 1.6 percent to 1.4 percent. With Seattle being a very land-constrained market, vacancy is expected to remain low throughout the year and leverage remains firmly in landlords’ favor, says the report. “I’ve never seen the vacancy this low. What I’ve historically seen is that once rental rates rise, we would see a surge of development. In today’s market we have seen some development, but it hasn’t been what I would consider over the top, in terms of the quantity.”
“It’s a trickle down effect of the overall job market, which is good in Seattle, but the e-commerce trend of Amazon, Walmart and other consumers needing their stuff in a day or two,” said Taylor Hoff, a partner at NAI Puget Sound Properties. “This is forcing many big companies to take up bigger warehouses in larger cities that are close to the population base. It’s kind of a perfect storm, Seattle is just an attractive investment.”
The shift toward e-commerce is changing how the retail and logistics industries are operating, according to NAI Puget Sound Properties 2016 second quarter industrial market report. The change has created a broad range of e-commerce business models, which varies depending on the size of the operation, product focus and value, and retailer model. The older South Seattle industrial buildings and the newer larger projects with trailer parking are what current tenants are looking for, each offering a different niche in our ever expanding e-commerce market, says the report.
As absorption remains strong and rental rates increase, developers are not hesitating to break ground on new projects, says JLL’s report. Strong leasing and development activity are most prominent in the Southend industrial market. There is over 1.8 million square feet of product under construction in the region, however, increased demand has created a very space-constrained market. Strong pre-leasing in the form of 500,000 square feet proves that tenants in the market are competing to secure the best available spaces while lack of developable land opportunities has pushed land prices up to $10 to $15 per square foot in the Southend industrial market, says the report.
There will eventually be another recession or slowdown, says NAI’s report, which is predicted for 2019 or 2020. The market’s rent growth may force companies to expand or grow in other less expensive markets due to a series of rate hikes through 2017 and 2018, in large part because the U.S. economy is closing in on full employment, says the report.
However, Carter believes that the strength of Seattle’s overall market is in its diversity. “Back in the 70’s we kind of went as Boeing went, and if Boeing had a downturn then Seattle had a downturn, because they were such a major employer. We didn’t have the diversity of the tech companies like Microsoft and Amazon. When you start accounting for all of these multiplier effects, it’s pretty dramatic in terms of job creation.”