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Southend Leading Puget Sound Industrial Space Market

By David Goll

Boasting a location along major freeways—as well as a supply of available and affordable land between the busy ports of Seattle and Tacoma—the Valley has become the center of industrial leasing and construction in the Puget Sound region this year.

The Valley is centered in the sprawling, growing city of Kent in South King County, which, with more than 120,000 residents, is the sixth largest city in Washington state. It anchors the Southend region—including such neighboring cities as Auburn, Tukwila, SeaTac and Renton—where, despite the construction of large new warehouse and fulfillment centers, vacancy rates are plunging below 4 percent in some submarkets, as rents tilt modestly upward.

We have a lot of new supply hitting the market this year.

Coupled with adjacent Pierce County to the south—where Tacoma and its suburbs of Sumner, Puyallup, Lakewood and University Place are located—the Southend area has become an industrial powerhouse.

It has moved to the forefront of the region’s industrial space picture not only because of the lack of affordable and available land in the immediate Seattle-Bellevue area, but its convenient proximity to both the Tacoma and Seattle ports. Officials of the region’s two major ports are currently awaiting approval from the Federal Maritime Commission to merge their cargo terminal investment, planning and marketing operations.

E-commerce giants such as Seattle-based Amazon.com Inc. are driving the construction and leasing boom, as are third-party logistics companies that handle consumer goods coming into the ports, according to Sam Wayne, a research analyst at the Seattle headquarters office of commercial real estate firm Colliers International. Amazon is building an 811,000-square-foot fulfillment center in Kent’s Stryker Business Center and expected to take occupancy later this year.

Amazon’s project is part of more than 4 million square feet of industrial space among 25 projects currently under construction throughout the Puget Sound region. That is added to the 11 projects already completed so far this year and another 65 in the planning pipeline, he said.

More than 3 million square feet of that new space is being built in the Southend area, according to Randy Gilliam, a senior vice president at commercial real estate firm Kidder Mathews in Bellevue. He said the region’s healthy consumer goods market has attracted businesses such as Simmons Bedding Co. LLC to lease large facilities in the Southend market.

North of Seattle in the city of Everett—with a population of 105,000 and home to airplane manufacturing giant Boeing Co.—B/E Aerospace Inc. and Korry Electronics Co. are both building facilities of about 250,000 square feet.

“We have a lot of new supply hitting the market this year,” said Wayne of Colliers, noting the corresponding high demand for warehouse, manufacturing and flex space.

Gilliam said between Seattle and Tacoma, easy freeway access is the key.

“The new development is mostly along the [Interstate] 5 corridor,” he said. Gilliam added that Interstate 405, which connects the Southend to the Eastside cities of Bellevue, Kirkland and Redmond, home of Microsoft Corp., is a secondary popular corridor for industrial sites.

Matt O’Brien, an executive vice president at the Seattle office of Jones Lang LaSalle Inc., a Chicago-based commercial real estate brokerage, said the red-hot industrial market is part of an economic boom of the past few years that has shaken the Puget Sound region out of its recessionary slumber.

“There is a population boom in the region, amazing job growth and the housing market is on fire,” O’Brien said. “Consumer goods are in huge demand.”

He said a major retailer planning to compete with Amazon in e-commerce is looking to occupy about 1 million square feet of space in the Southend area. O’Brien said he could not identify the company at this time.

Wayne said the booming market means a larger percentage than usual of the new construction is speculative, with developers assuming it will quickly be snapped up. He said about 40 percent of the more than 4 million square feet under construction has been pre-leased.

According to a report from Kidder Mathews, 2014 marked the fourth consecutive year the Puget Sound region recorded positive net absorption of industrial space. From 2011 to last year, nearly 13 million square feet was absorbed and vacancy rates dropped from almost 8.7 percent to slightly over 5 percent.

Because the market expects that new space, including speculative development, it will not be empty for long, and average asking lease rates are rising. O’Brien of JLL said industrial space in the Southend area that was leased for 30 to 38 cents per square foot monthly triple net a year ago, is in the 40-cent-to-45-cent range now. Wayne of Colliers said he is commonly seeing rents in the 48-cent range in that area.

Reports from Colliers note the industrial trends should continue in the Seattle region into the foreseeable future, as e-commerce business volume increases worldwide by 20 percent annually, with sales projected to hit $750 billion in 2015. The Puget Sound Economic Forecaster is projecting a 2.6 percent growth in jobs this year, slightly above national levels. The region’s trade sector is forecast to add 8,200 jobs this year.