Home Industrial Steadfast Seattle: Industrial Real Estate Insights for Q3 2023 from Kidder Mathews

Steadfast Seattle: Industrial Real Estate Insights for Q3 2023 from Kidder Mathews

Seattle, Puget Sound, Kidder Mathews, King County, Pierce County, Snohomish County, Thurston County
Photo by CHUTTERSNAP on Unsplash

By The Registry Staff

(EDITOR’S NOTE: Kidder Mathews is a sponsor of The Registry. The company did not pay the following analysis to be published. It was selected for its editorial value.)

Rumors of Recession Linger as Seattle Industrial Market Holds Steady

Despite persistent rumors of an impending recession spanning nearly a year, the third quarter of 2023 has shown that the data has yet to confirm such fears. While there has been a notable softening, a full-blown recession has been averted thanks to continued consumer spending bolstering the economy. The Federal Reserve’s ongoing interest rate increases, currently ranging from 5.25 percent to 5.5 percent, have had a discernible impact on the sale of commercial real estate across various sectors, including the industrial market, according to a Kidder Mathews industry report.

There was significant growth for the industrial market in the third quarter of 2023, driven largely by substantial gains in the Pierce County submarket, which saw an increase of 3.34 million square feet in occupied space. The entire region added 3.1 million square feet of industrial space, resulting in a vacancy rate of 4.9 percent, marking a 50-basis point decrease from the previous quarter.

Key highlights from the industrial market include:

  • An additional 3.09 million square feet was added to the regional supply in Q3, bringing the total to 371.4 million square feet.
  • Construction activity has decreased by 36.8 percent, with 6.66 million square feet under construction across 39 projects.
  • Pre-leasing rates increased from 33.3 percent in Q2 to 38.3 percent in Q3, although there was a net decline of nearly one million square feet in pre-leasing.
  • Sales activity included closing 37 properties this quarter, totaling $172 million, with an average price of $232.4 per square foot and an average capitalization rate of 6.07 percent, marking a 7.2 percent increase over the previous quarter.

In terms of employment, Washington State reported 3,606,600 jobs in July 2023, reflecting a 1.6 percent year-over-year growth. The four-county region added 11,000 positions during the same period, with a total employment figure of 2,260,200. Notably, while the largest segment employing 398,500 individuals, the Professional Business Services sector saw a decrease of 13,200 positions over the past year. The Information sector, employing 137,400 individuals, also saw a decline of 10,000 positions, representing a 6.8 percent decrease over the past year. In contrast, Leisure and Hospitality experienced the strongest growth, expanding by 5.2 percent with the addition of 10,400 employees. Manufacturing added 4,300 positions, a 2.6 percent increase, reaching 169,000 jobs.

In the logistics sector, the Northwest Seaport Alliance reported container volume through August 2023 at 1,874,148 TEUs, representing a 20.2 percent decline from the same period in 2022. Issues such as a labor union dispute and drought in Central America impacting the Panama Canal are being monitored for potential impacts on logistic warehousing.

Several significant sale transactions occurred in the third quarter of 2023, including:

  • Invesco’s acquisition of Fife 70 East from Principal Financial Group, Inc., at $204 per square foot, fully leased at a 4.85 percent cap rate.
  • The sale of Park 118 by PAR5 Investments to GAH Kirkland RE Holdings LLC for $354 per square foot for a 17,920-square-foot building. The buyer intended to occupy the space in the near term.
  • The owner-user transaction of American Food Group’s 66,230 square foot Kent facility to Kyokuyo America Corp. for $226 per square foot.
  • The sale of Chuck Flowers’ four-building project at 1089 Valentine Ave. SE in Pacific to Sobberdoggie LLC for $449 per square foot, covering 17,807 square feet of buildings situated on 2.3 acres.
  • SB Sumner Properties LLC’s sale of the Stripe Rite property, encompassing 32,102 square feet on 3.0 acres, to Heartland Northwest Properties for $358 per square foot, totaling $11,500,000.

The Pierce County market saw significant leasing activity in the third quarter of 2023, with notable transactions including:

  • United States Navy’s lease of 116,180 square feet at Prologis Fife Distribution in Fife.
  • Tredegar Film Products’ lease of 131,588 square feet at Port Commerce Center in Fife.
  • Infinity Global Logistics’ lease of 248,033 square feet at Tacoma Central Logistics in Tacoma.
  • Sany’s lease of 225,000 square feet at Northwest Logistics Center in Dupont.
  • Tesla’s lease of 245,619 square feet at Cascade Business Park, Bldg. 1, in Marysville.

Seattle Close-In Market

The Seattle Close-In market has seen vacancy rates rise from 6.3 percent in Q1 to 7.1 percent in Q3, a significant increase from the 3.6 percent recorded at the end of 2021. Absorption rates for Q3 were at -205,493 square feet, bringing the year-to-date total to -843,900 square feet. There are 350,000 square feet of new construction in multi-level flex space across two projects, with only 27,000 square feet leased.

Trammel Crow’s ongoing work on Terminal 106, a two-story, 692,752 square-foot distribution facility north of S Spokane St. on East Marginal Way, is set to deliver in Q4 2024. 

Sale volume reached $27.6 million across seven closed transactions, averaging $287 per square foot. Notable sales included the purchase of the former NW Wire Works Building (22,972 square feet) in SoDo by American Life and Urban Visions’ acquisition of the former Performance Radiator Building at 1101 Airport Wy. S for $6,600,000. 

Average asking rental rates for blended office/warehouse spaces remained flat at $1.38 per square foot.

Southend Market

The Southend market experienced a slip in vacancy to 5.3 percent, roughly matching Q1 2023 levels. The total inventory is 118.7 million square feet, with 1,011,803 square feet delivered in 2023 and -1,194,056 square feet of absorption in Q3 2023. There are 2.52 million square feet of signed leases with expected occupancy in the next nine months, offset by 11 projects anticipated to deliver 2.61 million square feet in Q4, with pre-leasing at 23.8 percent.

Five sale transactions were recorded in Southend, totaling $46.150 million, averaging $213 per square foot with an average cap rate of 5.64 percent. Notable sales included Lift Partners’ purchase of the M3 Business Center (132,129 square feet) from the JMS Family Trust and McClure Properties’ acquisition of the six-building Spectrum Business Park (68,912 square feet) from MCA Realty, Inc.

Eastside Market

The Eastside market continues to shrink, with 160,251 square feet of inventory removed in the third quarter. Vacancy rates are tied with Thurston County for the lowest in the region, currently at 3 percent, with 19,468 square feet absorbed in Q3 2023. Five buildings are under construction, totaling 205,272 square feet, with 89,697 square feet expected to be delivered by year-end. 

Leasing activity saw 12 tenants taking occupancy in Q3, totaling 61,001 square feet, with only three tenants occupying 12,000 square feet or more. Rental rates have softened slightly, ranging from $1.25 to $1.80 per square foot for warehouse and manufacturing spaces and $1.75 to $2.50 per square foot for office spaces.

Northend Market

The Northend market added 645,519 square feet in Q3 2023, resulting in a vacancy rate of 3.8 percent due to strong absorption of 3.33 million square feet. There are currently 1.35 million square feet in 12 projects under construction, with 951,399 square feet anticipated to be delivered in Q4, with 77.9 percent pre-leased. 

Thirty-seven leases commenced in Q3, totaling 762,561 square feet. The blended rental rate remained flat at $1.29, reflecting warehouse lease rates in the range of $0.90 to $1.35 per square foot, depending on age and location, and office rents at $1.80 to $2.50 per square foot.

Ten sales transactions occurred in Northend during Q3, totaling $60.26 million, with an average price of $246 per square foot and an average cap rate of 6.0 percent. Notable sales included Kalani Packaging’s purchase of a 67,595 square foot building of new construction from Mosaic Homes and Scott Galvanizing Co.’s acquisition of a 34-acre Builders FirstSource Inc. site.

Land remains available in Marysville/Arlington, with 35 proposed projects totaling 5.7 million square feet. Land prices range from $18 to $30 per square foot for finished sites and $6 to $15 per square foot for raw sites.

Pierce County Market

Pierce County’s vacancy rate increased from 2.6 percent at the end of 2022 to 4.7 percent, with 419,383 square feet in Q3 absorption. Construction has slowed, with four projects totaling 1.2 million square feet, 77.5 percent pre-leased, expected to deliver by year-end. Leasing activity includes seven leases, totaling 1.38 million square feet, with one notable lease signed by Floor and Décor for 1,118,480 square feet.

Pierce County sales in Q3 consisted of ten transactions totaling $9.6 million, averaging $281 per square foot, with an average cap rate of 7.0 percent. These sales were predominantly owner-user transactions.

Rental rates in Pierce County range from $0.90 to $1.30 per square foot per month, NNN, with office add-on rates of $1.00 to $1.60 per square foot per month. The blended rate dropped from $1.03 per square foot in Q1 to $0.78 per square foot in Q2, remaining flat in Q3. Land values have remained suppressed, approximately 20 percent below their highs two years ago.

Thurston County Market

Thurston County’s vacancy rate, although one of the lowest in the region, increased slightly from 2.6 percent in Q2 to 3.0 percent in Q3. A strong absorption of 976,385 square feet was reported. 

Construction has slowed, with five projects totaling 173,000 square feet underway, three of which are expected to deliver by year-end, with 26.9 percent pre-leased. The pipeline remains full, with 11 proposed projects totaling 3.6 million square feet.

Two leases commenced in Q3, including Sound Sleep’s lease of 132,872 square feet. Average blended rents increased slightly from $0.72 per square foot in Q1 to $0.74 per square foot in Q3. Shell rents range from $0.45 to $0.60 per square foot on larger spaces, with office add-on rates of $0.90 to $1.20 per square foot. Smaller spaces range from $0.50 to $0.70 per square foot on the shell, with office add-on rates at $0.95 to $1.25 per square foot.