Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/595440
M A R K E T H I G H L I G H T: S E AT T L E 16 • November 2015 • Western Real Estate Business www.REBusinessOnline.com INDUSTRIAL DEVELOPMENT ONCE AGAIN PICKS UP STEAM IN SEATTLE Summer ended with a swath of ab- sorption in Pierce County, and that momentum has carried into the fall. There was a slight lag in tenant activ- ity in August through the start of Sep- tember, likely due in part to concerns over Asian market volatility and the ensuing convulsions in the U.S. mar- kets. It was also partially due to spec- ulation and subsequent reaction to the Fed's decision to hold interest rates at virtually zero. The lag was quickly erased in the industrial marketplace as sizable chunks of product across the spectrum were snapped up. Some of the notable deals include Regal Logistics leasing 251,100 square feet at Portside Industrial Center in Fife; Givens Distribution leasing 132,321 square feet at the Titan Building in Sumner; and Panattoni/ MetLife se- curing 103,000 square feet of tenants at Des Moines Creek Business Park. Construction at Des Moines Creek Business Park will not be complete until December, yet proposals and leases are out for the entire proj- ect, with deals ranging from 20,000 square feet to 170,000 square feet. Average shell rates for these deals are $0.49 per square foot. Panattoni will likely kick of a second phase of spec- ulative construction at Des Moines Creek Business Park this coming spring with designs for an expected 400,000-square-foot building that will likely be preleased as well. With vacancy in the north end of the Kent Valley approaching 4 per- cent, tenants are scrambling to se- cure space. Interestingly, there are dozens of short-term requirements roaming the market, seeking space ranging from 20,000 square feet to 100,000 square feet. Many are fnding that most landlords will only do term deals. These short-term requirements in most cases likely represent compa- nies that are experiencing legitimate growth, but have some concerns about committing to term deals for space when rates are at all-time highs and most would agree we are in the later stages of our current economic cycle. These late-stage concerns can be seen with landlords that are push- ing hard for term and premium val- ues, and in Prologis' case, not market- ing rates and using commodity-based pricing. The investment sales market has generally been relatively quiet, likely due to the fact that so much of the market has already traded during this cycle and there are few sellers left (for now). Clarion Partners was selected as the buyer of Segale Business Park. The transaction will likely close in the latter part of the fourth quarter, prob- ably at a value in the low $200 million range. Rents at that park are across the board, at least 15 percent to 18 percent below market, so there is major up- side potential. Seeing this ownership change signifes a major change at last in Segale's holdings. This comes after the company exercised numerous de- velopers in 2014 on possible ventures on the Pacifc Gateway Lland and the Auburn C Street land, only to yank those properties from the market in the eleventh hour. The next ques- tion, assuming the transaction closes, is when does the next shoe drop for the Segale Family's holdings, as their land holdings essentially represent the core of the remaining future de- velopment pipeline in the North Kent Valley. Forecasting the next 12 to 18 months is anybody's guess. However, barring the unforeseen, our market- place should continue to enjoy rent growth and low vacancy through at least 2016. Thad Mallory Senior Vice President and Partner, Kidder Mathews Tony Miltenberger Senior Vice President and Partner, Kidder Mathews Matt Wood Senior Vice President and Managing Partner, Kidder Mathews The underlying forces bolstering the strength of the Seattle metro multifamily marketplace are robust job growth, new development projects and the short supply of single-family houses. While these factors also slightly impact vacancy levels, property prices and sales activity are expected to continue to rise. New and expanding companies, particularly in the tech sector, have sustained job growth in the Seattle-Tacoma region over the past fve years. They have put more than 115,000 people to work since the pre-recession peak. This infux of workers, strong housing demand and a number of new develop- ment projects contributed to the construction sector posting the region's strongest 12-month job gain of 14,600 new jobs. Company expansions are antici- pated to generate an additional 65,000 jobs this year alone. Construction of both single-family and multifam- ily housing projects is expected to continue at an ac- celerated pace over the next several years. Limited inventory and afordability issues associated with single-family houses are preventing many people from transitioning to homeownership, thus foster- ing intense demand for apartment rentals. Roughly 12,000 rentals are expected to come online this year – with about 2,600 apartments delivered in the sec- ond quarter of 2015 alone. This represents the sec- ond-largest quarterly gain in more than 15 years. The bulk of new completions will be focused in the in-city Seattle market. Development activity is ex- pected to remain elevated, as nearly 20,000 units are under construction with completions scheduled into 2017. Vacancy has dropped to its lowest level in 15 years, despite the more than 25,000 apartment deliveries in the past three years. Apartment demand will not be able to keep pace with the wave of new deliver- ies, however, in the second half of the year. This will likely cause the metro's vacancy rate to increase 30 basis points to 4.2 percent by end of year. Even with this slight uptick in vacancy levels, sig- nifcant tenant demand and a wealth of new luxury apartment deliveries are expected to increase ef- fective rents by 8.4 percent in 2015 to an average of $1,348 per month. The Seattle-Tacoma metro's strong economy and attractive housing market are causing investors to fock to the metro, as evidenced by the 17 percent surge in transaction velocity year-over-year as of June 2015. While local buyers have accounted for the majority of sales activity, foreign and institutional in- vestors, and out-of-state investors—primarily from California—have also escalated purchasing this year. Capitalization rates near the Seattle core are in the 5 percent area, while properties in cities like Tacoma and Everett are trading hands with capitalization rates in the low- to mid-6 percent range. Even with many new completions this year, competition re- mains intense for available assets. Net operating in- come has increased - as a result of solid rent growth –incentivizing owners to hold onto their properties. With this in mind, investors may want to consider non-luxury assets or assets farther from the metro core. Yield-driven investors searching for reposition- ing options might also consider assets in South Se- attle, Pierce or Snohomish counties. SOUND MARKET FUNDAMENTALS: THE SOURCE OF SEATTLE'S MULTIFAMILY STRENGTH Raymond Allen Associate Director, Marcus & Millichap