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/888015
www.REBusinessOnline.com Western Real Estate Business • October 2017 • 49 SEATTLE INDUSTRIAL LANDLORDS CASH IN ON TENANTS' LACK OF OPTIONS Tony Miltenberger, Senior Vice President and Partner, Kidder Mathews in Seattle The song remains the same for the booming Seattle regional economy and the industrial marketplace. The Seattle industrial market is flat out phenomenal for owners...and brutal for tenants. Year-to- year rent increases have exceeded 20 percent, regional vacancy rates continue to trend closer to 3 percent and if you build it, they will come. Cap rates for core product still range from 4 percent to 4.5 per- cent. Landlords eager to push rents on leases rolling over from 2011 to 2013 start dates are keeping in mind the benefits of maintaining tenant qual- ity at a slightly lower cost versus tak- ing on lower-quality or lower-credit tenants willing to pay extreme rates. Portfolio tenant quality will be critical moving forward. South Seattle The South Seattle vacancy rate has remained at less than 2 percent for 10 straight quarters, ending the second quarter of 2017 at 1.55 percent. South Seattle vacancy should remain at less than 2 percent, and may dip below 1 percent in late 2017. Operating in an extreme low vacancy environment is the new norm, creating new dynamics in how properties are valued for sale and for lease. Demand has become increasingly difficult to gauge, with deal velocity being depressed due to lack of supply. With no available alternatives, South Seattle tenants often have no choice but to renew in place. Most sales are also occurring off-market, which doesn't provide a true gauge of mar- ket depth. This dynamic leaves open questions like rent growth and cap rates, as single transactions move the market. User sales are the only sector that have been tested. The recent sale of the 18,000-square-foot former Ambi- ent Tile building in Georgetown gar- nered more than 15 offers and sold at a market high of $263.03 per square foot. The sale illustrates the massive demand for user buildings in South Seattle. Demand for these types of properties is occurring for the same reason that housing is in such high de- mand within this market: there are no suitable relocation alternatives. Given the current dynamics, we expect to see user buildings, when available, trade at record values. Miltenberger Pierce County / Port of Tacoma The second quarter continues to be strong for Pierce County. All of the first generation new construction has been absorbed, setting new highs for market rents and market vacancy in near historic lows. ProLogis will be delivering ProLogis Park Tacoma in the third quarter of this year. UPS has leased a 750,000-square- foot building, while buildings A and D of the project will have a little more than 500,000 square feet available. Crow Development will soon break ground on the Puyallup De- velopment, which has been sold to an undisclosed user, as DCT commences construction on the 542,000-square-foot Building A at Blair Logistics Center, which should be deliv- ered in the first quarter of 2018. Market fundamentals near the Port and in Pierce County continue to be strong with limited land inventory. Capital Markets Puget Sound industrial capital markets are still in high demand. With rents peaking and cap rates typically in the low 4 percent range, we are seeing unchartered prices per square foot. South Seattle has seen $187 per square foot pricing and is expected to surpass the $200 mark. High- quality, well stabilized properties in Kent will surpass $150 per square foot, making the overall Seattle market a good investment, if you can get in on it. n