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December 2, 2011

Investors turn aggressive on industrial properties

  • Puget Sound’s industrial market is moving toward speculative development.
  • By MATT MCGREGOR and SCOTT ALAN
    Colliers International

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    McGregor

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    Alan

    As 2011 draws to a close, the Puget Sound industrial market has seen big-box vacancy drop to nearly record lows, resulting in speculative development right around the corner.

    We have seen a major shift in the demand for large industrial space. This is due to large credit companies realizing massive expansion needs in the major core industrial markets of the United States.

    This year has welcomed several new large industrial users and multiple existing large users that are leasing and absorbing big-box spaces:

    • Amazon.com signed a long-term lease of 492,000 square feet earlier this year in Sumner.

    • Brooks Sports is expanding into 427,000 square feet in Sumner, which should open later this year.

    • Mitco Limited, a regional 3PL, signed a long-term lease of 139,000 square feet at Valley Center Corporate Park in Auburn.

    • Carlisle Construction Materials closed on land in Frederickson and is rumored to be constructing a 350,000-square-foot building.

    • Trader Joe’s is under way with a new state-of-the-art 500,000-square-foot distribution center in Lacey.

    • Pacer Distribution Services is rumored to lease a 200,000-square-foot distribution center in Sumner.

    Also expanding operations this year are Green Mountain Coffee Roasters, Service Paper Co., Peterson Co., Chasing Fireflies, Kellogg’s, lululemon, OnTrac and multiple others.

    The industrial market is running out of large spaces due to these new large leases and expansions. There are only two properties in the market (Seattle through Lacey) that have vacant contiguous spaces larger than 300,000 square feet. One of these properties, Renton Logistics Center, is rumored to have a deal that will secure a majority of the space. This leaves only the Portside Distribution Center in Tacoma as the last vacant big box standing.

    Photo courtesy of Colliers International [enlarge]
    Brooks Sports will soon expand into this 427,000-square-foot warehouse in Sumner.

    Given this trend, the Portside Distribution Center should not have to wait much longer for a tenant, as the fourth quarter of 2011 will be the fourth consecutive quarter of positive absorption and is likely to surge past 3 million square feet of total absorption for the year.

    This positive absorption has resulted in a vacancy rate drop of nearly 120 basis points over the same period last year. The South King and Pierce County industrial market has been the beneficiary of the majority of these transactions, as this is the area that contained most of the remaining vacant speculative development from the 2005 through 2008 industrial real estate boom.

    The result from the shortage of large vacancies is a huge jump in land sales and talk of speculative development:

    • Sumner Corporate Park owners have indicated they are likely to tilt walls of a nearly 400,000-square-foot industrial distribution center as early as spring 2012.

    • The Benaroya Co. closed on nearly 28 acres of industrial land in Sumner.

    • Prologis acquired 12.85 acres of land in Fife in the second quarter of 2011.

    • Tarragon has a 28-acre site under contract in Puyallup.

    • Alsco purchased a 6-acre site in Kent, while its competitor HCSA is closing on a 6-acre site in Auburn.

    • Washington Capital purchased a 9.9-acre site in Lacey where the new Trader Joe’s building is being constructed.

    Several other sites are being negotiated on by developers optimistic about 2012 and 2013.

    With the ongoing land grab, drop in vacancy, and lack of large industrial product, the international investment community has identified the Seattle industrial market as a top three market in the country for acquisitions. Both public and private equity firms are chasing product at nearing record levels.

    Through the end of October, 65 sales closed totaling nearly $250 million. Valley Avenue Business Center, a 443,000-square-foot industrial park in Puyallup, has since sold for $41.6 million.

    We have not seen this type of aggression since 2007, and the pool of investment firms looking to purchase industrial properties in Seattle has nearly doubled since that time. A typical investment offering during the 2007 era would have yielded around 18 to 20 interested parties, while assets traded during 2011 have fielded over 40 interested and aggressive parties.

    LBA Realty purchased the Columbia Pacific Portfolio (two industrial buildings totaling 473,000 square feet) early this year and a record number of firms, 44 total, signed the confidentiality agreement.

    As new assets hit the market, new investment firms are popping up and competing with the better known institutions, such as Prologis (formerly AMB Properties), LaSalle, Principal, RREEF, DCT Industrial Trust, Clarion Partners and TIAA-CREF. Some of the newer names to the market include Industrial Income Trust, Morgan Stanley, KTR Capital Partners, Colony Capital and Dexus Property Group.

    We will look back on this year as a monumental turning point in the industrial market. We anticipate the institutional buying frenzy will thaw the smaller 40,000- to 80,000-square-foot user market.

    The user sale segment has stalled out with the weaker economy over the past 24 to 36 months with fewer than normal owner/user sales. With the Federal Reserve strong, low long-term interest rates and the buying certainty of the institutions, the stage is being set for an enthusiastic 2012 where we expect continued land grabs, new tenants to enter the market and existing tenants to expand. The result will be more positive absorption, declining vacancy, speculative big-box development and increased rental rates.


    Matt McGregor, SIOR, and Scott Alan, SIOR, are senior vice presidents at Colliers International.


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