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December 13, 2012

Cautious optimism for industrial market

  • In the South King County market, activity for larger spaces remains low, perhaps due to the lack of existing 30-foot, sprinklered space.
    • By THAD MALLORY
    Kidder Mathews

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    Mallory

    The Pacific Northwest has seen steady job growth in the past year, especially King County in Washington.

    The Washington unemployment rate fell from 8.9 percent in October 2011 to 8.2 percent in October 2012, and the unemployment rate for Seattle/Bellevue/Everett — a zone that includes much of the South Seattle and Kent Valley submarkets — has fallen from 8.3 percent to 6.9 percent in that same time frame.

    The trend appears likely to continue.

    Leading the way was manufacturing with approximately 14,100 new jobs added, which included 7,800 aerospace-related jobs. Boeing’s resurgence locally has been a critical factor not only for those directly employed by the company but also for aerospace subcontractors.

    Evidence of aerospace subcontractor strength can be found in Kent: VAS expanded its operations by 100,000 square feet in the first quarter of this year; Hexcel added 54,000 square feet in the third quarter; and Carlisle doubled its space to 100,900 square feet in the fourth quarter.

    Suppliers, regional service industries and the housing market also improved.

    In Seattle, Amazon has practically single-handedly stabilized the downtown office market, and on the Eastside new construction is afoot with high demand for space from growing companies such as Google.

    Based on figures from the U.S. Bureau of Labor Statistics from July 2011 to July 2012, Seattle and Portland are experiencing some of the best job growth in the U.S. (Seattle is ranked fifth and Portland ninth).

    While housing in the region continues to show improvement in year-to-year sale values, a great concern amongst the residential real estate industry continues to be the shadow inventory of bank-owned homes that have not yet entered the foreclosure process, with many speculating that there is a backlog of two to three years of homes at the foreclosure stage. These homes cannot be dropped into the housing market at once or the result would be an instantaneous and long-lasting deflationary effect on home values.

    Port activity

    The ports of Seattle and Tacoma continue to battle each other for business rather than find a mutually beneficial growth strategy. Going forward, with the expansion of the Panama Canal, local and national concerns see a necessity of the two ports to strategize and effectively operate as one to remain competitive.

    Year-to-date activity for the Port of Seattle has shown a 5.4 percent decrease in volume, from an import/export/domestic total of 1.7 million TEUs through the first 10 months of 2011 to 1.61 million TEUs in the first 10 months of 2012. Twenty-foot equivalent units, or TEUs, are used to measure capacity in container transportation.

    In contrast, the Port of Tacoma saw a 13.8 percent increase in total TEUs over the same period. Some of this differential is evidenced by the decisions such as Hapag-Lloyd’s expansion in the Port of Tacoma as opposed to the Port of Seattle and its ongoing labor issues.

    Many in the maritime and related industries are concerned that Seattle’s Sodo industrial market will suffer from continued growth and expansion of office buildings, a new NBA/NHL stadium, and the potential for substantial retail and multifamily growth around these new developments. Truck access to and from the Port of Seattle is becoming increasingly difficult as a result.

    The higher and better use argument for South Seattle points to the growth and sprawl of the city pushing south, and conflict in this submarket will continue as it transitions. How the City Council reacts to impacts on the port will be a hot issue for years to come.

    Leasing activity

    As of third quarter 2012, the South King County industrial market saw 767,199 square feet of positive absorption for a vacancy rate of 6.34 percent; similar to second quarter’s 704,337 square feet but a continued drop from first quarter’s blistering 1.15 million square feet.

    Through the first nine months of the year, lease rates climbed on an effective basis by 8 to 10 percent. There has been little change in concessions as landlords prefer to strengthen rates rather than alter concessions at this point.

    The biggest change in market activity since the spring has been the lack of 100,000-square-foot and larger users in the market. The summer did see, for example, Jacobson Global Logistics lease 165,463 square feet at Kent North Corporate Park (doubling in size), Graybar more than double in size to 156,696 square feet at Renton Logistics Center, and Safeway lease 105,084 square feet at Kent East Corporate Park to relocate a division that was being displaced by the Bellevue Spring District project.

    The pipeline of this larger activity remains low at the moment, perhaps due to the lack of product depth in the region for existing 30-foot, sprinklered space. In addition, Bunzl recently exercised an option to terminate its lease for 163,992 square feet at Oakesdale Business Campus and relocated that use to new subsidiary Service Paper’s existing building in Sumner, which has created a new hole on the north end of the Kent Valley.

    Kent Warehouse and Labeling also completed its relocation from Kent I Distribution Center, reintroducing 250,000 square feet to the market. The company relocated to 240,000 square feet at Northwest Corporate Park — Kent.

    Thad Mallory, first vice president with Kidder Mathews, specializes in industrial properties in the greater Seattle area. Mallory was recently named Industrial Broker of the Year for Washington state by the Society of Industrial and Office Realtors.


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