Marketplace
Surveys

DJC.COM
 		    

February 22, 2001

Why we shouldn’t worry if NW industrial market softens a bit

  • The adjustments we are seeing in the industrial market are simply a reaction to an overly hyped economy, not an indication of bad times.
    • By WILMA WARSHAK
    Colliers International

    In the heyday of the booming office market, both developers and brokers wanted to be focused on office. Tremendous money was being made by both groups as tenants were expanding and leasing more space than they needed because growth was “assured.” Industrial brokers peered enviously into the great vats of dollars being filled by their office broker compatriots. Industrial developers watched office developers achieve yields often well beyond industrial returns. Well, times have changed. Industrial, while never having been out of favor as a good investment vehicle, is looking really good these days.

    Industrial is like the bonds of the real estate community. It rarely goes up really high and rarely comes down really low. Even during recessionary times of the early 90s, absorption remained positive and vacancies stayed in the single digits. That, for those who can remember, was not true of the Puget Sound office market.

    Now this is not to say that the industrial sector is immune to the vagaries of the economy. We have our own excitement – only it’s not so stressful. With economic indicators showing a decline in consumer confidence and growth, the need for products decline. Warehouses, often referred to as fulfillment or distribution centers, are starting to be put on the open market for sublease. In fact 40 percent of the vacancies in the industrial market are subleases. Fortunately, the overall vacancy is only 5 percent.

    Prior to the addition of sublease space, the market was very tight – almost too tight. Companies that had foreseen expansion needs were hesitant to locate into markets where their options would be limited. As a result, they took their business to another part of the state or even outside the state.

    Our competition is not always just properties in the Puget Sound area. If the requirement is large enough, other states such as Nevada and Utah become viable alternatives. So sublease space can be a good thing, as long as the trend does not continue to the point that rents begin to soften. Of course I am talking from the landlord side. The tenant is saying: Cool!

    Now, even if the amount of sublease space increases, it is unlikely that the market will significantly soften. The reason is twofold: one, while the industrial sector was affected by the fast growth of the economy, it did not grow at the same speed as the office market. The growth in office space far exceeded job growth, but this was not true for industrial space. The spurt of the technology market affected mainly the office sector: Technology companies and those that serve them, such as advertising firms and attorneys, need office space, not warehouses.

    Of course the “wealth effect” created more demand for products, which increased demand on manufacturing and distribution. In addition, some bricks-and-mortar companies, such as Walmart.com and Barnes & Noble.com, started separate online companies, to meet the potential onslaught of the new Internet competition. And, of course there were some Internet companies that required warehouses from conception – most notably Amazon.com, Webvan and Etoys.

    This new demand resulted in lower vacancy rates, higher rental rates and more development. – just not as much as office. The second component to why the market will probably not significantly soften is that developable industrial land in King County is scarce. As a result, developers cannot over develop.

    Now if, in fact, the market does continue to soften, where and what size spaces will feel the burn the worst? Well, let’s start first with location. Approximately 60 percent of new industrial development has occurred south of Kent. Although most developers would prefer to build closer to Seattle, where vacancies are the tightest and demand the strongest, land is limited. Thus developers go south where land sites are still available. This is especially true in Pierce County. There are enough sites now available in Sumner to build over nine million square feet. Only approximately 15 percent of it is built out.

    In the Fife market, major developers such as Opus and Northwest Building Corp. have more than 200 acres under contract on which they can develop. And there is even more land to be obtained. While Pierce County is receiving considerable attention as an industrial base with more development and tenants entering the market, this is a market that has grown partially by the decreasing options in King County. If the market further softens, more options will be created and more tenants will focus north, putting an upward pressure on vacancies in Pierce County.

    Which size spaces are most likely to be affected? Look at development trends. Over the past five years, most new development has been geared for medium-to-larger tenants. While these buildings could be broken into smaller spaces, the typical configuration would limit it. Thus the smaller tenants, 15,000 square feet and below, would face limited options and rising rental rates.

    Larger tenants are in a more advantageous position. In the early part of last year, there were perhaps two existing spaces over 100,000 square feet available. Today, there are more than a dozen available. In the face of this, it is likely that smaller spaces will continue to be leased up, with larger spaces duking it out for larger tenants.

    Having walked the pavement of this industrial market for over 14 years, it is my impression that the adjustments we are seeing in the industrial market are simply a reaction to an overly hyped economy, not an indication of bad times. It appears to be simply an adjustment back to the norms more reflective of the years between 1995 and 1998, which as I recall, were pretty darn good.

    The top producer nationally at Colliers International for 1999, Senior Vice President Wilma Warshak is a specialist in the sale and leasing of commercial properties. For 10 of her 14 years with the company, she has been Colliers’ top producing industrial broker in the Northwest.


    Other Stories:


    Copyright ©2009 Seattle Daily Journal and DJC.COM.
    Comments? Questions? Contact us.