December 14, 2006

Buyers line up to get south end industrial land

  • Land prices in mature markets are escalating, causing development to expand southward.
    Colliers International


    For the past three years there has been extraordinary interest in owning land. During that time land values have doubled, and in some cases, tripled in the Puget Sound region. The development community, which essentially went into hibernation starting in 2001, when the economy declined, is now back in full force.

    As is typical when a development cycle begins, demand for land increases, along with prices. Land is truly scarce in the Puget Sound region, especially in mature markets.

    In the past, the brokerage community has often cried wolf — “The land is running out!” — but land sites always seemed to magically appear. However, recently mature markets are demanding extraordinary prices for the small quantity of land that is available.

    One example is industrial land prices in Renton. In the recent past, $6 per square foot was considered high, but today, $12 per square foot would not be unreasonable. Another example is Fife. A couple of years ago, land was selling for $2.25 per square foot, but today it would be closer to $8.50 or $10 per square foot. It is the same story in Sumner, where a couple of years ago one could purchase land for $3 per square foot, today one would need to pay more than $8 per square foot.

    Amazingly, even at these prices, there are multiple buyers for every land site. Part of the reason is that the pool of buyers is different, or at least bigger, than in past years.

    What’s pushing prices?

    The number of developers competing for land in the region has increased substantially. In the past, the locally based developers and perhaps one or two national developers, such as Opus, would compete for land sites. Today, there are numerous national developers that are trying to gain a presence in the market, such as First Industrial, IDI, Duke and more.

    In addition, pension funds and some REITs, which typically do not develop, are teaming up with developers in order to add to their income-producing real estate investment portfolios. These institutions are forced into these partnerships because they unable to secure developed properties to purchase. In fact, it is this group that is often out-bidding traditional developers.

    Users are also responsible for the increase in land prices. With current market conditions, including relatively low interest rates, generally high levels of cash reserves, increasing rental rates and the cost of outfitting their facilities, users see ownership as a logical approach.

    Recent examples of users in the market are Ikea purchasing 70 acres in Frederickson from the Port of Tacoma for its new distribution center and Whirlpool seeking land sites for its new distribution center.

    Heading south

    With land in established markets difficult to obtain, the focus is extending farther south along the Interstate 5 corridor. Tarragon controls 130 acres in Frederickson, an area that has become more viable for users, especially those in the building industry. Oldcastle, one of the largest building suppliers in North America, secured 30 acres there for a new plant. Northwest Door also secured 30 acres for its new plant.

    Ikea’s purchase has given pause to distributors, who in the past disregarded Frederickson as a logistics site.

    Developers have even moved south into Thurston County and even farther into Lewis County. Lacey was the focus of extreme activity among such developers. Teutsch Partners recently bought 160 acres in the Hawks Prairie area and will be developing a high-image park geared towards users who want to own or lease. Buildings will most likely be 200,000 square feet or less.

    Lewis County has also received considerable attention. Tarragon purchased over 100 acres in Centralia and obtained the mandate to provide Michael’s Arts and Crafts a 750,000-square-foot distribution center.

    Price pressures

    Increasing land prices are not the only consideration. Construction prices are rising. Together, they make receiving a reasonable return on costs extremely challenging. The only option left is to raise rents, which is occurring.

    In the past, rates for spaces over 100,000 square feet were from 31 cents to 32 cents per square foot, per month. Today, the range is from 34 cents to 36 cents. Smaller spaces of 10,000 square feet are 38 cents to 45 cents per square foot, much more compared to 35 cents in past years.

    There appears to be a national slowdown in demand for larger spaces. If this continues, it may slow down rent rate projections.

    Regardless, with much of the Kent Valley composed primarily of business parks, new development will be needed to meet the requirements of today’s large distributors. These groups need more trailer parking, a larger number of truck loading doors (often cross loaded), heavy load capacity in buildings, and high ceiling clearances.

    Due to these factors, land prices will continue to escalate especially for the mature markets and growth will continue south. Overall, the face of the I-5 corridor, over the next five years, will be a continued extension of what began in the Kent Valley more than 30 years ago.

    Wilma Warshak is a senior vice president at Colliers International in Tacoma.

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