Seattle Industrial Market Report

4th Quarter 2022

Posted In — Market Research | Market Report

The Puget Sound economy continues to face headwinds as we end 2022. Inflation in the Region has outpaced the National figures in the CPI, core prices (excluding food and energy) and shelter.

The Federal Reserve has raised the target rates by 125 basis points over Q4 2022, with target rates now at 4.25% to 4.50%, in an effort to tame inflation. At the fiscal yearend (October), Seattle CPI was 8.9% according to The Puget Sound Economic Forecaster. Looking forward, PSEF projects inflation for the Seattle-Tacoma-Bellevue area at 4.9% in 2023, dropping to the target 2.0% level by 2025. Q4 2022 has seen 2.97 million sf absorbed with the regional vacancy at 3.85% plus 10.7 million sf under construction. Brokers across the region report that transaction velocity has slowed, but demand remains for modern product that is well-located. Rental rates have not seen rollback, continuing an upward trend, albeit at a slower pace. Shell rents continue an upward trend, partially due to rising construction costs and the higher clear heights and larger yard areas of the new construction. Office add-on rates also continue rising.

Below are a few notable points:

– 1.81 million sf was added to the regional supply in Q4 2022, with the total for 2022 being 5.74 million sf. The region now totals 364.1 million sf.

– 53 projects under construction total 10.7 million sf with 36.4% preleased. The Northend has 11 projects with 1.52 million sf (45% preleased) and Pierce County has 13 projects, 3.88 million sf and 50% preleased.

– Positive net absorption of 2.97 million sf, led by Pierce County (2.09 million sf) followed by the Northend at 0.49 million sf and then the Southend with 0.25 million sf.

– Regional vacancy dipped slightly to 3.9%.

– Average asking rental rate moved up 2.5% to $1.11/sf/mo.

– 47 properties closed this quarter, $23.7 million at an average of $258/sf, with a cap average of 5.44%.

Employment in the four county region has continued to grow, adding 88,900 jobs in the past year (November 2021 revised to November 2022 preliminary numbers). King and Snohomish Counties saw the most growth, adding 77,800 jobs while Pierce and Thurston added 11,100 jobs. Notably, the percent change in King and Snohomish Counties was 4.5% while Pierce added 2.7% and Thurston added 2.0%. The labor force participation rate has not reached the pre-pandemic levels of 65% plus, currently estimated at 64.5%. Total regional employment now stands at 2,265,300, a 4.1% growth over the preceding year. Manufacturing added 10,100 jobs over the last year and construction 11,000, with these two categories making up 23.7% of the job growth in the past year. Information jobs increased by 6.4% over the past year but recently there have been hiring freezes, layoffs and office closures from companies like Amazon, Google and Twitter.

There are some concerns that we continue to monitor. These include:

– Inflation continues to be at the forefront, with fuel costs particularly high.

– Potential layoffs in the tech sector and Boeing engineers.

– Construction costs continue to rise, leading to higher shell rents. Office build-out is not being fully reimbursed through office rents.

– Developers have pulled back from tertiary markets, and many planned projects are available as entitled (to varying degrees) sites.

– Cost of capital is well above levels of 18 to 24 months ago, resetting the feasibility analysis on many projects.

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