Seattle Industrial Market Report

2nd Quarter 2022

Posted In — Market Research | Market Report

As the June 2022 issue of The Puget Sound Economic Forecaster says, “Long-Term Complications Short Term Bliss”. The Fed is raising interest rates assertively, inflation has reached a 40-year high and the Puget Sound Industrial markets remain strong.

Q2 2022 has seen 2.3 million sq ft absorbed with the regional vacancy at 4.2% plus 8.4 million sq ft under construction. Demand continues across the region, but there are reports of soft demand in certain segments. Rental rates are anticipated to continue to increase, but not at the same pace as the past 12 to 18 months has exhibited. Shell rents continue an upward trend, as do office add-on rates, but the cost of building out office is not being fully compensated for at the current market rents.
Below are a few notable points:

– 3.35 million sq ft was added to the total supply (net of demolition of older product). The region now totals just under 363 million sq ft.

– 36 projects under construction total nearly 8.4 million sq ft with 45.5% preleased. The Northend has 3.78 million sq ft with Amazon’s Project Roxy contributing 2.8 million sq ft and will be delivering in Q3 2022. Pierce County has 11 projects totaling 1.5 million sq ft.

– Positive net absorption of 2.3 million sq ft, led by Pierce County (1.0M sq ft).

– Vacancy rate ticked up from 3.9% to 4.2%.

– Average asking rental rate moved up 5.5% to $0.96/sq ft/month.

– 106 properties closed this quarter, $440 million at an average of $232/sq ft, a 43% decrease in sales volume from the previous quarter.

The Federal Reserve voted for a 0.25% increase in March, then followed up with another 0.75% in June. Inflation has peaked at 40-year highs, nationally at 9.1% for June. Employment growth has been good, the four-county region has added 20,800 jobs in the first four months of 2022 (the latest available data), a 0.95% increase. Total regional employment now stands at 2,214,800. Manufacturing has seen some growth, adding 5,400 jobs over the last year, after shedding 1,300 in Q1 2022. The transportation and warehousing segment added 3,400 between April 2021 and April 2022, a 4.5% increase.
The second half of 2022 has potential difficulties to navigate.

– The Puget Sound Economic Forecaster’s June 2022 reported employment growth in 2022 at 2.1%, with a reduced projection of 1.3% growth for the remainder of the year. 2023 has been recast to growth of 1.3% with 2024 forecast at 0.5%.

– The Seattle area consumer price index finished 2021 at 7.6%, with the 2022 forecasted to be 5.0%. As of June 2022, the year over year CPI was 10.1%, or 8.8% if fuel and food is excluded.

– The Northwest Seaport Alliance reported 3,736,206 TEUs for 2021, a 12.5% increase over 2020 and 1.6% below the peak in 2018. YTD for 2022 is 1,497,609 TEUs, a 2.5% decrease from the same period in 2021.

– Leasing continues to be strong with 6.65 million sq ft. leased and scheduled to move in over the next 9 months, with Amazon making up 2.8 million sq ft.

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

– The capital markets are sitting in their hands, waiting to see what the Fed does in the July meeting.

– Market participants all acknowledge that the time of sub-4.0% cap rates is over, but where it shakes out remains a mystery. We expect transaction numbers to decrease until interest rates stabilize.

– Developers will sideline new land deals until the cost of capital stabilizes and land values reflect the cost of capital.

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