Seattle Industrial Market Report

4th Quarter 2023

Posted In — Market Research | Market Report

2023 was the year for rumors, bordering on anticipation, of a recession that never materialized.

Two elements contributed to keeping any recession at bay: the decreasing inflation rate and the stable job market. These elements buoyed consumer confidence that kept the economy going. Inflation peaked in at 8.9% (annualized) in June 2022, but now stands at 3.3%, creeping nearing the Fed’s target rate of 2.0%. The national unemployment rate is 3.7%, with Washington slightly higher at 4.0%. The labor participation rate in Washington is 64.8%, 368 basis points over the national figure of 62.5%, bolstering an optimistic regional outlook. In terms of the real estate markets, the office sector remains the weak link with the regional vacancy at 13.7% (direct and sublease) with an additional 3.4% occupied but marketed as available. The Seattle CBD/Lake Union has the greatest vacancy, 19.6% with 24.9% available. The Seattle retail sector is stronger at 8.9% vacant, with the region very strong at 3.0%. For the industrial markets at year end 2023, absorption was negative, offsetting the strong Q3 2023 absorption. For Q4, absorption was (-1.07)M SF and 2023 ended the year with a net absorption of 1.52M SF. The Northend had the strongest absorption for the year, at 3.24M SF followed by Thurston County at 1.4M SF. Regional vacancy is 6.0%, an increase of 120 basis points over Q3.

Below are a few notable points:

  • 4.3M SF of new product in 23 buildings was added to the region in 2023 bringing the regional inventory to 376.9M SF.
  • Construction activity has declined 26.5%, year over year, with 7.9M SF currently under construction in 42 projects. Preleasing stands at 41.9%, led by Pierce County with 67.2% of 4.2M SF under construction preleased.
  • Sales activity shows 36 properties closed this quarter, $133.2M at an average of $192/SF, with a cap average of 5.11%.

Washington State employment stands at 3,616,100 (October 2023, Revised, Employment Security Department, WA), a 1.6% growth year over year. The four-county region contained 2,278,000 (revised October 2023), or 63% of the State’s total. The preliminary November 2023 shows a decrease of 1,300, or 0.1%. The decreases are in Information (-3.9%) and Construction (-2.8%) with gains in Education and Health Services (5.7%), Government (5.5%) and Wholesale Trade (3.7%). Manufacturing added 5,200 positions, a 3.1% boost to total 171,500 with 4,850 positions added in King County and 600 positions (3.6%) in Pierce County. Government grew in each of the counties, 5.9% in King/Snohomish, 5.4% in Pierce and 4.0% in Thurston.

The Federal Reserve target rate is at 5.25% to 5.5%, after the last quarter point raise in July. Another quarter point interest was anticipated in November but this did not occur. The ten-year treasury hit a ten year high at 4.88% (10/31/23) but ended Q4 at 3.88%. In terms of lending, Life Companies are looking at spreads of 150 to 250 basis points over the T-Bill, with all in rates ranging from 5.49% to 6.49%. CMBS lenders are still looking for 300 to 400 basis points over the ten-year, with all in rates of 6.63% to 7.63%. With the cost of capital remaining elevated, the sales market has slowed considerably. These rates extend to construction lending as well, putting a damper on any project that was wasn’t well underway prior to the rise in interest rates. The general market has not yet come to grips with the elevated cost of capital and buyers and sellers remain far apart on pricing. The capital markets are anticipating the Fed to cut rates throughout 2024, which would have a positive impact on lending but would be done only in a weak economy.

The Northwest Seaport Alliance reports YTD (through November 2023) container volume as 2,711,245 TEUs (Twenty Foot Equivalent), a 14.0% decline from the same period in 2022. The longshoremen union, ILWU, had been working without a contract since July 2022 and instituted work slowdowns and stoppages impacting container traffic in Q1 and Q2 2023. A six-year contract was ratified by the members and announced in August. The agreement will be in force until July 1, 2028, giving the dockworkers a 32% increase in pay plus a $70 million bonus spread across its 22,000 members. Prior to the new contract, the average union member earned nearly $195,000 per year plus $102,000 in benefits (West Coast Dockworkers Ratify a New Contract, Los Angeles Times,
September 1, 2023).

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