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Seattle Industrial Market Report

2nd Quarter 2024

Posted In — Market Research | Market Report

2024 started slowly but Q2 saw a modest uptick in activity in the industrial markets.

Inflation has remained stubborn, with The Puget Sound Economic Forecaster (PSEF, June 2024) citing the April 2023 to April 2024 Seattle MSA CPI at 4.4%, driven by shelter and energy prices. This is above the national CPI of 3.4%. PSEF notes nonfarm employment increased by 24,800 since December 2023, which exceeded the forecast. Education and Health Services had the largest gains, at 6,500 positions. The labor participation rate in Washington is 63.8%, over the national figure of 62.6%, bolstering an optimistic regional outlook. Shipping disruptions, however, continue to plague the economy, related to conflicts in Europe and the Middle East with no resolution in sight for the wars in Ukraine and Israel. In terms of the real estate markets, the office sector remains the weak link with the regional vacancy at 14.7% (direct and sublease) with an additional 2.1% occupied but marketed as available. The Seattle CBD/Lake Union has the greatest vacancy, with 31.6% (CBD) and 16.5% (Lake Union) marketed as available. The Seattle CBD has added roughly 11% in vacancy over the past quarter. The Seattle retail sector is stronger at a 5.7% availability, with the region very strong at 3.0%. For the industrial markets in Q2 2024, absorption improved from (-2,059,046) SF in Q1 to (-267,807) SF in Q2.

Below are a few notable points:

  • 2.48M SF of new product was added to the region in Q2 2024 bringing the regional inventory to 382.23M SF.
  • Construction activity continues to decline, from 7.8m SF under construction in Q4 2023 to 4.6M SF in 27 projects. 90.2% of the 45.5% preleasing is in the Pierce County submarket, specifically in the multibuilding FRED310 development.
  • Sales activity shifted back to more investments sales in Q2, with 50 properties closing and an average cap rate of 5.95%, $366.5M at an average of $172/SF.

Washington State employment stands at 3,645,600 (May 2024, preliminary, Employment Security Department, WA), a 1.45% growth year over year. The four-county region contained 2,261,100 (revised April 2024), or 62.0% of the State’s total. The preliminary May 2024 shows an increase of 14,500, or 0.6% in jobs. Gains were evident in Education and Health Services (+ 2.8%) and Leisure and Hospitality (+ 4.5%) with declines in Retail Trade (-3.7%) and Information (-2.9%). Manufacturing remained stable, adding 400 jobs region-wide (0.2%) with Transportation / Warehousing dropping 1,700 jobs, a 2.0% decline.

The Federal Reserve target rate remains at 5.25% to 5.5% with market participants not anticipating any significant changes until Q4 2024. The ten-year treasury hit a 10-year high at 4.88% (10/31/23) but had dipped to 3.8% in January. On July 8, 2024, the rate closed at 4.3%, down 15 basis points from one month previous but above the 4.1% of one year ago. It’s being reported that the capital markets are pricing in a change in administrations and this is pushing the 10-year yield up. In terms of lending, Life Companies continue with reduced spreads of 135 to 220 basis points over the ten-year treasury with rates in the 5.82% to 6.68% Range. CMBS lenders are still looking for 300 to 400 basis points over the ten-year rate Banks/Credit Unions are lending in the 6.25% to 7.47% range. These elevated interest rates have damped sales activity over the past 12 to 18 months but with this quarter’s increase in volume, sellers may be adapting to the new lending atmosphere. This lending atmosphere has slowed construction as new projects have to account for higher carrying costs, and feasibility is slowing the new construction pipeline.

The Northwest Seaport Alliance reports YTD (through May 2024) container volume as 946,591 TEUs (Twenty Foot Equivalent), a 10.4% increase from the same period in 2023. Vessel calls were also up, increasing 5.2% to 694 over the same period last year. With Terminal 5 renovations complete, the Port has increased operational capacity for any container ships currently sailing.

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