Activity in the industrial markets has modestly picked up over the past six months.
After a slow start in early 2024, the market improved from Q2 through Q3. Inflation peaked at 10.1% in June 2022 but dropped to 3.1% by August 2024, mainly due to falling fuel prices. Core inflation, excluding food and energy, remains high at 4.0%.
The local inflation rate continues to exceed the national level, which was last reported at 2.5%, but is edging closer to the Federal Reserve’s target of 2.0%. In the regional labor market, tech sector job losses have slowed, indicating companies are adjusting to optimal sizes. The labor participation rate slightly decreased from 63.7% in May to 63.5% in August, compared to the national rate of 62.7%.
Shipping remains a concern due to ongoing conflicts in Europe and the Middle East. However, a potential strike by East Coast and Gulf Longshoremen was suspended after three days, with negotiations set to resume in January 2025, providing positive news for the nation’s economy. In real estate, the office sector remains weak, with regional vacancy at 15.2% (including sublease) and an additional 1.8% available. The Seattle CBD has the highest vacancy at 33.3%, while Lake Union is at 16.5%. Over the past year, the Seattle CBD added nearly 1.5M SF, increasing availability by 3.8%. The regional retail sector is strong at 3.3% vacancy, while industrial vacancy rose to 7.6% in Q3, up from 7.4% in Q2 and a recent low of 3.6% in Q4 2022.
Below are a few notable points:
• In Q3, 600K SF of new product increased the regional inventory to 384.3M SF.
• Construction activity rose from 4.0M SF in Q2 to 7.5M SF in Q3 across 23 projects. Pierce County accounts for 72.6% of this activity, including the start of Bridge Point Tacoma 2MM. Preleasing stands at 47.3%, with 96.4% of leases in Pierce County projects.
• In Q3, sales activity shifted towards investments, with 47 properties closing at an average cap rate of 7.0%, totaling $825.2M at $185/SF.
As of August 2024, Washington State employment is 3,653,900, reflecting 1.3% year-over-year growth. The four-county region accounts for 2,283,400 jobs, or 62.5% of the state total. Preliminary August figures show a 0.2% increase, with job gains in Transportation and Warehousing (+0.9%) and Education and Health Services (+2.0%).
Declines were in five of the ten categories, led by Manufacturing (-0.9%) and Retail Trade (-0.7%). Over the past year, Information has seen a -5.2% decline, well above the next categories, Wholesale Trade and Professional Business Services, both declining -1.3% over the past year. Government had strong gains, growing 5.2% over the past year by adding 15,900 employees.
The Federal Reserve cut interest rates by 50 basis points, to the current target rate of 4.75% to 5.0%. There remains optimism that there will be one more cut in November, but the question remains, will it be 25 of 50 basis points. The ten-year treasury has been climbing since mid-September when it was at 3.6%. 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 5.10% to 5.95% range. CMBS lenders are still looking for 300 to 400 basis points over the ten-year rate and Banks/Credit Unions are lending in the 6.25% to 7.50% 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.
The Northwest Seaport Alliance reports YTD (through August 2024) container volume as 2,137,902 TEUs (Twenty Foot Equivalent), a 14.1% increase from the same period in 2023. August 2024 was up 30.1% over August 2023, a strong increase.
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