The 2nd quarter was flat, with minor increase in vacancy from mild negative absorption. Pandemic driven closures are over. There are headwinds in the form of supply chain disruptions and inflation. Urban core area daytime employment is still well below pre-pandemic levels because of work from home and employees are slowly returning to offices.
In the 2nd quarter, the direct vacancy rate increased 13 basis points to 2.60%, but total available space declined 6 basis points. Kitsap county saw vacancy decline 18 basis points, but all other counties saw vacancy increase. Total available space reacted differently, declining in all but Thurston county. Total available space declined 6 basis points to 2.75%.
MARKET RENT TREND
Rent growth was 1.7% year over year in the 2nd quarter 2022, down from 2.8% in Q1 and the 3.8% growth seen in Q2 2021. Costar is projecting further slowing in Q3 2022 to 1.6%, before turning back to a growth of 3.3% Q4 and 3.9% to 4.9% in 2023.
NEW & PROPOSED CONSTRUCTION ACTIVITY
Retail development activity is measured and mostly on a build-to-suit basis with multiple new units for chains like 7-11, Starbucks, Popeye’s, Chick Fil A, Chipotle, Habit Burger, Valvoline, and Gravity Coffee. In Q3 2022, Top Golf will open in Renton. Further out and perhaps in 2023 are a neighborhood center in Black Diamond at Ten Trails and a larger project in Covington, both as part of master planned residential developments.
MARKET DEMAND/NET ABSORPTION
2nd quarter absorption was negative 239,074 s.f. The total absorption for the last four quarters is 877,210 s.f., which is below the five-year average of 1,100,064 s.f. Amazon is taking spaces for food stores in Federal Way (The Commons) and north Seattle on Aurora Avenue N. Burlington will lease the space adjacent to Amazon in Federal Way. Winco leased a portion of the former Sears store at Kitsap Mall.
In the 2nd quarter there were 113 sales of retail properties over $1 million. 14 of these are redevelopment sites, 5 are gas stations, 13 are mixed-use, 9 are auto service, and 21 are owner user deals. Larger investment sales in the 2nd quarter include Burien Towne Center, Alderwood Towne Center and Marysville Town Center. Cap rates range from 4.0% to 7.8% and average 5.07%. Q2 saw large interest rate increases and this will impact cap rates in the second half of the year. The level of impact varies from property to property, but brokers are looking at 100 basis points as a starting point and going up or down depending on the specific asset. The outlook for the 3rd quarter is stable to reduced sales volume with single tenant net lease demand remaining high.
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