— By R.J. Vara, first vice president of investments, Marcus & Millichap’s The Vara Group —
The Seattle industrial market is undergoing a transitional phase marked by rising vacancies, fluctuating demand and evolving investment dynamics. There was a robust surge from 2020 to 2022, which saw nearly 19 million square feet of industrial space absorbed and more than $8.4 billion in transaction volume. However, the market experienced a reversal in 2023, with roughly 2 million square feet of previously absorbed space becoming available. This shift, driven by decreased container traffic at local ports, rising interest rates and elevated inflation, has continued into 2024, with speculative construction projects contributing to elevated vacancy rates.
As of mid-year, Seattle’s industrial vacancy rate has increased by about 2 percent year over year, reaching 7.7 percent. This has surpassed the national average of 6.6 percent. The rise in vacancies is primarily attributed to the completion of new distribution facilities, with spaces of more than 100,000 square feet now available in double digits. Delivery numbers are expected to fall to their lowest level since 2017, but investors are beginning to explore opportunities in the southern regions.
Regarding investment activity, Seattle’s industrial sales volume has notably increased compared to 2023. Year-to-date transactions have totaled $821 million, surpassing the $658 million recorded in 2023. Despite being significantly lower than the peaks of 2021 and 2022, transaction activity indicates a stabilizing market. Recent transactions are predominantly by private buyers and owner-users, a shift from the dominance of private equity, REITs and institutional investors seen between 2020 and 2022.
Throughout 2021 and 2022, owner-users often struggled to compete with the prices and terms offered by institutional investors. Now, with reduced competition, they are taking advantage of the opportunity to stabilize their occupancy costs after rents nearly doubled in many local markets over the past five years.
Private investors and family offices with longer investment horizons are also capitalizing on overlooked markets or well-located assets that offer a low basis relative to replacement costs.
Despite these adjustments, the market faces uncertainty due to looming CMBS loan maturities. Nearly $700 million in CMBS loans are set to mature by the end of 2025, with more than $500 million more scheduled for 2026. As property owners navigate recent vacancies and rent growth trends, we may witness resilience in overlooked submarkets as the broader market adapts to new economic realities and shifts in investor behavior.
This article was originally published in the September 2024 issue of Western Real Estate Business.