The Seattle close-in industrial market consists of those areas within the city limits north and south of Downtown. This is a very dense market composed of about 1,995 individual buildings that amount to 46,520,000 square feet. This is the place where the first Pacific NW industries were established. The submarkets of Ballard, Interbay, SODO, Georgetown and South Park are home to old and new manufacturing-based businesses, suppliers and distributors. They are also home to behemoths like Boeing, the Port of Seattle and a majority of the Alaskan fishing fleet.
In addition to decades-old industries like aerospace, ship building, custom metals fabrication, contractor suppliers and wholesale food distribution, we have newer industries emerging as well. These include craft beer, wine and spirits makers, specialty food production, software engineering, computer hardware design, new automotive sale sites, coffee roasters, digital printing, recreational equipment design and manufacturing and now even marijuana production, to name a few. This market is an amazing microcosm of the evolution of American industry.
The continual growth of newer and more diverse manufacturing and distribution companies is still percolating steadily despite the setbacks of the Great Recession. This stubborn growth, coupled with the slow conversion of older industrial buildings to office and retail uses, and the lack of land available to build new product, has been driving down vacancy rates and driving up lease rates for some time.
The numbers show the stability of this market as well. Since 2000, the real vacancy rate has only fluctuated between the all-time low of 1.1 percent in the first quarter of 2000 and the all-time high of only 5.5 percent in the third quarter of 2009. Since that time, vacancy has steadily retreated to 3.1 percent today. Average asking rates have increased over the same time period. They started at $6, triple-net, in 2000, peaked at $9.36 in the first quarter of 2008, and dropped again to $7.56 in the first quarter of 2011. Since 2011, the average asking rate has resurged to $8.40 in the first quarter of this year. I expect rates to continue to escalate in the near term with no obvious limitations.
Lease rates have increased dramatically in the past 12 months due to the lack of available space in the market. With vacancy now around 3 percent, tenants have very few choices for expansion space regardless of whether they are looking for 4,000 square feet or 100,000 square feet. There are only a handful of vacancies of any kind to choose from. Landlords have also been able to push asking rates up much higher than before, thanks to all the new companies entering the marketplace.
For the first time ever, we are now seeing asking shell rates of $7.20, triple-net, for spaces from 40,000 square feet to more than 100,000 square feet. In my opinion, we are now entering new territory for record-setting lease rates that should continue for the foreseeable future. Owning real estate in this market has nothing but upside.
By Bob Swain, Principal of NAI Puget Sound Properties in Bellevue, Wash. This article originally appeared in the June 2014 issue of Western Real Estate Business magazine.