When it comes to rental rates, long-time Puget Sound industrial tenants facing renewals or relocations are getting the real estate equivalent of shopping for a new car – sticker shock.
After nearly three decades of rent stagnation, things have definitely changed. With three consecutive years of double-digit industrial rent growth, greater Seattle – with a whopping 17% increase in 2017 alone – is now registering not only the highest increases in the country but, dare we say it, the planet. While this is good news for owners and developers, it’s bad news for renters.
So, the big question on the minds of tenants (yes, and owners for that matter) is obvious: Where is this trend going and what should they do about it? But before we get into that, how did we get here in the first place?
Going back to the 1950s, Seattle has had a long history of longitudinal development.
Always reliant on Boeing, the industrial market grew out of South Seattle, expanding into Kent in the early 1960s. With an abundance of developable land to the south, Kent Valley rates held steady as supply consistently met demand.
Once Kent filled, developers pushed further south into Auburn and finally into Fife and Sumner where there was an ample supply of land to meet the region’s slow but steady growth, weathering good and hard times alike.
But in 2015-2017, the southbound push found the end of the valley. With a rapidly improving economy for Boeing, Nordstrom, Starbucks and, of course, Amazon’s amazing expansion, developers found themselves with limited places to build. And those developable sites were both expensive and environmentally challenging to build on. Put it all together and that which was once abundant and affordable became, well … hello, sticker shock.
So, the existential question is this: Is the recent rent growth sustainable and what should tenants do to protect themselves from long-term rent pain?
As far as rent growth goes, our take is this: As much as rents have climbed, they have not topped out. Based on our deep-dive analytics, we firmly expect Seattle industrial rents to continue climbing through 2018/2019.
To be sure, demand exceeding development is a major factor. Over the next 12 months, the builder market is on pace to deliver +/-4.8M square feet of new construction: a number that falls well short of the approximately 5M square feet of demand currently circulating the area. Then take into effect a limited number of projects scheduled to kick off in 2018/19 and the result is obvious: rents that are high today may soon look like a bargain.
So what tenants can do about it? The good news is, there are strategies that renters can implement to effectively insulate them from above-market leases. These include staggering their expiration dates, termination options, defined terms related to renewal options and considering ownership over leasing. Putting these strategies into action isn’t always easy but they are possible.
To renters in the market, we say this: don’t simply fall victim to what the sticker says. With the right information and strategies, a market that seems stacked against you may turn out better than expected.
Matt McGregor is Executive Vice President at Colliers International in Seattle, handling leasing and transactional management for logistic and manufacturing companies.