Episode #7 - Market Update (2019 in Review)
The Industrial Advisors take a look back at the Puget Sound market in 2019, give us their thoughts on trends, and forecast the market direction as we kick off a new year.
Bill Condon: Welcome everybody to our podcast. We are going to cover the 2019 year in review here for our industrial market. And Matt, I got to say 2019 was a fantastic year for from a capital market side, from a leasing standpoint -
Matt McGregor: Construction.
Bill Condon: Just a great year all the way around. What are some of the things that stand out to you about the year, in 2019?
Matt McGregor: Absolutely, I agree it was certainly a blockbuster year. I would say the birth of the South South Sound being Fredrickson, DuPont, Lacey, we always knew about DuPont, Lacey, but Fredrickson, I think has been a huge story in 2019 from, Best Buy kind of kicked it off to Ashley ACE hardware just sign there for about 500,000 feet. SeaTac packaging; you got another deal under contract that's like 73 acres going on. You've got coastal looking like they're signing on a building there. You got many institutions, LPC, [inaudible 00:01:15] Exeter, Avenue 55 you know, all acquiring and building there. I mean, as we've joked about in the past, could you have driven there, you know, 24 months ago without a mapping assistance?
Bill Condon: It's amazing. I mean it has, it seems like overnight become just a huge market. I mean, you have over 3 million square feet of, of leases signed there in the last, call it four or five months. And there were some companies that started going spec there and at the time you're like, "Is it the right time?" And boy that the big box activity has certainly shifted down there. Part of that I think is, there's not a lot of big box available -
Matt McGregor: In the Valley.
Bill Condon: North of there, right? In [inaudible 00:01:57] Sumner and, and Tacoma. But yeah, 2019 I think certainly one of the trends is the birth of the, the South Sound and the big box activity down there.
Matt McGregor: For sure. I mean the, the absorption, which we'll talk about later is kind of crazy how it has shifted from, most of our careers the predominant market was Sumner and it shifted, maybe there's several reasons, but I think the biggest reason to your point is lack of large product there that used to be there and now it shifted. But it seems like even with some availabilities, these guys are, are choosing to go down there. Right?
Bill Condon: Yeah, I think so. I mean the big, big box certainly. And I would say Pierce County still had a really solid year this year, even without having a ton of big box availabilities. Right? I mean the bread and butter has, as we've always said, kind of in that Sumner and Fife and Tacoma market is, is that 150 to 300,000 square foot market and a lot of really good activity there in 2019. Pierce County I think had a really good year as well. South Seattle's, kind of flat.
Matt McGregor: A little bit flat there.
Bill Condon: Yeah. And then the Valley was good and rents are continuing to go up, which we'll we'll touch on as well.
Matt McGregor: That's right.
Bill Condon: Talk a little bit about the multistory birth and how that's going?
Matt McGregor: Yeah, great point. I would say that is the other takeaway from our market as well as other markets is the birth or I should say the rebirth, because that was really a thing of the 1920s and 30s with a multi story, Sears type distribution centers, were really multistory and now we've gone back to that model although they weren't driving trucks, multi stories on those old projects. But yeah, I mean congratulations to Prologis and Amazon and Home Depot for filling the first multi-story project in the United States. And then obviously several people followed not only in this market but other markets. And in Seattle we're seeing Trammell Crow, Avenue 55, I think a Lyft Partners is going to kick one off. So you've got several projects here, you've got some in San Francisco, New Jersey. So it is certainly starting to be a trend.
Bill Condon: Definitely. And I think from a credibility standpoint, from a tenant's perspective as well, the Amazon, the Home Depot deals, the fact that they signed in a multistory, a warehouse, I think will help other tenants get comfortable with doing the same thing.
Matt McGregor: That's all right. Let's talk a little bit about rent growth. I mean, we continue to see huge rent growth here with last year's rent growth was just over 9% and if you average it out over the last three years, we're averaging just over 8.5% rental growth. Crazy, I mean, year over year.
Bill Condon: Yeah. It's been great the last few years, and prior to that it was probably even higher than 8 and 9% and so we continue to see it; I think the fundamentals are extremely strong in particular when you're between Seattle and Tacoma, there's not a lot of land left as we know, good tenant activity. So I think we're going to continue to see that. You know, we talked previously about how we felt like the gap between South Seattle and the North Valley was too much. Right? I mean, we were averaging, a while ago, it was about a buck 25 in South Seattle and we were at 60 cents in the Kent Valley, and now when we look at it, we're close to a buck in South Seattle and we're about 70 cents in the Kent Valley. And so we felt like that was going to happen and it did. Just the discrepancy was too high between those two markets. South Seattle still a good market, but we expected that gap to get a little bit closer between those two markets.
Matt McGregor: Yeah, you're totally right. Historically, the gap between the North Valley and Seattle just 10 miles away, it was typically 20/25 cents, and you're right, just looking at the charts and graphs that we're looking at here in the studio, it certainly has gone back to normal levels between those markets. What do you think of the rent growth in the South Sound? Obviously we saw a lot of rent growth. I won't quote names, but we saw one South of Tacoma in early 2019 sign at 41 cents, and at the end of the year we saw one sign at 48 cents. So huge rent growth. Where do you see that happening now moving forward?
Bill Condon: I think it's a reflection of land, right? I mean a lot of those deals you could do a 41 cent deal when you bought dirt for five bucks a square foot or six bucks a square foot and as you know, I mean dirt down there is getting more and more expensive. So I think we we'll certainly see rent growth in the South Sound. I think we're going to continue to really see it in Pierce County and the Sumner, Port of Tacoma and Fife markets as well, just because there's not very much land left in those markets and there continues to be, I think, really good tenant activity in, in those Pierce County markets. What do you think about South Seattle and the Kent Valley from a rank row standpoint?
Matt McGregor: Yeah, it South Seattle is an interesting one because, as you noted, we predicted that that would fall down in second half of '19 and close that gap on the North Valley. I don't see South Seattle going down anymore; I think that it's gone down, it's hit a new equilibrium. And I do see the North Kent Valley being a huge growth factor. I don't think we're going to get the growth factor in 2020 in the South Puget Sound that we saw in 19 just because you got a lot more product coming online. So unless that gets absorbed as quick as it did, you know, which would mean back to back record years down there, you're probably not going to get the hike that you got year over year in the last year.
Bill Condon: Yeah. I mean I think you would agree with this, we talk all the time, but if I was buying a building and I could pick any market to buy a building and I would go North Kent Valley, and I'd go multi tenant. I mean, no one's building that smaller, call it a 100 to 200,000 square foot buildings anymore because they're too expensive to build. And so as you know, I mean there's just a ton of activity from a tenant standpoint that's still in that North Kent Valley, looking to be there. And so I still think we got a lot of room left and in particular in the North Kent Valley, to grow.
Matt McGregor: I agreed, I liked the site plan for the new Boeing stuff that [inaudible 00:08:09] bringing out, smaller Bay stuff. They should do very well on that project. To your point, not a lot of people are building that stuff.
Bill Condon: Yeah, I mean you look at some of the deals we're doing now, you're 85, 90 cents a square foot on the shell for some of those smaller spaces in the North Kent Valley. And if someone would have told you that, five years ago you would've told me you're crazy -
Matt McGregor: Crazy. For sure.
Bill Condon: But I think we got room there to continue to go up.
Matt McGregor: Yep. Absolutely. And then everybody's, every year talking about Amazon, but I feel like in particular 2019 they just kind of pushed the pedal to the floor and yeah, and really we're taking down big footprints across the United States, not just Seattle and then doing something they said they were going to do, which is taken down a whole lot of smaller projects. Right? Certainly we saw that impact here.
Bill Condon: Yeah, they did obviously the big deal at the multistory building, but to your point, they also did a handful of deals in that, call it 50 to 70,000 square of square foot range and you know, a lot of that of course is you know, get product to your customers faster.
Matt McGregor: That's right. Exactly. It'll be interesting to, we just recorded a podcast on 2020 predictions that you'll catch following this one, and we had an economist on there really talking about Walmart, which from a Seattle perspective, you say, "What? Walmart? Who's talking about Walmart?" And give a listen to that because certainly Walmart seems to be making some huge strides on online sales and seems to be, I don't want to say catching up with Amazon, but give a listen to that. That was interesting.
Bill Condon: That was really interesting, and from a logistic standpoint, they have it really dialed in and I think he gave some interesting takes on Amazon on that as well. So definitely a worthwhile listen.
Bill Condon: Let's talk capital markets, because we had a phenomenal year on the capital market side and just kind of big picture. The demand from institutional groups to place money in Seattle has never been higher. Right?
Matt McGregor: Agreed. Crazy.
Bill Condon: And, quite frankly, I don't think there's a gap between us and the Inland Empire. If there is one, it's very small.
Matt McGregor: Well, it used to be up until say three or four years ago, I would say we always said 50 basis points spread. Right? I would say, I agree with you; 2019 was not only the year where you would say, "That gap is no more," but we had sales more aggressive than them. So, not to say we're a better market than then than the Inland Empire, but certainly it is far fewer opportunities to buy here, and you got the same institutions wanting to buy here that they're buying there. And we'll get to this, there was 42 transactions, which was a record by the way, here in 2019 there was a lot more than that down there. Opportunities at bat. Right?
Bill Condon: Right.
Matt McGregor: But we saw aggression here on a cap rate basis that we did not see in the Inland Empire in 2019.
Bill Condon: Yeah, I think we're a little bit more insulated than the Inland Empire. But yeah, 2019 from a cap rate standpoint, I mean we traded the Auburn deal, that was a upper three cap and that was stabilized. And so I think that Seattle is now on par with that, and with the Inland Empire and we'll continue to see a lot of demand to place capital here, especially for the bigger deals.
Matt McGregor: Well, and then our market from a capital markets perspective has widened to the North and the South in 2019. Prior to '19 you really didn't see capital markets running down into Thurston, Centralia, a Fredrickson area and then into Woodenville and Everett, you had a couple players, but now it's the norm, right? No problem. We're seeing low four caps on both of those markets. So we've now our market in one year.
Bill Condon: Yeah. When you look at it from a macro standpoint and you look at it on a map and you look at a market like Everett or you look at a market like Fredrickson and you realize, you're in pretty close proximity to the heart of everything. And so it's, we get a little bit of a discount, right? Compared to the Valley?
Matt McGregor: For sure.
Bill Condon: But certainly those are viable markets and will continue to be, I think moving forward. Because as you know, we have lots of institutional groups saying, "Hey, where else should we be looking besides the Kent Valley?" And so those markets will, I think continue to be active.
Matt McGregor: Agreed. Let's talk numbers. So I mentioned total transactions, 42, in comparison to say, our five year average of about 24 transactions a year, just under $1.5 billion in industrial trades in our market. And by the way, we track only $5 million deals, $5 million and greater. Back to back years of 1.5 billion, when our 10 year average is about just under 600 million a year. So over two X our normal volume, back to back years. Crazy.
Bill Condon: Really good. I think a part of it is the excise tax forced, not forced, but anybody that was thinking about selling, wanted to try and get it in in 2019 so they didn't have to pay the extra couple of points. And then there's been a lot of portfolio purchases too. I mean certainly you look at Blackstone and Prologis and the acquisitions they've made from a company standpoint, there's a lot of product in Seattle that went along with that. But I think it just speaks to the demand to be here and, and the fact that people pay up and, and, and love Seattle.
Matt McGregor: That's right. And to your point on the excise tax; we closed just about $510 million in transactions on the industrial side in December, which almost meets our annual average, in one month.
Bill Condon: Yeah. We knew we'd have a big December, we didn't know it was going to be that big, but you look at the transactions we did and a lot of them were impacted by that increase in excise tax. I mean, two points on a eight 50, 60, $70 million deal's a lot of money.
Matt McGregor: That's right. And we continue to see a trend of off-market deals. We've been tracking this for years. Out of the 42 deals, 55% of those were off-market still. Right? Crazy. Why do you think that is?
Bill Condon: Yeah, I think that number is going to go down just as we've become more and more institutional. Institutional groups don't like going off market. Some of it is portfolio stuff, but some of it is just, hey, these owners have seen so many offers, they know what their buildings are worth. There's so many unsolicited offers being thrown around that oftentimes these groups will have a number in their head and if somebody hits it, they'll do it. And so they don't want to go through the hassle of putting it on market. It's definitely worth putting buildings on the market because you and I know there's so much demand, you don't want to leave money on the table if you're a seller. And so why wouldn't you go to market with the aggression that's out there?
Matt McGregor: That's right. And that's why I'm always baffled by how many off-market trades there are in this market. Because you go to other markets like the Inland Empire, it's like 9%, right? It's not. And we continue year over year, it's over 50%. It's just kind of crazy.
Bill Condon: It is amazing. Yeah.
Matt McGregor: Let's talk about who the biggest buyers were. So in total dollar, volume number one was Blackstone, obviously they bought GLP, but in this market that totaled three transactions of just over 500 million.
Bill Condon: Yeah. A big part of that portfolio purchase. Exeter was active. You start looking at who are the groups that are buying buildings one off here in our market and Black Creek was extremely aggressive and did a great job and performed on everything. Clarion of course, who we love as well, continues to love Seattle and buy product close in, if they can. TA was active this year as well. We sold TA a couple deals -
Matt McGregor: That's right, and Black Creek was number three at 113 million.
Bill Condon: And then you know, you get the groups like Lift and Torino that continue to be active and are great to work with. And so I think there's more and more groups that continue to call us and say, "We want to be in Seattle. We're not here yet."
Matt McGregor: That's right. The list keeps growing.
Bill Condon: It keeps growing, I mean, I met with a group out in New York yesterday who I'd never even heard of and they're saying, "Hey we got to get here", and so let me just - [crosstalk 00:16:27] [inaudible 00:16:27]
Matt McGregor: Let me guess, "We have one point $5 billion to place in Seattle. And we're aggressive."
Bill Condon: Yeah.
Matt McGregor: "And we'll pay cash."
Bill Condon: "We'll pay out." So yeah, it's no shortage of buyers for sure.
Matt McGregor: Let's talk about a number of transactions. So the most with four transactions was Lift Partners. Smaller deals totaling just under just over 40 million. Black Creek group, as we mentioned, was three, Blackstone with three, TA with three. So those are your top guys. And then it drops down to two from there; [inaudible 00:17:00] had two, Clarion had two, Duke had two and Torino had two. And then drops down to one for the balance of the 42 transactions on a great capital markets year.
Bill Condon: Yeah, capital markets was great. Now, large leasing was also, we had a phenomenal year.
Matt McGregor: We had some monsters.
Bill Condon: Yeah. As good as we've probably ever had from a leasing standpoint. So why don't you talk a little bit about the large leasing and in particular really the trend that has pushed those groups further South?
Matt McGregor: Yeah, [inaudible 00:17:30], Lacey and DuPont and Fredrickson, we had the largest lease signed in Lacey at just under 1.3 million feet, Home Depot [inaudible 00:17:40] at 810,000, and then DuPont, Kimberly Clark at 747,000. Then of course shifting up North, you had Amazon on the triple decker at 493,000, and Ashley Furniture rounds up the top here, six at 416,000 and then finally Fredrickson, Best Buy, 405.
Bill Condon: Yeah, I mean just a phenomenal year there I think, and we've always said it, "You can tell a lot about a market, based on that mid-market activity as well." And that's, in my opinion, as strong as it's ever been, from the call it 50 to 150,000 square foot range. And in particular the majority of that activity is from Tukwila through Tacoma, and we continue to see great activity on that front. And a lot of those groups are looking to go from 50 to 70,000 feet or 70 to 100, and so I think that's just really a good sign for our market longterm and short term, just that 2020 is going to be another good year with both the mid-market size tenants and the larger tenants. Because there's, as you know, a lot of large tenants that are close to landing, I think we talked about it; Q1 could be a record amount of absorption for us in 2020.
Matt McGregor: I think Q1 is. And that's based on when we, when we're talking about Q1 2020 because, to your point, it was 19 activity that got it there. So we could have a first quarter that matches the entire absorption of 2019. And Q1 really between four deals that are right there.
Bill Condon: Yeah. I mean complemented by the other deals that are kind of bread and butter of the market. I think it's going to be just a great year. So closing thoughts. Let's talk about what you think about 2020 and where we're heading. We talked about large leasing and how 2000, first quarter could be a record amount of absorption. What else do you think about a 2020 is we get cranking?
Matt McGregor: Well talking about absorption. So last year, kind of the Valley, South Seattle through Tacoma was about 1.8 million square feet of absorption, and then you obviously had some large deals transact down South that really puts us on a great absorption year total. But to our point earlier, I think that fourth quarter activity in 2019 is going to push a record absorption year and quarter in Q1 of 2020, and I do think that we'll have a record absorption year in 2020. There is a lot of deals right there at signature, so I think you'll continue to see rent growth, sorry tenants. Probably in that same realm of call it, 7 to 9% this year. I think you'll see big rent growth as we talked about in the North Valley, and then maybe Seattle picks back up with continued online fulfillment growth and people needing to be close to the population base.
Bill Condon: Yeah, I agree with all of that. I think in the capital market side, we might not see the volume that we saw -
Matt McGregor: For sure that would be drop-off.
Bill Condon: This year, but we'll continue to see the aggression. We'll continue to see cap rates at the levels that we're seeing them at. But on the leasing front, I mean I just think that fundamentally, we are in a great position. Seattle, to your point, will trend upwards from a rent growth standpoint. I think that the North Valley, again, continued rent growth, probably will lead the market, from a rent growth standpoint and Pierce County, of course and the South Sound will continue to get great activity. So all in all feel really [inaudible 00:21:17] [crosstalk 00:21:17].
Matt McGregor: And the Seahawks will win the Super Bowl.
Bill Condon: Yep. I definitely agree. I've been saying that, I say that every year. But I really believe it actually, this year. But yeah, no, it's going to be a great 2020 and we're looking forward to seeing where it goes and being part of it.
Matt McGregor: That's right. Well, thank you for listening. As always, you can catch our podcast on your favorite podcast sites and we appreciate it and listen to our next podcast on 2020 predictions. Thank you so much.
Bill Condon: Thank you.