Office
At beginning of Q2 , the Puget Sound region experienced a complete halt of construction, leasing and sales activity. Vacancy increased 30 bps to 8% with 449K SF being absorbed. Sublease space increased in Downtown Seattle as tenants stopped to re-assess the current market conditions. Class A office space remained unaffected as well capitalized tech companies continued their expansion plans.
A growing trend that is likely to continue is that much of the space vacated by traditional tenants will be absorbed by tech and e-commerce, as exampled by Amazon’s occupancy of the vacated Macy’s in the Redmond Town Center. Worth noting is that the Puget Sound already has the highest percentage of FAANG square footage of any market in the US at 15.2%
Construction of the 7.7M SF pipeline during Q2 was delayed due to stay at home orders, nevertheless the pipeline managed to grow by 700K SF. The trend in growth for projects continues to head East, as the margin between space under construction on the Eastside versus the Seattle CBD continues to widen. Much of this is attributed to Amazon’s plans to expand it’s workforce to 25,000 in the coming years, along with numerous competitors that are likely to follow suit.
Notable Trades (Property | Seller | Buyer | Price):
Farmers Insurance Office Building – 3003 77th Ave SE, Mercer Island | VEREIT | Ryan Companies JV HAL Real Estate | $46,500,000
Industrial
The Puget Sound industrial market remained strong through Q2 as warehouse demand was actually increased by the pandemic. The country’s increasing reliance on home delivery has had a positive impact on the region via Amazon, both as a job creator and a tenant driving a significant portion of the activity in the region.
A recent study by Prologis indicated that every 100 bps shift from brick and mortar retail to online retail generates 46M SF of net warehouse demand in the US. Online retail requires three times the logistics space as the inventory is kept in the warehouse rather than on retail shelves.
Construction activity increased during the quarter, as 900K SF of new space was delivered despite all the pandemic related delays. The total construction pipeline increased to 7.9M SF, driven by retailers and distributors looking to enhance their last mile and logistics capabilities to accommodate the increasing demand for home delivery.
The Kent Valley and Pierce County markets saw the most activity as Amazon is rumored to have leased more that 1.6M SF of industrial space in Puget Sound since the beginning of the year, more than half of which is in the Kent Valley. Prologis has been the most active player in the region over the past 24 months, with $740M in acquisitions spanning 41 transactions.
Notable trades (Property | Seller | Buyer | Price):
1525 E D St Tacoma | United Natural Foods | Industrial Realty Group | $42.3M
Salvation Army – 1010 Fourth Ave S Seattle | Salvation Army | Alexandria Real Estate Equities | $42M
McFarland Cascade – 160 E Marc St, Tacoma | Cedar Management | Prologis | $33.5M
Multifamily/Residential
Q2 2020 saw a net absorption of 994 units with 1,913 units being delivered. Occupancy decreased 20 bps YoY to 94.1%, though King County (where 70% of inventory exists) grew by 10 bps.
Average rents at $1,834 were up 160 bps YoY as continued hiring by Amazon, Google, Facebook and Microsoft drove demand in submarkets with close proximity to these employers.
Investment sales declined 33% from Q1, however the average cap rate for the Puget Sound region dropped from 4.6% in Q1 to 4.4% in Q2.
Notable trades (Property | Seller | Buyer | Price):
Waterscape at Juanita Village | UDR | Stream Real Estate Development | $92.9M
Borgata Apartments | UDR | Stream Real Estate Development | $49.7M