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Transcript

Q3 Results · Industrial Advisors

• 0:00
  We are at one of the better markets in in the country, and so it is a
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  matter of time before we bounce back.
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  We'll bounce back quicker and everything will shoot back up again.
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  Yeah.
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  If you take out by the end of this year, if you take out 2018, which we have to
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  look back, that was a phenomenal year, 21 and 22, so just those three years.
• 0:18
  Yeah.
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  I actually think in our careers this will end up being the the
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  fourth best investment sale year by volume in our career.
• 0:41
  Welcome to our Industrial Advisors podcast.
• 0:44
  You have Bill Condon and Matt McGregor.
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  Today's topic, going through our Q3 review.
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  We just got our numbers and stats in, and so, uh, been an interesting
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  quarter, really interesting quarter.
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  Uh, we were talking about it before the show started, and it's kind
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  of strange because you think back.
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  2008, the downturn of 2008 through, we started recovering
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  in 11 where vacancy started going down, and we just looked at this.
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  The vacancy currently is about the same, a little higher at 9.2 in the valley.
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  So the worst of that downturn was 9.1.
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  Market in 2008 or thousand 10.
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  2010. So obviously the market hit in 2008 with the downturn.
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  Yeah, but if you recall, Seattle was the slowest to be hit
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  and the quickest to recover.
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  So it was actually a shorter window than what it was nationally.
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  Nationally.
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  It was like five years here.
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  It was about three, but it took until oh nine to really hit.
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  You started seeing it in oh eight.
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  Yeah.
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  Took oh nine and then oh, 10 was the depths of it at nine.
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  0.1% vacant.
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  We're currently 8.9, but the valley is 9.2.
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  So if you include obviously Everett in the north end, but arguably across
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  the board, we are at the same as the worst vacancy of our career in 2010.
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  Why doesn't it feel like that?
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  It doesn't feel like that?
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  Well, I think the market's, the market's grown up since then from a standpoint
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  of there's more, it's a bigger market.
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  There's more build bigger markets.
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  More tenants, so there feels like there's more action because it's a bigger market.
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  Yeah.
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  I do remember in 2010 doing a deal for 50,000 feet at 29 cents on the shell.
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  I remember that.
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  Yes.
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  Yeah.
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  Which is just crazy to even think about.
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  Today's triple nets are higher.
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  Yeah.
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  Today's today's market.
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  But, um, but yeah, I think the market's grown up since
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  then and been built out more.
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  And so because the, the depth of tenants is larger, there's more action than.
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  There was then, even though it's slow today, I would agree with that and
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  I would add that I feel like when it happened, then it was sudden.
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  It was like somebody turned off the spigot for about a year.
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  Yeah.
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  And I remember like the phone not ringing and it being deathly quiet,
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  like email box, like it hit the country.
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  And then I was going, what's everybody complaining about nationally?
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  Yeah.
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  And then like six months later, I remember in November of oh eight, it was.
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  Wow.
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  Now I know what everybody was talking about, right?
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  Yeah.
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  Well, and if you, if we'll talk about this later, but from an investment
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  standpoint, during that really quiet time in 2000, like that 10 era, there was
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  like, you could count buyers on one hand.
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  Yeah.
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  That would even look at, would even look at sometimes yes.
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  Sometimes it was birch.
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  Correct.
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  Yeah.
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  Um, and so there just weren't, there was just caution everywhere
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  on the investment side.
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  Yes.
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  And we're not there.
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  No, not even, no.
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  Now there's plenty of investors out, out there right now, so, so you're right.
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  A healthy, and we'll get to that, a healthy investment market.
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  But then to the, to my point earlier, this is taking two and a
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  half, three years to go from a high three per vacancy to what it is.
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  Where in, you know, really it went from a tight market.
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  Then to a terrible market in about a 12 month time span.
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  Yeah.
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  Right.
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  Yeah.
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  Where we've just been slowly going into it.
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  Right, right.
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  But there's a lot of healthy aspects.
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  Yes, there is.
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  That's what, yeah.
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  Yeah.
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  So let's talk about some of the major, major themes that we're seeing.
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  Yes.
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  Um, number one, I think.
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  Renewals are a, a big part of the market right now.
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  You know, when in doubt, I think the majority of action that we're
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  seeing right now are renewals and not relocations from tenants.
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  Yeah.
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  And truthfully, obviously to pre prepare for this show.
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  We call landlords, we call investors.
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  We call tenants get opinions.
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  Yeah.
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  Landlords are all talking about renewals.
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  That's what they're seeing.
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  Not a lot of new deals.
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  And obviously we'll get there on, you know, no surprise that negative
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  absorption, but a lot of renewals.
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  Yeah.
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  And, and within those renewals, if you take it a step further, landlords are more
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  flexible on term, on doing things that they would not do in a healthy market.
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  Yeah.
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  You wanna renew for two years and you want two bucks a foot, we'll do Yeah.
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  You know, we'll keep you there Taking worse credit than they normally would.
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  Yeah, exactly.
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  Yeah.
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  Um, just because from a vacancy standpoint, they're weighing.
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  Credit risk versus if I have to go find a new tenant, it's
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  probably gonna be vacant anyway.
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  Yes.
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  Right.
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  So for, for a while.
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  So, so yes, they're taking more risk on the tenant, on the credit side.
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  That's right.
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  And then speaking of credit, that was our second kind of theme of the market this
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  quarter and this year, third quarter is.
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  Credit risks and tariffs really starting to turn up what we're seeing in Vacan.
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  You know, obviously vacancies, but bankruptcies.
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  We've had several big bankruptcies this year.
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  We talked to a major landlord in preparation for this that's
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  talking about a couple more.
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  I won't throw names out there, but.
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  Certainly smaller three pls that were retail focused.
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  Mostly if the majority of their contracts were, were a major retailer.
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  Retailer with tariffs, you know, consumer confidence, consumer spending is changing.
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  And you know, if you're a one trick pony on the three pl, you're at credit risk.
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  Yeah, for sure.
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  For sure.
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  And so that's something landlords are constantly weighing
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  in in today's environment.
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  Some positive news.
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  I mean, south Seattle struggled for, for years now.
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  And there's been a little bit of rebound in that market for Q3
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  vacancies actually gone down 70 bips.
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  Yeah.
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  Yeah.
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  So that, that is the.
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  Really the, the, I would say out of all the markets the biggest change, right?
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  Yeah.
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  South Seattle, we've been unfortunately beating it up on many podcasts.
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  We can now say it's improved.
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  Things are improving.
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  I would even say the homeless situation down there when you
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  drive down there is improving.
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  But overall vacancies down 70 bips.
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  You know, when you look at that, I think.
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  You know, there is still a challenge with that market, but good news from
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  a standpoint of vacancy came down.
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  Yeah, and you're right on the challenge, and we can just touch base on this.
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  I did on track six, they're about 30% occupied, but I understand
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  there's two deals that look imminent that would bring them to about 60%.
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  At least.
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  And that's, I believe, if not the longest, one of the longer term vacancies
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  in South Seattle is the multi-story.
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  Yeah.
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  And it's not just track six, it's others Horton's still struggling
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  with 0% vacancy and then the Trammell Crow building with 0% vacancy.
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  Yeah.
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  Just driving by that building the other day.
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  It's, it's nice.
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  Yeah.
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  Um, beautiful building just needs a tenant.
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  So we are gonna jump into the vacancy rates by.
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  Submarkets And then, and then talk about the different size,
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  size range, as, as, as well.
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  So just quickly going through South Seattle, close in is,
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  is 9.3% currently vacant.
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  Um, down from 10.
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  Down from 10.
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  So that's, that's good to get into digits.
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  Uh, Kent Valley is at 9.2.
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  That's up from 8.6 last quarter.
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  Pierce County's at 9.9.
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  That's a jump from 9% last quarter due to deliveries, correct?
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  Yes.
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  But now the, now replacing Seattle is the worst vacancy.
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  Yeah.
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  But you know, two big buildings lease up there and all of a
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  sudden, well, and one is at.
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  Yeah, I think, yeah.
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  So we're gonna see a big one removed that'll drop back down quickly.
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  Yeah.
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  Yeah.
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  They, they that, that, that'll move the needle.
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  Yeah.
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  And then Thurston counties that stayed pretty consistent, 5.3%.
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  So when you exclude the north end, you're about 9.2 when those submarkets
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  that we just went over up from 8.8 the previous quarter, and then you look
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  at the east side and north end real quick, they stayed pretty consistent.
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  6.3% on the east side vacancy.
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  North end's 8.2.
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  That's right.
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  And then let's go to sizes.
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  Same theme we've been talking about all year.
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  Let's play small ball, right?
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  Yeah.
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  10 to 25.
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  4.5%. And as you go up in size, you go up in vacancy.
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  Yep.
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  Until you get really big 25 to 54.7.
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  So both of those still a landlord market.
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  Then we switch to a tenant market 50 to 107.4.
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  The continuing theme, which is unfortunately jumping up
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  in vacancy again, one to 200.
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  'cause we had last quarter, remember we had some positive absorption
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  and now we got negative again.
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  So one to 212.7%.
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  What?
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  I mean, we got.
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  Couple years extra inventory there.
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  That's just been brutal.
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  Yeah.
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  That's, that's been a, uh, a tough size mark.
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  It's a tough size range that landlords are really starting to get aggressive in.
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  Yes.
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  Unless you can do something unique and break a building
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  up or do something different.
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  That's right.
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  And then the biggest increase in vacancy was above 200, but
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  that's because of deliveries.
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  He had about a. A full hundred basis point jump in that.
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  But that's because you're starting to now deliver some big boxes.
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  Yeah, that's exactly right.
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  So some of the largest move-ins, just couple, you know, couple to note.
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  Amazon, at least a couple hundred thousand square feet in South Seattle
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  and Goodwill and flying food rib.
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  Those are the three biggest.
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  I mean, and none of those were huge.
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  Amazon was pretty good size.
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  Yeah.
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  What was the total on Amazon?
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  2 34 5 or something like that.
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  Yeah.
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  It was, uh, Emerald Gateway.
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  Prologis.
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  Yeah.
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  So you mentioned absorption.
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  We were negative 550,000 square feet in Q3.
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  So that puts us at year to date negative 1.4 million for the market wide.
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  Yeah.
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  Let's pause there and say predictions for Q4 on that.
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  So we're negative 1.4, which is the worst year man in a bare.
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  I actually, we should have prepared for this, but I'm gonna guess
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  it's the worst absorption year in over 10 years, maybe since 2000.
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  10 or 11.
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  Yeah, I mean, we've been positive for so many years in a row.
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  I think 11 we started recovering.
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  So you would say we definitely had positive absorption from 11
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  on, so it should be since 2010.
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  Yep.
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  Yeah.
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  Again, more development in today's environment, 15 than,
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  than, you know, 10, 15 years ago.
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  But, but yeah, that's part of it and comes back quick, so, so what
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  do I think in the fourth quarter?
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  I think that if there's a big deal or two that gets inked, awesome,
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  that'll help with those numbers.
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  But I honestly, I think we're gonna be relatively flat over the.
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  Q4 and hopefully there'll be a big deal or two that gets done and then
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  we head into 2026 with some momentum.
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  Yeah, and this is rare 'cause you are Mr.
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  Positive.
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  I'm gonna actually say that we're gonna cut this at the end of the year.
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  Down to a negative about 400,000 feet and I'm banking on Correct.
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  A major deal happening.
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  Yeah.
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  I mean that's, that's what it takes, right?
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  Yeah.
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  Um, but we do need, and we've talked about this a lot over the years, you know, you
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  can tell a lot about a market by what's going on in the midsize range, right?
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  Yeah.
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  So call it 50 to one 50, right.
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  Which is not great, right?
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  I mean, it just, that's the fundamentals of what.
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  You know the Kent Valley kind of plays in.
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  That's right.
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  That's right.
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  So we need to get that market back and then the big box that'll come, and then
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  if we can get that mid-market to come back then, then everything follows.
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  That's right.
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  Let's talk about investment sales.
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  That, as you pointed out in the beginning of this podcast, it's the one
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  thing that just is going super strong.
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  We're at one point, almost 1.3 billion in sales.
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  Already topping last year with what arguably normally is the best
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  quarter of the year going into Q4.
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  Yeah.
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  So no question.
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  We're already beating last year and you minus COVID and we are above average
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  with a quarter to go, which is just huge.
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  Yeah.
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  And there's some product out there.
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  I mean, we're selling some stuff that'll trade in in, in Q4.
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  So the investment demand is real.
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  It's real.
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  You, you look at it from a historical standpoint, obviously
• 11:47
  with where the vacancy rates are.
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  Today, investors are buying buildings at a basis they feel really, really good about.
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  Yeah.
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  And for sure, I, I do think that, or $80 a foot down, maybe a hundred
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  down from the top, top of the market.
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  I, I mean, you look at it, this is gonna be an era I think where investors
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  look, if they're buying in the core markets for, in the Puget Sound, they're
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  buying a building that they believe in.
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  They're gonna look back 2, 3, 4 years from now and be like.
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  That was a fantastic basis.
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  That's right.
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  And so, um, we're at, we are at one of the better markets in, in
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  the country and so it is a matter of time before we bounce back.
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  We'll bounce back quicker and everything will shoot back up again.
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  Yeah.
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  If you take out by the end of this year, if you take out 2018, which we have to
• 12:31
  look back, that was a phenomenal year.
• 12:33
  21 and 22.
• 12:34
  So just those three years.
• 12:36
  Yeah.
• 12:36
  I actually think.
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  In our careers, this will end up being the the fourth best investment
• 12:42
  sale year by volume in our career.
• 12:44
  And again, you just take out those three years.
• 12:46
  Yeah, so health healthy market for sure.
• 12:48
  I think part of that too is investors are focused on, you know, markets that.
• 12:53
  You know, nationwide have good fundamentals and we're
• 12:55
  certainly one of those.
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  Yeah.
• 12:57
  And land, I mean, land is going crazy.
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  I mean, obviously we're Well, land's a good, if you can go,
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  we've got the up site out.
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  It's phenomenal.
• 13:05
  Well, think about it.
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  I mean, if you're, if you're a developer right?
• 13:08
  And you're looking at a site and you're, you're thinking that's gonna be in
• 13:11
  production in the next couple of years.
• 13:13
  Yep.
• 13:13
  Yeah.
• 13:14
  Time for the market to recover for sure.
• 13:15
  You're buying it in a, in a really, really good market, it makes a lot of
• 13:19
  sense to be looking at land, right?
• 13:20
  Yeah.
• 13:20
  Way down from the top of the market.
• 13:22
  And to your point, you don't, that's not gonna be a development, you know,
• 13:25
  probably for three years, right?
• 13:26
  Yeah.
• 13:26
  Yeah.
• 13:27
  So I get it.
• 13:27
  Yeah.
• 13:28
  Yeah.
• 13:28
  So really it's kind of looking at Q3 and, and recapping what we, we just discussed.
• 13:33
  We think a lot of re you know, Q4 will have a lot of renewals, still
• 13:36
  maybe a big deal or two that, that ins at least one big deal that, yeah.
• 13:39
  Hopefully.
• 13:40
  Uh, hits that absorption.
• 13:41
  Of course I made that prediction.
• 13:43
  I didn't think about some of the deliveries.
• 13:45
  So that'll throw that off.
• 13:46
  Yeah.
• 13:46
  'cause we are delivering, I mean, we're delivering the golf course.
• 13:49
  Yeah.
• 13:49
  Right.
• 13:49
  So that might throw my numbers off a little bit.
• 13:52
  Well, maybe we lease 'em.
• 13:53
  Who knows?
• 13:53
  Yeah.
• 13:53
  Yeah.
• 13:54
  And obviously Bridge is delivering a couple billions as well.
• 13:56
  Yeah.
• 13:57
  Uh, but we'll see.
• 13:58
  Um, credit is obviously going to continue to be a big.
• 14:01
  And how investors look at credit will be big going forward.
• 14:05
  Mm-hmm.
• 14:05
  That's always big.
• 14:06
  And then South Seattle and some of those other sub-markets.
• 14:09
  We'll see how those continue if they continue to progress or hit
• 14:12
  kind of the equilibrium again.
• 14:14
  But we're looking.
• 14:15
  And then the final big prediction, Mariners are hitting the playoffs
• 14:18
  for the first time since Oh won.
• 14:20
  They won the West and it was the last time they won the West was in 2001.
• 14:24
  Okay.
• 14:24
  So yeah, it's been a while.
• 14:26
  They've never been to a World Series.
• 14:27
  We're gonna beat the Phillies in the World Series is what's gonna happen.
• 14:30
  We're gonna beat the Phillies in, we're beat the Phillies in the World Series.
• 14:32
  Yeah.
• 14:33
  Okay.
• 14:33
  Excellent.
• 14:33
  And don't forget about the Seahawks at, at, you know, three in one right now too.
• 14:37
  Okay.
• 14:37
  Well, the listeners are gonna be listening to this on Friday.
• 14:39
  Saturday's the first Mariner game.
• 14:41
  Yeah.
• 14:41
  And then are we having Sunday night football?
• 14:43
  No, they, we don't know yet.
• 14:45
  We don't know yet.
• 14:45
  Okay.
• 14:45
  We don't know that they got a, the MLB gets priority over the NFL, so
• 14:49
  they're gonna name the Mariners's time and then the NFL might push
• 14:51
  the hawks back a little bit.
• 14:53
  I think the Hawk Hawks are getting a lot of publicity.
• 14:55
  Right now.
• 14:56
  Right.
• 14:56
  They should be.
• 14:57
  And then Tampa Bay's a very popular team.
• 14:58
  Yeah.
• 14:59
  I would think that'd be a good Sunday night before.
• 15:00
  Yeah.
• 15:00
  I don't know if they can flex it.
• 15:01
  I'm calling it now Sunday night.
• 15:02
  Yeah.
• 15:02
  Maybe.
• 15:03
  I don't know if they can flex it or not.
• 15:04
  We'll see.
• 15:05
  RSR winning the World Series.
• 15:06
  How about that?
• 15:06
  Yeah.
• 15:07
  Yes, I love it.
• 15:07
  Uh, happy Friday.
• 15:09
  And uh, let's go Q4.
• 15:11
  Yep.