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SEATTLE-Recent purchases by Portland, OR-based Harsch Investment Properties underscore the growing strength of the Puget Sound region’s multitenant industrial market. While several recently completed bulk-distribution buildings held by institutional investors languish unleased, demand for smaller spaces threatens to overtake supply.

“There’s a lot of demand and very little product to sell,” reports Scott Alan, a senior vice president in the Bellevue, WA office of Colliers International. “It’s s tough market to enter. If you own, you’re in a very good position. But it’s hard to get in right now.”

Harsch picked up the the 126,000-sf Kenyon Industrial Park in South Seattle from Statewide Mortgage Services Co. Inc for $11.75 million and a 113,045-sf building in Kent, WA for $7.5 million from an entity of Kent-based Davis Property & Investment LLC (DPI). The deals bring Harsch’s Seattle-area industrial portfolio to five properties totaling about 565,000 sf and its total Seattle area portfolio to well over 1.5 million sf.

“The kind of tenant profile we enjoy servicing tends to be smaller, locally owned manufacturers, suppliers and service businesses” says Rob Aigner, senior vice president and Seattle regional manager for Harsch. “They’re looking for proximity to major lines of transportation and the Port of Seattle. These are not the high-bay warehouse tenants.”

Aigner calls Seattle one of the nation’s bright spots economically. “Even with the softening of national economy, we see the local area as being very strong,” he says, pointing to continued growth by local stalwarts such as Boeing, Microsoft, Costco, Nordstrom and Starbucks. The region is forecast to experience job growth of 1.9% this year, more than twice the national average of 0.9%.

DPI co-founder Jeff Davis, who expects to announce several more significant real estate deals in the coming months, agrees with Aigner’s assessment, noting, “We think there’s still a tremendous upside to many of these smaller industrial-based markets along the I-5 corridor. We remain bullish on these sub-markets, as well as the flex product that works so well for today’s small-to-medium-size tenant.”

According to CB Richard Ellis, the overall market has one of the lowest vacancy levels in the nation at 5.44% for the end of 2007, down from more than 7% a year earlier. The brokerage pegs monthly lease rates at $0.49 a sf.

“There’s tremendous demand for small tenant spaces. We’re actually seeing a rise in rental rates on smaller buildings,” Alan tells GlobeSt.com. “But larger buildings are having a tougher time. A number of recently completed larger buildings sold vacant to Black Rock, ING Clarion and LaSalle and still haven’t found tenants.”

According to Aigner, Harsch pays cash for all its investments and thus worries little about the credit market. It prefers longer holds over quick turnarounds and is willing to pay the higher management costs of serving smaller tenants in order to build a loyal tenant base. He says the company also strives to build strong broker relationships, which is how it was able to defy the inventory shortage and acquire the DPI property in an off-market transaction. With so few properties on the block, Alan says off-market deals seem to be becoming the norm.

Both Aigner and Alan believe cap rates are creeping up a bit as pricing retreats from peaks reached in early ’07. “We’re seeing some sellers trying to hold to prices from six months ago,” says the latter. “But more what’s happening is owners holding on to properties and reaping the rewards of rising rents, waiting for prices to go up again.”

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