Western Real Estate Business

OCT 2016

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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M A R K E T H I G H L I G H T: S E AT T L E www.REBusinessOnline.com Western Real Estate Business • October 2016 • 33 Seattle is on the rise, and compa- nies are thriving in the downtown core and surrounding submarkets. Seattle's office market is one of the healthiest in the country. Leasing con- tinues to be led by a robust technol- ogy sector that's fueled by both the expansion of homegrown companies and the addition of engineering of- fices from mostly California-based companies. These companies have established significant footprints in Seattle as they have been able to at- tract, hire and retain workers from a talented employee pool. Institutions like the University of Washington continue to produce additional engi- neering graduates from an expanding computer science program, and com- panies have had great success recruit- ing talent eager to move from across the country and internationally to the Puget Sound region. Traditional brick-and-mortar com- panies like Sears, Best Buy and Star- bucks are all working in Seattle to monetize the use of electronic devic- es. Many new companies to the mar- ket like Snapchat, Airbnb and, most recently, Pinterest, have opened their first Seattle locations in co-working spaces. The collaborative nature of the co-working environment is also popular among startups. These com- panies are often created by former employees of some of the region's longstanding heavyweights. Amazon has had a significant rip- ple effect on the region, especially in the Downtown Seattle market. The company is attracting a workforce to its urban campus at a stunning pace. It is now the city's largest tenant with 7.5 million square feet owned and leased in 2016, and commitments to 10.2 million square feet by the end of 2019. After 45 years in suburban Fed- eral Way, Weyerhaeuser is furthering the trend of office urbanization by opening its newly developed Pioneer Square headquarters in late summer of this year. Bellevue-based Expedia purchased the former Amgen campus in Seattle's Interbay neighborhood in 2015. The company plans to repur- pose the lab space and add additional square footage to house about 3,500 employees by the end of 2019. Google leased more than 600,000 square feet of prime lakefront real estate in South Lake Union this past March that will be developed by Vulcan. Other nota- ble lease transactions this year include Avalara at Hawk Tower, Saltchuk at 450 Alaskan Way — both at about 100,000 square feet in Pioneer Square — as well as Davis Wright Tremaine's recent lease of 178,600 square feet at Madison Centre. All three projects are currently under construction. Vacancy in the Seattle Central Busi- ness District and surrounding area submarkets was 7.89 percent while availability was 11.2 percent in the second quarter of this year. The down- ward vacancy trend is expected to continue through the next two years, with space under construction total- ing more than 6 million square feet across 20 projects, 44 percent of which is already pre-leased. Another six projects have announced a start date within the next few months, all with delivery dates before the conclusion of 2019. The first and second quarter of 2016 had an average absorption of nearly 1.4 million square feet, main- taining the recent trend of an aver- age annual absorption that more than tripled the 30-year historical average. Average Class A rents have also risen steadily to $42 per square foot annu- ally. One of the best indicators of how the core Puget Sound industrial markets are doing is to count the construction cranes as you crawl through traffic to the Downtown core. On my normal commute home, I count close to 20 cranes in Seattle. The Bellevue CBD tells a similar tale. Job growth, con- sumer spending and new construc- tion are all strong in the Puget Sound. From a macro-economic perspective, this has translated into a very robust commercial real estate market in the Puget Sound. As employment and consumer spending goes, so goes our industrial markets. Major employers like Amazon, Mi- crosoft and Starbucks, which reside in and around the core of Seattle and Bel- levue, have been major catalysts (both directly and indirectly) that fuel com- mercial real estate growth on a broader scale. Tech companies, eager to gain a foothold or expand their presence in the Puget Sound, have focused on these areas as well. The core is where the tech workforce wants to be, live and social- ize. Even the old-school companies like Weyerhaeuser, which sold its corporate campus in Federal Way for $70.5 mil- lion this past February, have packed up and moved to Seattle. From a numbers perspective, the Puget Sound added an estimated 234,000 new jobs between 2010 and 2015. About 72.8 percent of this gain was in King County, with nearly 87,000 of those new jobs directly/indirectly attributed to Amazon and Boeing. Regional unemployment went from 9.6 percent to 4.5 percent during that same time. More than 600,000 people moved into this area during the four- year period from 2010 to 2014, which may be the largest population boom in the region's history. Per capita per- sonal income in the four counties that comprise the Puget Sound region was estimated to be $59,330 in 2014, 24.5 percent above the national average. Industrial vacancy in the Puget Sound sits at 4.3 percent, according to CoStar. Compared to the national av- erage, the Puget Sound is running in lockstep, albeit 2 percent lower. Flex property vacancy is hovering around 6 percent, which is as low as I've seen it in the 20 years I've been in this busi- ness. Rent growth has been steady in most submarkets. However, in some product types and sizes, bidding wars have emerged as vacancy rates plunge to 1 percent, give or take. It is a good time to be a landlord. Industrial rates have arguably risen faster close to the Downtown Seattle core than anywhere else in the Puget Sound. This can be attributed to a few factors, including a lack of functional product and a desire for some compa- nies to be close to our region's largest concentration of businesses and con- sumers. This has pushed rates into the neighborhood of $10 to $12 per square foot per (annualized) for distribution spaces. Rates have risen north of $15 per square foot for industrial spaces that have the potential for conver- sion to higher/better use. For some, this has led to a migration south to- ward the Kent Valley, northeast Pierce County and the Port of Tacoma areas. With all this strong data, it is hard not to feel a little euphoric. However, when the euphoria starts to set in, it is probably a good time to give your head a shake (like in 2001 before the dot.com bubble and the 2007 hous- ing bubble). While there are no fore- seeable storm clouds on the horizon locally, the broader economy, not to mention the world, has a way of throwing us curve balls. Recent eco- nomic data suggests manufacturing sector hiring has flattened. The Puget Sound continues to deal with trans- portation challenges directly tied the region's economic and population growth. Many employers are also having difficulty hiring quality work- ers due to a lack of affordable housing in and around Seattle/Bellevue. These are just a few issues facing the Puget Sound that do have an effect on the health of our industrial markets. For the foreseeable future, we are forecasting steady growth in the core Puget Sound industrial markets. If you could trade the Puget Sound industri- al market like a stock, it wouldn't pay to be short. Sean Durkin, Vice President, Corporate Real Estate Advisor, contributed to this article. SEATTLE'S OFFICE MARKET REMAINS HEALTHY INDUSTRIAL BETS BIG ON THE PUGET SOUND REGION Jake Bos Senior Associate and Office Specialist, Kidder Mathews Brian Bruininks President and Managing Broker, The Andover Company/ Corfac International Amazon has had a significant ripple effect on the region, especially in the Downtown Seattle market. The company is attracting a workforce to its urban campus at a stunning pace. It is now the city's largest tenant with 7.5 million square feet owned and leased in 2016. If you could trade the Puget Sound industrial market like a stock, it wouldn't pay to be short.

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