— By Candice Chevaillier, CCIM, Principal, Lee & Associates | Pacific Northwest Multifamily Team — Absorption still lags supply in the Seattle MSA contributing to higher vacancy and flat rents. In Q1 2024 3,000 units were delivered, yet only 2,800 were absorbed. Vacancy is stabilizing at 6.9 percent this quarter and then is expected to trend down starting in Q3, finally allowing meaningful growth in rents. Construction costs remain high and options for financing limited, curtailing new development. This is creating demand for existing value-add acquisitions. 2024 and 2023 sale volume in the Seattle MSA is still a trickle of what it was in 2022 and 2021, shifting Cap Rates slowly upwards. This trend is expected to be short-lived. As interest rates finally begin to fall, and rents begin to rise, investors who catch this inflection point will prevail from best pricing and benefit while more conservative capital sits on the sidelines.
Market Reports
— By Alex Muir, Senior Vice President, Lee & Associates | Seattle — As we near the halfway mark of 2024, capital markets activity in Seattle remains slow. The year has largely consisted of price discovery and waiting for interest rates to drop. With that said, the sales volume for office assets has nearly surpassed the 2023 total. Four transactions over $30 million have occurred year-to-date, all of which are larger than any deal last year. These sales are emblematic of the type of deals that are driving investment activity, with three being owner-user acquisitions — Alaska Airlines, Costco, Seattle Housing Authority — and the fourth involving a loan assumption. Distressed sales are occurring more frequently as well, with several buildings in downtown Seattle trading below $150/SF. While it has yet to materially impact vacancy, there are signs of life in the leasing market. Pokémon recently signed a lease for 16 floors in The Eight, an under-construction tower in the Bellevue CBD. This is the largest lease in the market in three years. Other tenants, such as ByteDance and Snowflake, have signed leases larger than 100,000 SF, as a new wave of tech companies grow in the market. With the …
— By Vanessa Herzog, SIOR, CCIM, Principal, Lee & Associates | Seattle — Industrial markets in the Pacific NW are adjusting to new parameters but remaining steady. Vacancy rates are hovering around 7% in the 6-county region along the I-5 corridor (Arlington to Vancouver, WA). Leasing activity slowed in the first quarter but started picking up as we progress through the second quarter. New construction is active with permitted projects, but the regional project pipeline is diminishing, not due to demand, but due to high land price expectation, stabilized rental rates and continued high costs of new construction. We think this trend will continue well into 2025 leaving Developers and Land Sellers frustrated. Regionally, large land parcels are difficult to find or assemble, leaving Developers looking at infill assemblages, land use changes or full site redevelopment. IOS specialized properties are slowing in demand from Tenants. Finally, we are seeing the small owner user facilities for sale or lease, and the demand from this user group level off. Here are some statistics: Total Inventory at 398M SF, Current Vacancy rate 7% (27.8M SF), Market Asking Rates $1.12/SF/Mo., Sublease Space 20% of total vacancy (5.6 M/SF): New Construction underway 9.9M SF. Demand …
Inflated Interest Rates Impact Values, but Tech and Growth Drive Resilience in Metro Seattle
by Jeff Shaw
— By Steven Chattin, Managing Director, Berkadia — Nationwide, inflated interest rates are significantly impacting property values. In the Seattle metro, cap rates are increasing while values decline and bridge debt rates hover at 8 percent or higher — non-starters for many multifamily investors. The common play is to secure favorable short-term financing for if and when rates come back down. Due to these factors, family offices, high-net-worth individuals and private capital groups are the most active players in today’s market. Lenders are also feeling the impact of the economic environment, with the current depth being extremely shallow for competitive options. As transactions slow, some players are scaling back or stepping out of certain arenas entirely. Umpqua Bank recently shuttered its multifamily lending operation on the West Coast. According to second-quarter data provided by CoStar, multifamily sales volume has decreased by 50 percent year over year. Agency debt is most favored right now with fixed rates preferred over floating rate debt. Where available, loan assumptions are generally the most attractive option and have bridged many deals across the finish line. Challenges aside, many developers are staying busy as evidenced by the nearly 12,000 additional units projected within the Seattle-Tacoma metro …
— By Lisa Stewart, Senior Managing Director, JLL; and Nick Menghini, Puget Sound Research Manager, JLL — Real estate market participants are maintaining cautious optimism for improved conditions across the Puget Sound as signs of vitality are emerging despite persistently challenging economic forces. Viewed through the lens of prior real estate cycles, it’s clear the Seattle area has a greater critical mass of highly skilled talent and a broader, more resilient economic base than previous slowdowns. Among the promising indicators are the Puget Sound’s rebound of population in-migration, from net outflows during the pandemic to more than 53,000 new residents moving here in the first half of the year. Seattle now lays claim to being the fastest growing of the top 50 U.S. cities, according to Census data. Several leading employers are also growing again. This includes Boeing, which has more hiring underway than in years’ past. Rising star Blue Origin has had about half as many open positions as Boeing over the past 12 months. The life sciences sector is further expanding as Big Pharma firms like Pfizer, Moderna and Novartis join homegrown startups with significant Puget Sound presences. Overall, companies encouraging a return-to-office (RTO) have brought more daytime foot traffic to employment …
— Jennifer Seversen, Vice President, CBRE — Suburban retail is emerging as the main driver of retail growth in Seattle. In the height of the pandemic, many consumers stayed close to home, rediscovered their neighborhoods and began shopping primarily in their communities. These habits have continued and, as a result, retailers on once-heavily trafficked commute paths have experienced declining sales revenue. Retailers are taking notes, particularly those in city office districts that rely heavily on daytime foot traffic. The white-hot activity in suburban retail has led to vacancy rates under 2 percent, healthy rent growth and record-breaking absorption within new developments. Rents in suburban markets like Totem Lake, Bothell and Woodinville are outpacing downtown Seattle by 50 percent, something that would not have been conceivable three years ago. Well-located mixed-use retail projects and neighborhood centers have led the way in pushing rent growth, while grocery-anchored developments have been attractive assets to investors. Restaurants have proven to be a major driver of retail activity, with Seattle having a 7 percent increase in diners year over year through the second quarter, the fifth highest increase in the U.S., according to OpenTable. An example of the rise in suburban retail demand is Harvest, …
It’s been quite the run for Seattle. Like many secondary markets out West, the Emerald City was a pandemic darling, racking up loads of new residents and workers over the past few years. Seattle-area employers added more than 102,600 workers in 2021 alone, according to Marcus & Millichap’s second-quarter market report, which predicts the area will add another 85,000 workers by year’s end. The report also forecasts Seattle’s population will increase by more than 220,000 residents over the next five years. All this activity has led to a bull run for multifamily owners, investors and developers. Net absorption in Seattle’s central business district surpassed the 5,000-unit mark for the first time on record last year, while rents have risen by 14 percent year over year. Demand was so fierce that all 20 of the metro’s submarkets recorded vacancy compression over the past four quarters, resulting in an average 2.8 percent vacancy rate, according to Marcus & Millichap. This is the lowest rate in two decades. Nearly 9,000 units — representing 1.9 percent of the supply — were added over the 12-month period that ended in March, with another 25,000 units still under construction at the end of the second quarter. …
By Brian O’Connor, Executive Director, Valuation & Advisory, Cushman & Wakefield The Seattle Metro apartment market has been surprisingly resilient. The market quickly bounced back from the COVID downturn at a robust clip and has continued moving at a healthy pace. During the first six months of 2022, metro Seattle absorbed more than 12,600 units. That already surpasses a typical full year of demand by several thousand units. From January 2022 through June, the market absorbed 3,779 newly constructed units — a respectable level. If you also factor in the decline in existing units, then the market absorbed another 8,886 units. That tells us that the supply of new units was too low…or demand was much stronger than we expected. The market had rebounded to a metro-wide vacancy rate of only 1.33 percent at mid-year 2022, an astoundingly low level. From year-end 2021 to June 2022, overall apartment vacancies declined from 3 percent to 1.33 percent. We do, however, expect vacancies to begin increasing slightly. These rates typically see an uptick as we head into winter. Rent growth also slows during this time. We expect to see the metro-wide vacancy rate start to rise just a bit by year-end 2022, to …
By Dino A. Christophilis, Senior Vice President, CBRE; Daniel Tibeau, Associate, CBRE; and Parker Ksidakis, Associate, CBRE Few sectors were as disrupted by the pandemic as retail. While 2020 proved to be a tumultuous year, the last year and a half have demonstrated the resiliency of retail — both in Seattle and nationally. The Seattle economy is performing well for a recovering retail sector, with continued employment growth and increasing retail spending. The Puget Sound is notorious for its lack of new retail development, and the recent years have been no exception. The environment of increasing demand with a flat level of supply results in positive conditions for existing retail space. Like much of the nation, concerns persist in Seattle around inflation, increasing debt costs and a potential slowing in the global economy. However, the situation in Seattle is more positive and nuanced. Growing Investment Activity Year to date, Seattle is poised to outperform the prior year in terms of total investment dollars. The second quarter of 2022 experienced 65 percent greater investment volume relative to the same quarter in 2021. This figure is particularly notable as 2021 was an exceptional year. Investors deployed pent-up capital that was held during the height of the pandemic. Total retail …
By Charlie Farra, Senior Managing Director, Newmark The Puget Sound office market has fared better than many peer metro areas during the pandemic. While the market remains tenuous in the region, local office fundamentals have improved to date in 2022. A consistent through the chaos is a flight to quality. If employers expect a return to office, they are being tasked with creating a physical environment that is far more favorable than a home office or local coffee shop. We are referring to this as “commute-worthy real estate.” Energy, collaboration, amenities, views, natural light and safety are some of the main points of focus and, due to current economic conditions, the ability to find such space at discounted pricing is within reason. New office leases are trending toward 75 percent of their pre-pandemic footprint as companies consider how and where to operate their businesses going forward. Professional service companies currently account for the most demand and are in the office more frequently than the technology sector. In tech cities like Seattle, this is a seismic shift from the previous decade, which saw skylines transform from the expansions of Amazon, Microsoft, Meta and Google. Many companies returning to the office are utilizing a hybrid …
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