Emboldened by renewed job growth and improving sales, retailers will push forward with new store openings in Puget Sound, which will ease the use of concessions. Leasing velocity in the Seattle-Tacoma retail market has built momentum through 2011, led by regional and national chains occupying vacant sites in high-traffic corridors. King County trade areas such as the Northgate/Central and Eastside/Bellevue submarkets have been the primary beneficiaries of resumed tenant expansions, but most suburban areas also recorded a modest upturn in leasing volume this year. The broadening recovery enabled landlords to hold the line on concessions.
While the rate of recovery will remain strongest in King County heading into 2012—aided by move-ins from Ross Dress for Less, Big Lots and several grocery chains—tenant demand for established centers in Pierce and Snohomish counties will build. In addition to a collection of smaller lease transactions, nearly a dozen regional and independent retailers have secured junior-anchor and big-box sites this year, with many of the leases set to commence over the next nine months.
Seattle retail developers completed about 695,000 square feet of space during the 12 months ending in the third quarter, an increase from the delivery of 250,000 square feet one year earlier. The largest retail property delivered thus far in 2011 was the 122,000-square-foot Lowe’s in Pierce County. The region’s retail planning pipeline totals 3.8 million square feet of space, though none of the developments have established groundbreaking dates. Retail builders are scheduled to bring 430,000 square feet of space online in 2011, decreasing from 730,000 square feet in 2010. During the past five years, completions averaged nearly 1.7 million square feet annually.
Overall retail vacancy in the region improved 50 basis points on a year-over-year basis ending in the third quarter.Marketwide, community centers logged a 30-basis-point drop in vacancy over the past year to 7.6 percent, while vacancy in neighborhood centers increased 40 basis points in that time to 9 percent. Neighborhood shopping centers in the South-Central Tacoma/Northwest Airport submarket registered a 200-basis-point rise over the first nine months to 13.7 percent, establishing the highest rate in the region. Community centers in the West Seattle/Tukwila/Kent/Auburn submarket posted the market’s steepest decline in vacancy so far this year, falling 100 basis points during the first three quarters 9.1 percent. Vacancy in the Puget Sound retail sector will fall 80 basis points in 2011 to 6.1 percent, resulting in the region’s first improvement since before the recession. Last year, vacancy ticked up 30 basis points.
Asking rents in the Seattle-Tacoma retail market retreated 0.7 percent over the past 12 months to $21.29 per square foot in the third quarter, while effective rents also fell 0.7 percent to $18.62 per square foot. In the third quarter, asking and effective rents down 0.4 percent and 0.5 percent, respectively, from year-end 2010 levels.Marketwide concessions of 12.5 percent of asking rents in the third quarter were identical to year-ago levels, which remained well-above average incentives of 8.4 percent of asking rents offered before the downturn. With retail operations stabilizing, concessions will hold steady over the final months of 2011 and will gradually decrease in 2012.Steady tenant demand in the Northgate/Central submarket supported a 2.5 percent increase in asking rents during the first nine months to $24.56 per square foot. Area effective rents increased 3.4 percent to $22.48 per square foot. This year, asking and effective rents will each slip 0.5 percent to $21.28 per square foot and $18.61 per square foot, respectively.
With low interest rates and local economic conditions recovering, investor demand for retail assets will strengthen moving into the New Year. Institutional and high-net-worth buyers resumed multi-tenant acquisitions, targeting core-anchored centers. Resurgent deal flow from these investors was largely isolated to King County, where the pace of trading involving multi-tenant centers priced above $10 million more than tripled. As such, average cap rates for high-visibility anchored centers fell to the low- to high-6 percent range, which is about 100 basis points below initial yields for performing strip centers. Private buyers, meanwhile, remained focused on single-tenant buildings. Freestanding assets backed by corporate guarantees command cap rates in the low- to mid-6 percent range when brought to market.Single-tenant assets occupied by highly rated tenants or those with shorter lease terms will trade at cap rates 50 basis points to 100 basis points higher.
– Justin C. White is a vice president of Marcus & Millichap’s Seattle office