The Economy Rains on Washington's Real Estate Markets
Washington's economy, and that of Seattle in particular, has suffered some major blows in the past few years, including Boeing's decision to relocate its corporate headquarters to Chicago and the high-technology sector's softening. Although the company still maintains manufacturing facilities in Washington, “Boeing continues to see a reduction in work force in response to a drop in demand and domestic U.S. airline industry weakness,” says Shawn Hoban, CCIM, CPM, of Coast Real Estate Services in Everett. In eastern Washington, industries such as medical, financial services, and government dominate, but many national and regional industrial users have consolidated and vacated the region, says Mark Davis, CCIM, CRB, CRS, of Tomlinson Black Commercial in Spokane.
Investors Still Want Multifamily
The Puget Sound multifamily market presents a contradiction: While demand has decreased, “apartment properties seem to be in favor with buyers, although at a lower level than two years ago,” and sales prices are holding their own, Hoban says. “The area is viewed as a high-barrier-to-entry type of market, which props up values in a rather anemic operating climate,” he explains. “Supply, in other words, does not respond to demand.” Thus, despite slowdowns in the airline and high-tech industries, vacancy rates hover around 7.6 percent, only a 0.5 percent increase from September 2002, according to Dupre and Scott Apartment Advisors.
New multifamily construction in the area is limited, which could assist a recovery in the near future, Hoban says. If job growth in the airline and technology sectors occurs, “rapid absorption of the remaining apartment supply and existing vacancies could follow, and we may return to a cycle reminiscent of the late 1990s that saw a spike in demand and limited supply,” he says.
Puget Sound area rents peaked in third-quarter 2001 and have fallen only 1 percent, now averaging $800, says Gregory Laycock, CCIM, of Cushman & Wakefield of Washington in Seattle. “That trend is a little misleading, since [the average] includes the addition of new construction. New units generally rent for more, pushing the average rent trend higher,” he explains. Landlords' use of incentives has increased to a record level. Renters may receive one month free rent on six-month and nine-month leases or two months free rent on one-year leases. “Therefore, expectations are for rents to remain flat for the remainder of the year,” Laycock concludes.
Industrial Fundamentals Weak
About 30 miles south of Seattle, Pierce County's industrial market has experienced sporadic activity, mostly startups or undercapitalized companies leasing space less than 10,000 square feet, says David B. Douglas, CCIM, SIOR, of Insignia Kidder Mathews in Tacoma. Most large-scale space of more than 200,000 sf already has been absorbed, and properties in the 10,000-sf to 100,000-sf range “have been extremely quiet for the last 18 months to 24 months,” he says.
Although overall occupancy is 91 percent, institutional-grade multitenant space in Pierce County is only 86 percent full, a significant drop from the nearly 95 percent rate of two years ago, Douglas says. Industrial landlords have lowered rents 12 percent to 15 percent, and much of this reduction is credited to competition from sublease space, he says. Only one major deal was signed in the last six months: USCO, a logistics company, leased 350,000 sf in the Mowich Building in Sumner's Valley South Corporate Park.
Occupancy level recovery in mid-size industrial buildings isn't expected for another 18 months, but activity in “bulk distribution properties of more than 100,000 sf should regain speed within the next 12 to 15 months,” Douglas says. Pension funds are expected to increase their investment in industrial properties in Pierce County over the next few years because of “the area's long-term viability as a port gateway for trade from the Pacific Rim,” he predicts.
In Spokane, local, regional, and national distributors wanting office/warehouse space drive the industrial market. “Newer industrial buildings are about 50/50 office/warehouse after tenant buildout,” Davis says. Sales are brisk, especially those by local users, and prices have risen. Yet vacancy — around 15 percent — is up, and lease rates have suffered a 10 percent to 15 percent drop. “Construction is almost nonexistent,” he says.
Economy Undercuts Office
The current economic slowdown discourages job growth, and employment in western Washington is expected to rise only 0.1 percent this year, according to the Puget Sound Economic Forecaster. These factors have severely affected Seattle's office market, and many experts expect the situation to deteriorate further before rebounding. However, employment is predicted to pick up in 2004 and expand at a 1.5 percent rate, the best since 2000, Laycock says. Such an increase should bode well for the region's office market.
About 60 miles north of Seattle, office properties are experiencing reasonable activity, says Marshall “Clay” Learned, CCIM, SIOR, of North West Properties in Mt. Vernon. Occupancies generally are up, and lease rates and prices are stable. Most income-producing properties are selling well, and a shortage of product may cause future overbuilding, he says.
Retail Remains Strong
Despite low consumer confidence, retail remained Washington's strongest commercial real estate sector last year, a trend that is expected to continue. Regency Centers has several developments nearing completion, including the 217,657-sf Cascade Plaza in Everett anchored by Safeway, Ross, and JoAnn Fabrics; the 140,510-sf James Center in Tacoma anchored by Fred Meyer; and the 83,941-sf Padden Parkway Market Center in Vancouver anchored by Albertson's. Approximately 1.5 million sf of new retail space is planned to come online in Puget Sound by the end of the year, but vacancies are expected to rise only 0.5 percent, according to Marcus & Millichap.
Tulsa Markets OK
Aviation, telecommunications, and energy-related businesses make up the majority of Tulsa, Okla.'s economy, which has suffered massive layoffs due to American Airlines' restructuring and Williams Telecommunications' and WorldCom's bankruptcies.
Office. Suburban properties currently outperform their downtown counterparts in occupancy, lease rates, and demand. For example, American Airlines recently sold a 158,814-square-foot, class A suburban office property for approximately $31 per square foot to a Trammell Crow Co.-affiliated entity, according to Patrick E. Coates, CCIM, of Kennedy-Wilson. While suburban class A and B lease rates have dropped only 50 cents to $1 during the past year, central business district rates have fallen $1 to $2, he says. However, the overall occupancy rate has declined only 2 percent to 3 percent. Construction has been restrained; only three new multitenant properties have been built over the past three years, and no developments are planned for the near future, Coates says.
Multifamily. “Investors are purchasing a great number of apartment complexes, banking on rising interest rates and increased apartment demand,” Coates says. Out-of-state investors find the local 9 percent to 12 percent capitalization rates attractive, he continues.
Retail. A glut of big-box space dominates the market, “and developers looking for anchors are having difficulty finding ones willing to commit to new development,” says Adam Adwon, CCIM, MAI, of Appraisal Data Services. For example, a CBD development subsidized by the city has yet to locate an anchor. Lease rates and sales prices have not dropped significantly, but “marketing times appear to have extended somewhat,” he says. The restaurant industry has experienced a 15 percent to 20 percent decline in sales, and Adwon expects a reduction in the number of national fast-food chain locations, “although there is a never-ending supply of locals willing to get into the restaurant business.”