WESTERN SNAPSHOT, DECEMBER 2008

Puget Sound Retail Market

Weber

Retail trends in the state of Washington continue to fluctuate based on the state’s ever-changing consumers, tenants and markets. The new trend is creating a tenant mix that provides a place where family, friends and neighbors can meet to enjoy a cup of coffee while they sit by an outside fireplace and enjoy music by a local artist. With the premium on fresh shopping experiences, developers and tenants are seeing more and more consumers gravitate to new open-air shopping centers and away from enclosed malls. Consumers still demand the everyday, well-known retailers, but they are also looking for that locally owned restaurant, cheese shop or butcher shop to bring the pizzazz and uniqueness to their shopping schedules. However, due to the economic downturn and changes in lending practices, landlords and developers are having to work harder and be more innovative to make a deal with locally owned retailers.

The Puget Sound region continues to be a strong market despite the country’s economic turmoil. Washington has experienced some of the lowest retail vacancy rates in the nation. A comprehensive report encompassing 119 seasoned, anchored shopping centers and more than 17 million square feet indicates that Washington had a regional vacancy rate of 2.98 percent, an increase of only 13 basis points from last year’s measure.

Unfortunately, many broker agents have experienced more of the dreaded calls from tenants saying that they need help in terminating their lease or wish to sublease their space. Fortunately though, due to the low vacancy rate in past years, many national and regional tenants are taking advantage of the space these failing tenants are providing. Taking advantage of a tenant’s market, aggressive retailers are now experiencing very attractive lease concessions. Rental rates have experienced a steady increase in the past few years; for example, the blended asking rate showed a $1.18 per square foot increase from 2006 to 2007 and a $1.54 per square foot increase this year to a new high of $24.53 per square foot. New anchored and unanchored shopping centers are experiencing per-square-foot lease rates ranging in the high $20s to low $40s. While aggressively expanding tenants may not be achieving lower lease rates than what the landlord/developer requires for lending purposes, they are likely experiencing increased concessions involving free rent, tenant-improvement allowances and tenant-specific improvements. Landlords with the foresight to anticipate increased concessions and the flexibility to be creative are the ones completing deals.

Several markets continue to grow in the Puget Sound region. In Snohomish County to the north, Powell Development’s new 500,000-square-foot Lakewood Crossing in Smokey Point is anchored by Target, Costco, Best Buy, Office Depot, Petco and Marshall’s. Also located in this vibrantly growing market just east of Interstate 5 and north of Lynnwood is Millcreek Town Center, which features Central Markets, UW Bookstore, LA Fitness, Pier 1 Imports and many other shops.

In Bellevue, Schnitzer West’s The Shops at Bravern, anchored by Neiman Marcus with more than 300,000 square feet of new high-end retail and restaurants, will have a huge impact. Since the little town of Covington lifted a development moratorium a few years ago, the city has taken off and added a half million square feet of retail. Many new centers have been built featuring Kohl’s, Wal-Mart and The Home Depot with news that a Costco is coming soon. Just to the north of downtown Seattle in South Lake Union, the Vulcan Real Estate team is redefining lifestyle development. Vulcan has single handedly changed the lives of many people in this dynamic new district where you can work, play, eat and live all in one place.

Close by in South Center is the new Westfields lifestyle addition that boasts a Northwest architecture feel and a long list of new national, regional and local tenants. South of Seattle is Federal Way where the widening of 320th from I-5 has transformed the area. Just south at 348th and Pacific Highway is a new Wal-Mart and Opus Northwest’s 250,000-square-foot Federal Way Crossings, which includes LA Fitness, Office Depot and Sportsmans Warehouse. Head southeast to discover the ever-growing South Hill-Puyallup area with new developments like Tarragon Development’s Sunrise Village, which is anchored by Lowe’s Home Improvement Warehouse, Target and LA Fitness. South Hill-Puyallup continues to experience the residential and retail growth from the South Hill Mall to 175th where the long-awaited Cross Base Highway project is finally making progress. In Lacey, close to Olympia, Cabella’s, The Home Depot and Costco have laid groundwork for a new 45-acre retail development.

While still steady, retail investment sales in the area are much different than a few years ago. Investors pursuing income-producing properties are not seeing the cap rates rise exponentially for Class A quality real estate, but are seeing the components of their loans change exponentially. Cap rates are still in the high 6 to low 7 percent range. It is not unheard of today though to see 35 percent or more needed on a down payment for a loan to be approved. Also, sellers are having to guaranty rents on vacancies or leave large sums in escrow to get the appraisal and loan package moved through the process to a successful close. A few years ago, 20 percent down was not unheard of, but lenders and investors are much more cautious these days.

Expect a continued slowdown in activity as 2008 comes to a close. With the presidential election past and the holiday season approaching, many retailers will focus on their current stores, working hard to make their year-end sales goals. Expect a shaky start to 2009, but anticipate that lending practices will open up after the second quarter and in turn help facilitate retail expansion. The national and regional tenants that continue to be aggressive in their expansion plans now in the Pacific Northwest are the ones that are going to reap the benefit of this current market condition when it begins its upswing and the country’s overall economy turns the corner.

Tim Weber is vice president at First Western Properties in Tacoma, Washington.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.