Western Real Estate Business

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WESTERN SNAPSHOT, MARCH 2010

Seattle Retail Market

1. MARKET MOVES

In 2009, investment sales for retail were off by 80 percent or so from peak levels in 2006. There was only one sale of a food and drug-anchored neighborhood center in 2009, and that was at an 8.5 percent cap as part of a larger, national portfolio transaction. The largest investment sale was IKEA purchasing its lone store in the area after it had recently renewed a long-term lease there. Several single-tenant properties sold in a range of 7.5 to 9.5 percent cap rates, with the spread dependent on tenant credit and perceived risk.

On the development side, there is really very little in the way of expanding, new projects. A number of new centers hit the market as demand fell off and absorption has been slow. New, speculative development is not feasible.

Although there have been store closures in most retail segments, the junior anchor category was probably most responsible for pushing up the broad rental rates. The area felt the closures of Linens ‘n Things, Circuit City and Joes, as well as some continuing food-store consolidations. Heading into 2010, there are better-capitalized retailers looking to capture additional market share by occupying the better locations left behind by the failed chains. New and expanding entrants include Dicks Sporting Goods, Sports Authority, Ross and a few ethnic-food store chains.

2. MARKET MEASURE

Investment sales are expected to return to more normal levels in 2010. Buyers are out there with investment capital to place. Financing remains difficult, but is also expected to ease somewhat. Cap rates are expected to settle into a higher range than what was seen in the peak period of 2005 to 2007, but perhaps slightly lower than levels seen in 2008 and 2009. The safest retail types (food, drug, etc) will be favored.

3. THE MARK OF A MARKET

The Puget Sound area has geographic barriers to entry, including the area’s natural land and water features, as well as man-made, e.g. a relatively constrained and overloaded transportation infrastructure. This favors close-in markets, which have tended to outperform tertiary locations. These same market characteristics prevented drastic over-building in the last development cycle. While the retail market has softened considerably and retailers struggle with reduced sales volumes, the market is staying afloat. The ownership base of most Class A centers is generally well capitalized and although net cash flows have been declining, owners have not been selling at distressed pricing.

— Andy Robinson is vice president, Valuation Advisory Services, in GVA Kidder Mathews’s Seattle office.

TOP REASONS TO INVEST IN SEATTLE REAL ESTATE

1. Seattle is a center for international trade with a strong port.

While the real estate economy has been hit by the recession, Seattle’s geographic position makes the city a key access point to the Pacific Rim and international trade. This fact and Seattle’s diverse culture has attracted investors from several foreign markets, giving the city an edge in both commercial and residential real estate, as international firms locate offices, operations and employees here.

The State of Washington’s Department of Commerce continues to be aggressive in developing international trade opportunities for the state, attracting companies from around the world, which has helped to stabilize the local economy. In addition, according to its own numbers, the Port of Seattle drives $17 billion in annual business revenue and generates 194,000 jobs. The Port of Seattle’s limited-tax general obligation bond also recently received a long-term AAA rating from Standard & Poors (S&P’s highest rating) based on factors such as large and diverse taxing area, strong incomes, and policy that guides budgeting and planning. These elements continue to make Seattle a top-of-mind destination for commerce.

2. It has a diverse employment base.

Seattle boasts employers in a broad range of sectors, including software, bio-tech, manufacturing and internet commerce. As a result, Seattle has been able to weather tough economic times more successfully than other U.S. cities, and this has helped to maintain the value of residential and commercial real estate relative to many other markets. In addition, companies like Russell Investments are relocating to Seattle, and the Bill and Melinda Gates Foundation is building its new headquarters in the city. As these and other organizations make Seattle their home or expand their operations, they create more jobs, which lead to growth in commercial and residential real estate.

3. Seattle boasts an attractive culture and physical setting.

Seattle is surrounded by the natural beauty of the Olympic Mountains and Puget Sound to the west and Lake Washington and the Cascade Mountains to the east, making outdoor recreation a year-round pursuit. Seattle’s cultural attractions include world-class performing arts, live music and a renowned culinary culture. These features have made Seattle attractive to many younger adults who are moving to the area for the high quality of living, and this in turn helps to drive Seattle’s economy. In a recent Wall Street Journal.com article, Seattle tied for first place with Washington, D.C., as the “Next Hot Youth-Magnet City” because of factors like the high-tech sector, natural terrain, cultural life and a strong university presence.

4. Seattle is a leader in sustainable architecture and planning.

Seattle’s growing skyline boasts some of the most sustainable buildings in the county, and the Seattle-area housing market has been strengthened by the construction and sale of sustainable residences, with green-certified homes selling for a consistently higher price and more quickly than non-certified homes. At the same time, the city of Seattle and regional government agencies are collaborating to build more public transportation and improve roads and this is driving more transit-oriented development. Most recently, Seattle’s first light-rail line opened, connecting downtown Seattle with rapidly developing neighborhoods to the south and to Seattle-Tacoma International Airport.

Mark Walsh is chief operating officer of The Schuster Group, a Seattle-based real estate investment and development firm.

©2010 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.



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