The following article was written by two real estate investment brokers at Kidder Matthews. Jason Rosauer and Rob Anderson (collectively Team Rosauer) lead an investment brokerage team that specializes in property sales of office, industrial, and retail buildings, as well as land development sites throughout the West Coast. They also publish monthly market reports that detail the commercial real estate market in the greater Seattle area. The report offers an inside look at the current real estate trends around Seattle’s neighborhoods and projections for future trends. We’ve broken up the Team Rosauer August Market Report into three posts, the first of which looks at the trends in Interbay and Issaquah.
Does Interbay need a Rezone?
Nestled between Magnolia and Queen Anne, Interbay is situated as the ideal commercial setting for the highly populous area. More Seattle residents are beginning to take notice of the neighborhoods just north of downtown, as are regional developers, Goodman Real Estate and Unico Properties. Two multifamily projects are underway by these developers to bring over 350 new apartment units to the area that already houses over 50,000 current Seattle residents. How does Interbay fit into this scenario?
Obviously, right in the middle! So thought Whole Foods when it developed a 59,000 SF retail center in 2008 right in the center of the populous area. Despite the popularity and high sales generated at the Whole Foods center, the city has responded by limiting development to 25,000 SF or less for retail spaces. The city’s objective was to preserve the industrial property, jobs, and character of the neighborhood. But the influx of Martin Selig’s Class A office space on Elliot Avenue, the population growth in the area, and a way above average median household income ($71,000 within 1 mile of Whole Foods) suggest a face lift is needed for the area.
Local property owners agree that a rezone to allow bigger box retail to enter Interbay will likely result in high volume sales for retailers and undoubtedly prompt a boost in property values. And the result for the city: a higher tax revenue stream. Based on the current finances of local governments, expect a rezone in this area within one or two years and retailers to quickly take advantage.
The correlation between retail sales numbers and office rent in Issaquah
National retail sales rose 0.8 percent in July, which was the biggest gain since February and better than the 0.3 percent forecast. In the Puget Sound retail sales were up 3.60% in 2011 over sales in 2010 and are continuing that trend into 2012. This was likely great news for Regency Centers and Port Blakely Communities, some of the country’s more prestigious development companies, who are co-developing a 200,000+ square foot retail development at the Issaquah Highlands. Developers have noticed the trends in the area as well as the excellent demographics in Issaquah. With a trade area population of over 225,000 and an average household income of $100,000+, Issaquah looks primed for the Issaquah Highlands.
Whether the Issaquah retail market is ready for the estimated $35/SF triple net rents listed for the project is another question. The average triple net rent for the 149 retail properties in Issaquah is currently around $21/SF, but some of the best located developments (Issaquah Commons, Meadows Shopping Center, etc) are leasing spaces above $30/SF. Those retail centers are also all below 6% vacant and trending downward. The rest of the Issaquah retail market is below 4% vacant and also situated to steadily decline until newer developments add space. Ultimately, Issaquah’s market is growing from a smaller boutique style submarket into a healthy, more rounded submarket with numerous retail options. The result is that the demand is there to substantiate higher rents in the Issaquah retail market.
And if the retail continues to grow in this positive direction, investors would be comforted to know that the office market will soon follow, especially considering the traffic congestion and population, both of which have increased dramatically in the last decade. Traffic frustrations are causing more and more employers to office outside of the Seattle and Bellevue CBDs and forego the time and expenses of commuting to the downtowns. Plus, more people are moving to Issaquah (the 2010 census report showed a 171.4% increase in population from 2000) requiring more public services, including medical and safety services. The underlying message is that office rents will increase substantially over the next decade to keep pace with the growth in retail and the growth in population.
More to come…
Stay tuned for the rest of the August market reports with details about Mill Creek, Northgate, South Lake Union, and the University District. All of these reports are brought to you by Team Rosauer at Kidder Matthews.