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 September Market Report into three posts; the first will look at the trends in East King County and Pierce County.
EAST KING COUNTY
INSIDE PERSPECTIVE—Positive Signs on the Eastside
Housing permits in the Puget Sound are projected to increase by 30.9 % in 2012 and then again by 36.6 % in 2013. There is no question that much of that development and growth is targeted for those cities east of Lake Washington. With more companies headquartering east of Seattle, more and more residents are moving to the area. The positive employment trends and increased demand in the area has resulted in stabilized office property values and growth in the multifamily and retail property products.
The development in the Bellevue CBD has stalled out over much of the last three or four years, but once again there are signs of light and new development. With major tenants, such as Google, Symetra, and HTC, to name a few, looking on the east side for huge amounts of space to lease, developers are looking to be the first to capitalize on the demand. Few spaces remain to develop in the Bellevue CBD, so the first few developers to jump on an opportunity will likely be the first to cash in. Furthermore, over 83% of economists in a recent poll agreed that the growth in the Puget Sound warranted the use of multiple rent spikes for landlords in the next five years. The demand is there and appears to be growing for space in Bellevue.
But Bellevue is not the only winner on the east side. A huge amount of construction is taking place in the suburban areas to foster the retail and small office needs of the growing population. The construction of the Maple Valley Town Square and the Grand Ridge Issaquah Plaza at the Highlands will add almost 300,000 square feet of retail space in the next two years. Although the big box layout often seen in many suburban areas is shrinking, many big box stores, like Target and Sports Authority, are introducing a smaller format to meet the current need. The result has been shrinking cap rates (decreasing for big box space to a national average around 7.25% to 7.5%) and increasing property values.
These trends will continue for the eastside. Look for cranes on the horizon in the Bellevue CBD again soon, and expect the many employees who move to the area to shop the suburban retail market and receive services from the smaller suburban office market.
INSIDE PERSPECTIVE-Safety in the Self-Storage Market
Key economic indicators show the economy of the Puget Sound is recovering with great speed and is actually beginning to expand steadily. Over the last eight quarters the Puget Sound has added over 72,800 new jobs and more companies continue to look to expand in the area. Builders are again constructing new homes and commercial property values are stabilizing and beginning to appreciate steadily for the first time since 2007. Nevertheless, Pierce County has lagged behind the rest of the Puget Sound. Zero office, industrial, or retail buildings are currently under construction, and the county has only seen around 57,000 square feet of new commercial buildings delivered to the area year to date.
One market, however, that Pierce County has capitalized on and that continues to see positive trends is the Self-Storage Market. With just under 100 self-storage properties throughout the county, investors are looking to realize value in the demand of many apartment dwellers who need space for storage. Decreasing discount rates (down to 10% nationally) and capitalization rates (down to 7% nationally) suggest safety in the investment market for self-storage properties, which results in higher values for those property owners.
Self-storage in Tacoma can range from as little as $30 per month to $200 per month depending on the size and location of the space. With extremely low vacancy rates in the area currently and minimal operating costs, the income for these properties is high and appears poised to grow higher. Larger operators are beginning to get involved in the market as well because they can leverage management efficiencies. But larger operators entering the market not likely push out the smaller mom and pop operators as demand increases throughout the area.
As the multifamily rental market continues to thrive in the Puget Sound, expect self-storage rentals to increase over the next 12 months. While rent increases the operating income for self-storage, investors will continue to turn to this market, especially in Pierce County where other options still look too risky.
More to come…
Stay tuned for the second and third posts in the September market reports series with details about the greater Seattle commercial real estate market, brought to you by Team Rosauer at Kidder Matthews.