By Jack Stubbs
Seattle, a city that has been changing significantly over the last several years driven by technology companies continuing to take up significant amounts of office space in the downtown core, rising rents and home prices and a growing workforce, is in transition.
The landscape of the city has changed dramatically over the last several years as the growth of the technology and life sciences sectors, in particular, continue to drive the local economy. And key to looking at the economic infrastructure of a city is an examination of its short- and long-term economic drivers.
According to a report released by Jones Lang LaSalle, the City Momentum Index (CMI), Seattle is demonstrating strong short-term momentum while also possessing the features necessary for long-term success: the city is ranked as number 12 on the Global Top 30 list (led by San Francisco, the Silicon Valley and New York) of cities that are at the forefront of the innovation economy and set for continued success in the future.
JLL’s CMI, now in its fifth year, tracks cities that possess the attributes for economic success over the short and long term. The Index covers 131 major established and emerging business hubs across the globe and measures each city’s short-term socio-economic and commercial real estate prospects. The report focuses on the cities that have the qualities necessary to manage and benefit from technological shifts in the global economy and assesses their “future-proofing” potential—ability for sustained long-term growth—by examining factors such as innovation capability, talent and higher education infrastructure; prevalence of technology start-ups; public infrastructure; and quality of life.
The issues that the CMI examines—specifically, factors that influence economic development—have become increasingly impactful from a national perspective over the last few years, especially following the economic recession during the last cycle. A 2011 report written by the Brookings Institution, “Technology and the Innovation Economy,” examines how innovation and entrepreneurship were crucial for the country’s long-term economic development, especially following the financial collapse of 2008. Taylor Reynold of the Brookings Institution analyzed the role of communication infrastructure investment—in economic recoveries—among the 34 countries from the Organization for Economic Cooperation and Development—and found that nearly all viewed the development of technology as crucial to their economic stimulus packages, especially following recessions: investments in technology help countries create jobs and lay the groundwork for long-term economic development.
Globally, technological innovation remains key to long-term economic growth, according to the report: a 2009 Newsweek-Intel Global Innovation Survey interviewed 4,800 adults in the United States, China, United Kingdom and Germany, and researchers found that two-thirds of respondents believed that innovation will be more important than ever to the U.S. economy over the next 30 years.
Along these lines, JLL’s CMI report highlights that the importance of identifying Seattle’s “future-proofing” capabilities is becoming increasingly recognized by real estate investors, developers and corporations alike—access to talent also remains a key consideration for corporations looking to attract and retain a skilled workforce.
One of the key findings from the report was how Seattle—driven largely by job growth, increasing influence of technology companies and a growing workforce—is a city hitting its stride at just the right time, according to Joe Smurdon, market director with JLL’s Seattle office. “The report says we are in the sweet spot, and I really think that we are. There is job growth here, and we’re moving fast with all of these tech firms moving up here,” he said. Seattle’s Office of Economic Development also has various initiatives in place, like the Startup Seattle program, which organizes events and services for tech startups. And in 2016, the Puget Sound region was designated as a TechHire community, which is an initiative for underemployed adults that seeks to fill the growing number of tech jobs by partnering employers with software development platforms.
Smurdon also thinks that, over the last few years, the city has continued to make a name for itself in the national context, as well. “Seattle was on the map a few years ago, but it is really on the move now. We’re in good company with the Bay Area and big cities like New York, LA and Chicago,” he said.
From a national investment perspective, the CMI report identifies educational infrastructure as one of the key ingredients to maintaining long-term economic and real estate momentum. Founded in 1861, the University of Washington is the largest four-year educational state institution in Washington and has a student and faculty population of 72,500. According to a ranking report released by Reuters in September 2015, “Top 100 World’s Most Innovative Universities,” the University of Washington was the most innovative public university in the world and fourth overall behind Stanford, MIT and Harvard.
From a national perspective, investment in the institution has continued over the last few years since 2014. With research grants and contracts amounting to $1.39 billion in 2014, $1.08 billion of which came from federal sources, the university receives more federal research funding than any other public university in the U.S., according to the University of Washington’s web site. In fiscal year 2014, 18 new startups based on UW research technologies were launched, a record for the university, which brought its 10-year total to 103 technology startups.
Real estate investment and development around the University of Washington continues to occur as well throughout the University District. In March 2017, the city implemented its city-wide Housing Affordability and Livability (HALA) initiative, a new policy that requires developers to either include affordable units into their developments or contribute to a city fund for affordable housing—the University District was one of the first neighbourhoods in the city to be rezoned. As part of HALA, the city is committed to a goal of building or preserving 20,000 affordable homes over 10 years. More recently, in early April 2018, a 24-story, 227-unit project developed by California-based student housing developer Eran Fields, located just a few blocks from the university, was granted approval by the northeast review board to proceed in the city’s Design Review Process as the first high-rise tower to be approved for development since the U-District up-zoning changes were enacted.
On Monday, April 9th, an 8-parcel property totaling 41,200 square feet and located at 4202-4238 12th Ave NE was brought to the market as a redevelopment opportunity. The investment opportunity, representative of the continued activity locally in the U-District, has also seen preliminary interest from investors and developers in Canada and Asia, according to Colliers Seattle’s Multifamily Property Advisors team, who marketed the property. Campus Station, the largest single-fee assemblage brought to the market since the U-District was up-zoned, can accommodate either 549 market-rate units or 372 units of student housing (1,114 beds), as well as 348 parking stalls. The site also allows potential hotel and office uses.
More broadly, the technology sector continues to drive Seattle’s real estate market, according to JLL’s report. More than 60 percent of the office space currently sought by tenants is required by technology companies that continue to look for centrally-located, creative offices with high-end amenities and transit accessibility, according to Smurdon. “We still have opportunity for growth here; several of the office buildings have gone to single-tenant users,” Smurdon said.
Indeed, the impact of tech giants in the region—like Amazon, Facebook and Microsoft—has continued to dominate the headlines over the last few months. On March 13th, Facebook expanded its footprint in Seattle by announcing the opening of its new 6-story 150,000 square foot Westlake office in South Lake Union, which is right across from the company’s office at Dexter Station, a roughly 346,000 square-foot, 10-story Class A office building that the company has occupied since early 2016, and which is now home to approximately 2,000 employees. And in December 2016, the company signed a lease with Vulcan Real Estate for the 384,000 square foot Arbor Blocks campus in the heart of South Lake Union.
Google is also making moves to expand its presence in South Lake Union, with plans to occupy The Lakefront Blocks, a three-block project located at 630 Boren Avenue North that will provide approximately 638,000 square feet of office space, 150 apartment units, and 10,000 square feet of retail. Construction on The Lakefront Blocks, which is also being developed by Vulcan, is expected to be complete in 2019.
Further afield in the Puget Sound region, Facebook has also been expanding its footprint on the Eastside in Redmond—home to Microsoft—in recent months. In January 2018, the company acquired two high tech/flex buildings totaling just over 72,000 square feet for $20 million from Redmond-based Crane Aerospace Inc. Facebook has amassed nearly 700,000 square feet of office space across a number of properties around Redmond’s Willows Road, according to sources with direct knowledge of the company’s activities in the region.
Redmond-based Microsoft leased 86,000 square feet in Shorenstein Properties’ Redmond Town Center complex in early February, 2018. And Smurdon thinks that Microsoft’s continued presence on the Eastside will continue to fuel growth in the office market the other side of Lake Washington. “Bellevue and the Eastside is a hot market as well, anchored by Microsoft, which will open up a whole new world for people living on the Eastside.”
Current demand in the commercial real estate market on the Eastside remains strong, especially in relation to 2017. A year ago, in the second quarter of 2017, the market saw negative absorption and a vacancy rate increase to 12 percent, according to a second quarter 2017 “Eastside Office Market Overview” report by the Broderick Group. 2018 has seen this dynamic shift in the opposite direction, according to the company’s first quarter 2018 report. The overall vacancy rate for Class A and B commercial properties on the Eastside currently sits at 8.7 percent. Vacancy in the Bellevue CBD sits at 7.5 and is expected to drop into the 4 percent range by year end 2018 due to signed and pending leases. The report indicates how the short-term outlook is positive for Eastside landlords: limited new construction and/or supply and continued growth of large credit tenants (namely T-Mobile, Microsoft, Amazon, Facebook and Google, among others) will encourage tenants to pursue the remaining quality office space on the Eastside.
According to Smurdon, even though job growth throughout the broader region will continue to be led by the tech sector, other sectors, also, will come to the fore in the months ahead. “The growth is going to continue to be led by tech. But biotech and healthcare are two other strong sectors that we’re keeping our eye on,” he said. According to the web site for the city’s Office of Economic Development, Seattle remains an established leader with immunotherapy, with anchors like Juno Therapeutics and the Fred Hutchinson Cancer Research Center: in South Lake Union, research and development in engineering and life sciences is nearly 14 times more concentrated than it is nationally.
Locally, the impact of the life sciences has become more widespread throughout the Puget Sound region in recent months months, as well. Bothell, in particular, has become increasingly recognized as a hub for the life sciences, and several commercial transactions in the area demonstrate that the life sciences sector remains as active as ever. On January 31st, Boston-based Partner Therapeutics Inc. acquired a roughly 89,000 square foot research and development facility in Lynnwood from New Jersey-based Sanofi-Aventis U.S. LLC, a healthcare company, for $45.6 million. On March 9th, Immunex Corporation sold three research and development buildings in Bothell totaling approximately 150,000 square feet to Bellevue-based Taylor Development Inc. for $21.5 million.
According to a 2018 Life Sciences report by CBRE, New Jersey has the fourth largest life sciences cluster in the country after the San Francisco-San Jose Bay Area, Los Angeles-Orange County, and Boston-Cambridge. Seattle had the 13th largest figure of employment in the life sciences sector as of third quarter 2017, with the Bay Area, Los Angeles and Boston leading the way.
And in spite of all the growth occurring in Seattle and the surrounding region—fueled largely by the tech, life sciences and healthcare sectors—citywide coordination will be needed at the infrastructure level to ensure that the city continues to grow sustainably, according to Smurdon. “We need to make sure that our infrastructure is supporting all of this job growth,“ he said.
According to the Department of Numbers, a website that contextualizes public employment and economic data, the current employment statistics figure for Seattle as of February 2018 was 2,041,900—up from 2,036,500 in January 2018 and 1,987,300 in March 2017.
Seattle’s investment in public infrastructure will continue to shape the landscape of the city, according to Smurdon. “If we look at what [the city] is doing with transit and the waterfront, there which are two projects that will really change the face of our city and the traffic patterns,” he said. Smurdon was referring to the $688 million redevelopment of Seattle’s waterfront, a multi-phase project that is slated for completion in 2024, and the Sound Transit Light Rail expansion project—set to begin in 2020 and be complete in 2041—a series of additions to the Light Rail system that will extend it north to Everett, south to Tacoma and east to Bellevue.
In the longer-term, too, Smurdon predicts that activity throughout Seattle and the broader region will continue due to several factors. “We don’t see activity slowing down, either. It’s hard for people to have a crystal ball for the long-term, but we’re really looking at what transportation, rental rate growth, population growth and workforce growth will do to the city,” he said. “Investment from the community, working with the public and private sectors hand in hand, is where we will get the real payoff.”