Home Commercial Eastside Experts: Market Slowdown Can Produce “Healthier” Market Long-Term

Eastside Experts: Market Slowdown Can Produce “Healthier” Market Long-Term

Broderick Group, Wallace Properties, Kemper Development, Bellevue

By Meghan Hall

The beginning of 2020 saw the Eastside commercial real estate industry firing on all cylinders: multifamily, office, hospitality and retail all seemed to be faring well. The current pandemic has impacted asset classes in dramatically different ways; while office and multifamily have maintained decent fundamentals, hospitality and retail have been hit hard. For those across the Eastside industry, however, the current economic slowdown provides an array of opportunities that could produce a healthier market long-term.

“Up until March of this year, I used to say this was the best recession I’ve ever been in,” joked Bob Wallace, of Wallace Properties. “But I probably can’t say that anymore…Nobody wants to make a decision right now, but there certainly is some momentum…”

Experts’ mixed outlook on the Eastside market stems directly from the variance in asset class performance over the past several months. While office, for example, is historically the asset class that supports growth in multifamily, retail and hospitality. Even though many businesses are continuing to operate under work-from-home conditions, leases have remained in place. What has not remained, however, is the office foot traffic that has proven pivotal to the success of retail and hospitality. 

“We have been kind of kicked in the face a little bit over the last several months with COVID-19,” Kevin Schreck of at Kemper Development acknowledged. “Office is the leg of the stool that is working well.” 

As an example, Kemper offered up The Bellevue Collection as an example. While retail has remained shuttered until recently, and its hotel has seen nearly non-existent occupancy rates as business travel has slowed, its office leases have remained intact. “When all of [those components] are working together, it really provides jet fuel for the market,” Schreck added. “We’re really bullish on turning the page post-COVID-19.” 

Any impact on the office market likely remains to be seen as the result of long-term leases in place, stated Broderick Group Principal Grant Yerke. Given that 2019 was a record-breaking year for the office market in many ways, it may be some time until the asset class feels the impact of coronavirus.

“Our fundamentals on the Eastside were, historically, as good as they have ever gotten,” said Yerke. “…Last year was a big year…We haven’t seen anything blow up.”

At the end of the second quarter, the Eastside market had a vacancy rate of 6.42 percent, while downtown Bellevue’s CBD had a vacancy rate of 3.9 percent and saw rent growth of 20 percent in 2019. Additionally, added Yerke, while requirements have generally slowed, there has not been a wave of sublease space to hit the market yet, either, and sublease-related vacancies are tracking at historic levels. No one submarket on the Eastside is necessarily at a disadvantage when compared with others, thanks to how tech firms have spread out their campuses: T-Mobile on the I-90 corridor, Facebook in the Spring District, Microsoft in Redmond, Google in Kirkland, and Amazon in Bellevue.

“If you look across the Eastside, I think it’s interesting how these major companies have kind of staked out their geographic areas,” said Yerke. “You have these remarkable companies—and I’m not sure if it was strategic or just played out that way—but they all happened to find their niche on the Eastside, which does not necessarily include downtown Bellevue…It is hard for me to see many soft spots…”

Some softness in the market will occur, but the expectation is that the Eastside will weather the storm okay. Any softening in the market, even if it’s a vacancy rate of six or seven percent, added Yerke, could work to create a better market in the long-run.

“Our market has trended too far towards landlords in the past five years; it’s been frustrating to be a tenant broker, so to get some space back here is not the end of the world,” said Yerke. “It will probably create a more of a healthy market…”

Looking at the other asset classes, there is also some room for optimism. multifamily on the whole, has remained stable, although concerns regarding free rent and tenants’ long-term ability to pay remain a concern. Schreck noted that currently, about 78 percent of retailers across Kemper’s portfolio are open, while Wallace added that the market is seeing some retail lease demand, as well. To keep retailers in business, both Wallace Properties and Kemper are working with tenants in an effort to agree on terms regarding rent deferral for those who need flexibility.

“There are some good things,” said Wallace. “There is more liquidity; interest rates are low; there is demand.” 

However, all three experts agreed that it will likely take a vaccine for the hospitality industry to resume entirely.

“I think it is going to take a vaccine, frankly, to really get that flowing again,” said Schreck.

For the time being, companies like Wallace Properties and Kemper are continuing to plan for the future, with both firms pursuing entitlements of various sorts. While Wallace stipulated that Wallace Properties is not currently looking to spend large chunks of capital on new opportunities, the firm is still looking at ways to improve its Puget Sound portfolio. Schreck added that Kemper as well is looking at ways to diversify, and is hoping to add luxury residential product to its portfolio down the line.

“It is a good time to plan, frankly,” said Schreck.