Home Commercial Report: Economic Fundamentals, Decreased Construction, to Aid in Retail Market Recovery

Report: Economic Fundamentals, Decreased Construction, to Aid in Retail Market Recovery

Marcus & Millichap, Seattle, Tacoma
Courtesy of Mike Petrucci

By Meghan Hall

In comparison to the rest of the nation, Puget Sound’s retail market has held relatively stable over the past year and a half. The strong economic drivers behind the region’s recent growth have kept retail afloat, and now those same fundamentals, coupled with a general lag in construction, are aiding in the sector’s recovery, according to a new report released by Marcus & Millichap.

“The pandemic did little to sway Seattle’s retail sector, which benefits from a decade of robust population and income

“The retail market in Seattle-Tacoma is benefiting from rising retail sales spurred by the net in-migration of consumers,” explained Marcus & Millichap’s Joel Deis. “The metro currently boasts the lowest vacancy rate among major U.S. markets and limited new supply will maintain upward pressure on rents going forward. Looking into 2022 and beyond, retail space demand will receive additional tailwinds as major employers bring workers back to offices, boosting surrounding retail foot traffic. Job creation will nearly double the national pace next year as well, further expanding the consumer base.”

Employment numbers continue to improve across the region, with 118,000 jobs to be created through the end of 2021. Total employment is predicted to increase by 6 percent by Q4, the fastest pace of job growth recorded since 1997. As of August, the unemployment rate sat at 4.8 percent, a vast improvement from the pandemic’s high of 16.9 percent.

As economic fundamentals have improved, development in retail continues to lag–although this has proven to be a boon to the industry. About 360,000 square feet of retail space will be delivered this year, falling far below the region’s five-year average of about 780,000 square feet. New supply will increase inventory by just 0.2 percent, the smallest annual increase in 15 years. Of new deliveries, multi-tenant properties accounted for 90 percent of all new supply delivered, and the vast majority of construction is occurring in the Eastside, Northend and Tacoma submarkets.

“Deliveries in the metro hit an eight-year low over the past four quarters, and only 540,000 square feet of retail space is currently under construction, which will continue to aid availability in the second half,” the report explains. “By the end of this year, Seattle’s vacancy is expected to be the lowest of any major U.S. market.”

Across Seattle and Tacoma, retail vacancy is expected to remain surprisingly tight, at just three percent. This is just 20 basis points above the region’s pre-recession vacancy rate, according to Marcus & Millichap, and rates have remained low due to minimal supply pressures and climbing demand.

As a result, rental rates continue to climb, and the average asking rent will increase to $23.40 per square foot, a 4.2 percent increase year-over-year. In 2020, rents increased more, recording a 6.8 percent gain. Prices for investment sales also continued to rise. Even though deal flow for single-tenant assets declined by 25 percent, limited listings increased median sales price by four percent to $522 per square foot. The average cap rate decreased to 5.4 percent.

However, looking ahead, the market will still face challenges. A huge factor that has still yet to play out is the pervasiveness of work-from-home policies, which can keep consumers out of the office–and subsequently away from retailers or retail centers. Additionally, as eviction moratoriums and other safety nets expire, delinquencies could increase, further impacting retail fundamentals moving forward.

“Many large employers like Amazon, Microsoft and Google are allowing office staff to work from home more than 50 percent of the time and will not return to the office completely until well into the second half or early 2022,” the report notes. “The reduction in foot traffic could have negative implications for retail fundamentals in the CBD, which observed the largest vacancy increase and smallest rent gain in the metro over the past year.”