Home Commercial Report: Retail Sector “Holds Attention” of Investors in the Puget Sound

Report: Retail Sector “Holds Attention” of Investors in the Puget Sound

Marcus & Millichap, Seattle, Tacoma, The Waterwalk at Point Ruston, Village at Totem Lake
The Village at Totem Lake

By Meghan Hall

The retail industry was one of the hardest hit sectors during the pandemic, with closures and shelter-in-place orders rendering many businesses obsolete. Without daily foot traffic, retailers were forced to rethink their business strategies. However, across the Puget Sound, retail has seemed to weather the storm better than other markets due to the region’s strong local economy. In the coming months, retail fundamentals are expected to improve according to a second quarter report released by Marcus & Millichap.

“As the metro is one of the nation’s stronger and rapidly expanding economies, Seattle’s retail demand drivers have been exceptionally robust in recent years, placing property metrics on stable ground entering the pandemic,” states the report. “…The Puget Sound’s retail recovery is being supported as restrictions ease and the vaccine becomes more widely distributed, releasing pent-up demand for shopping, dining out and entertainment.”

There are a few fundamentals that Marcus & Millichap are tracking closely that are proving to be beneficial for the retail sector. First, and key to renewed growth, is increases in employment. By the end of last year, the Seattle-Tacoma metro recovered 37 percent of the 255,800 jobs it had lost during the pandemic, decreasing the unemployment rate to 7.2 percent. Marcus & Millichap expects that the region’s retail employment base will grow by 3.5 percent, or 68,300 jobs this year. 

A limited construction pipeline is also proving to be a boon for the sector. Deliveries slowed to their lowest levels since 2010, with just 523,000 square feet of deliveries in 2020. An additional 508,000 square feet will be delivered this year, still far less than the 750,000 square feet delivered in 2019. The largest projects include The Waterwalk at Point Ruston, which will include 200,000 square feet of retail, office and residential, and the Village at Totem Lake, which will total 400,000 square feet of retail, cinema uses and housing. However, Marcus & Millichap notes that the slowdown in construction has proven to be beneficial for the retail industry, “easing supply pressures” as the local economy continues to recover. 

As a result, vacancy remains relatively tight. Over the course of 2020, the Seattle-Tacoma market saw 390,000 square feet of net absorption and vacancy remained between 2.5 percent and 3.4 percent. Throughout the remainder of the year, Marcus & Millichap predicts that vacancy will reach 3.1 percent, a 10 basis point increase.

Despite marginal rises in vacancy, rents are also expected to rise. Rents climbed an impressive seven percent in 2020; in 2021, rents will increase by 1.1 percent to $22.87 per square foot. Demand for space is expected to be particularly high in markets such as Tacoma and the greater Southend.

Pricing for investment sales has also continued to climb throughout the past several months, despite slower deal flow, reports Marcus & Milichap. The number of investment sales that closed in 2020 was just one-third of 2019 levels, at $765 million in volume; however, pricing per square foot reached $439. Cap rates declined 30 basis points to 5.7 percent. 

Looking ahead, areas with “stable household formation”–i.e., more suburban markets–are likely to attract tenants and investors. Entry level pricing and strong upside potential are particularly important in these markets. Sites with redevelopment potential, or properties anchored by grocer, home improvement or drugstore tenants will continue to perform well.