Vacancy = Up | Net Absorption = Down | Rental Rates = Up | Deliveries = Flat
As we navigate the tumultuous waters of commercial real estate in 2023, the Seattle retail market stands at a crossroads. With rising vacancy rates, declining net absorption, and a fluctuating economic climate, the retail sector faces its fair share of challenges, according to a recent Q3 2023 retail market report by brokerage firm Kidder Mathews. However, there is reason to believe that the Emerald City’s retail market is poised for growth once the broader economy rebounds.
A Year Defined by Uncertainty
The past nine months have been characterized by economic uncertainty, with the retail sector treading a path somewhere between optimism and caution. While the office market took a significant hit, the industrial sector showed resilience, according to the report. In contrast, the retail market finds itself in a more ambiguous position. Retail sales experienced a surge in September, both compared to the previous month and year. However, consumer confidence has waned, reflecting concerns about future business conditions, job availability, and incomes, according to the Consumer Conference Board’s Expectations Index.
Vacancy Rates: A Tug of War
At the end of the third quarter of 2023, the direct vacancy rate stood at 2.9 percent, marking a slight uptick from the previous quarter (2.8 percent) and last year (2.6 percent). To put this into perspective, the last time Seattle saw a vacancy rate above 3 percent was in 2018, and a rate above 5 percent was in 2014. The only counties surpassing the 3 percent mark were King County (3.2 percent) and Kitsap County (3.1 percent). While low vacancy rates are often seen as indicators of a healthy market, they do not tell the full story. Subdued market demand has softened fundamentals and is expected to persist despite the upcoming holiday season.
Rental Rates: The Upward Climb
Driven primarily by low vacancies across the region, the average asking lease rate increased by 3 percent year-over-year and 1.8 percent quarter-over-quarter. However, this growth rate is notably lower than the averages of 5 percent per year between 2020 and 2022 and 6 percent per year between 2015 and 2020. Nevertheless, despite the current slowdown in retail activity, rents are projected to grow between 3 percent and 5 percent over the next few years as the economy and the commercial real estate market recover, Kidder Mathews summarized.
Development Activity: A Pause in the Action
In the third quarter of 2023, Seattle saw 132,000 square feet of retail completions, with more than 240,000 square feet of projects currently under construction. The largest of these projects include the 65,000-square-foot development at 19001 Cascadia Blvd. E in Bonney Lake and Black Diamond Crossing – Phase 1 in East King County, totaling 43,000 square feet, scheduled for delivery in December 2023. Additionally, 130,000 square feet of mid-sized and smaller retail developments are underway, along with a handful of pad sites.
Market Demand and Net Absorption: A Mixed Bag
Net absorption figures for 2023 tell a challenging story, with negative totals recorded in all three quarters, culminating in a year-to-date total of negative 493,448 square feet. Snohomish County (-183,669 square feet year-to-date) and King County (-173,429 square feet year-to-date) experienced the most significant negative activity. While Thurston County posted positive net absorption in both the second and third quarters, negative activity in the first quarter led to a year-to-date total of negative 1,897 square feet. Urban cores continue to lag behind suburban markets in terms of market demand, aligning with nationwide trends.
Investment Activity: A Shifting Landscape
Seattle’s retail investment activity has been significantly impacted by the current financial environment, high interest rates, and a scarcity of available inventory. Transactions over $1 million in 2023 totaled 318, amounting to $749 million, with an average cap rate of 5.8 percent, slightly higher than the mid-5 percent cap rates observed in 2022. Barring a substantial surge in the fourth quarter, the year-end total for 2023 is poised to be the lowest since the pandemic-affected year of 2020, and even lower than 2013.
As we move forward, high interest rates and economic uncertainties are expected to continue influencing leasing and investor demand in the near term, posing challenges to the retail market’s recovery. However, Seattle’s retail sector remains resilient, and with improved consumer confidence, a rebounding economy, and a return to office spaces, it is well-positioned to chart a course toward growth in the future, the report concluded.