By Meghan Hall
Over the course of the last market cycle, the Puget Sound has become a gateway market, piquing the interest of domestic and foreign investors alike. Its relative affordability compared to regions like the San Francisco Bay Area, plethora of talent and clusters of innovative, technology-based companies have driven up investment in recent years, with investment sales volume hitting a record for the past decade in 2018. The Registry spoke with CBRE’s Senior Vice President Tom Pehl about how the region’s investment market is shaping up in 2019. Pehl provides strategic advisory and transaction services to a variety of owners, investors and occupiers of commercial real estate.
What is your current perception of the Puget Sound investment market? How did the health of the market in 2018 compare to that of previous years, and how have investors altered their strategies since the beginning of the current market cycle?
The current market environment remains very active with strong demand from all investor types for assets in the Puget Sound investment market. Active investors include major regional operators, REITS, pension funds, insurance companies, foreign capital and high net worth individuals.
Total investment sales volume for 2018 exceeded $16 billion among office, apartments, industrial and retail properties. The volume slightly exceeded the $14 billion average for the previous three years and represented a record volume for the past decade. Markets are fundamentally healthy in terms of both occupancy levels and supply. Very few opportunities exist for opportunistic investment strategies and significant competition for all assets has accelerated valuations market-wide.
As property fundamentals in suburban markets have strengthened, institutional investors have expanded their investment criteria beyond the Central Business District, or CBD, in search of higher yields and have demonstrated confidence in future strong performance in these submarkets.
What surprised you about 2018, and how is 2019 looking from that vantage point? Are you noticing any particular investment trends?
2018 did not present any significant surprises in terms of investor demand. Two notable events were the sale of multiple, very large office properties in both the Seattle CBD and Eastside suburban markets; and interest rates – rates did increase modestly, but to the extent anticipated by the market.
Which sector do you think will account for the most investment activity in the next 12 to 24 months? Why?
Office and apartments will likely continue to account for most of the investment activity simply because the market size associated with these asset classes is much larger than industrial or retail.
Do you feel that there is currently enough product on the market to trade? Why or why not?
At this point of the cycle, the demand from capital continues to outweigh the supply of product coming to market. This supply-demand imbalance is heightened for higher quality, well-located properties that match the criteria of investors. The two factors creating this sustained dynamic are Seattle’s emergence as an economically diversified gateway market and the global movement of capital to these gateway markets.
Do you believe buildings with certain tenants will sell better than others? Why or why not?
Longer term leases backed by investment-grade tenancy are generating the highest property values. In terms of investor demand, well-located buildings with below-market rents are highly desirable and generally receive strong buyer interest.
The Puget Sound Region has emerged as a gateway market that is on the radar of many companies. How do you anticipate the market evolving as companies move outside of Seattle, deeper into the Eastside markets?
Access to talent is the number one focus for growing companies. The Eastside possesses a diverse industry base supported by a wealth of talent, which is attracting more companies to these submarkets. The extension of the regional light rail from Seattle to Bellevue and Redmond will accelerate this dynamic, connecting the major employment centers in the Puget Sound Region.
If 2018 was a successful year for the industry, in general, how do you feel about 2019? Is there anything that excites you? Worries you?
2019 is expected to deliver continued employment growth from industry leaders and well-capitalized companies, creating confidence that market fundamentals will continue to improve. Rising interest rates will remain a concern, although the Federal Reserve Bank has recently moderated expectations of near-term increases.
If you were an investor, what would be your strategy in the coming year? What properties would you seek to acquire, hold or release?
While it is difficult to generalize about investment strategies, focusing on where and how companies will access employment talent will correlate to stronger financial performance for commercial real estate in the long run. Overall, investors will continue to seek well-located properties supported by strong underlying asset and market fundamentals.
Do you believe the Puget Sound is well-positioned to withstand any market correction that may come along in the future? Why or why not?
While It would be difficult to make a statement about “any” market correction that may occur, the Puget Sound region possesses a diverse set of industries that are net importers of talent and capital. This diversity is one of the primary reasons that the regional economy recovered faster than most of the nation during the last recession. Ten years from that environment, the regional economy is perhaps better positioned to weather a downturn in the economy.