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Significant Retail Sales and Retail Conversions Indicate Evolving Market in Year Ahead, According to JLL Report

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Seattle, JLL, JLL Capital Markets, Simon Property Group, Regency Centers, TH Real Estate, retail conversions, Shops at Bravern
Totem Lake In Kirkland. Image courtesy of JLL.

By Jack Stubbs

Despite the national attention to retail sector and worries about the industry, the Puget Sound retail market continues to be healthy. According to JLL’s most recent “State of the Market” report—in which the Capital Markets Team examines patterns in the industrial, office and retail markets—the retail sector continues to evolve and is set for more activity in the coming year.

The report, which looks at a ten-year period from 2007 to 2017, takes stock of the region’s retail market in the years leading up to 2018, but stops short of reporting actual figures for this year. By all measures, the report shows that 2017 was an exceptional year for the market.

The number of retail sales (over $10 million) in 2017 in relation to years past indicates that activity in the retail sector was strong, with regional and national players alike taking a strong look into the sector. While there were 23 retail property sales in 2017 (totaling $558.1 million), there were 22 sales in 2016, 27 sales in 2015 and 22 sales in 2014.

According to Sudarshan Sampath, research manager at JLL’s Seattle office, activity in 2017 was characterized by a constrained market in spite of the significant number of sales. “It’s a narrow band of investment with 13 to 20 properties on the market each year. The market is broadly supply constrained with owners either not looking to sell or retail components viewed as part of more attractive office and multifamily deals,” he said.

The core assets are as usual on the radar of most investors, which is creating a disproportionate amount of attention on certain geographies in the region, according to Sampath. “Everyone is looking for core assets and potential sites, including North Seattle and in particular the Northgate neighborhood due to the development of light rail,” he said.

The region continues to churn out new projects in the retail sector, many of which are situated along well-connected neighborhoods and transit corridors. At Northgate, an area roughly seven miles to the north of Downtown Seattle, there is a new light rail station slated to open in 2021, and on March 8th, Simon Property Group announced its preliminary plans to redevelop Northgate Mall, a complex that opened in 1950 as the country’s first regional shopping mall (according to the project’s web site), which has long been recognized as the commercial and retail hub for North Seattle.

Simon Property Group plans to overhaul the historic 55-acre site by cutting the retail space (which currently totals around 1 million square feet) to between 500,000 and 700,000 square feet. The multi-year redevelopment project also calls for the addition of significant amount of Class A office space—between 500,000 and 750,000 square feet—and several hundred units of housing and a hotel.

Simon Property Group’s revamping of the Northgate Mall corresponds also to another broader trend identified in the JLL report, which is that retail conversions have become attractive investment opportunities: 6 out of 23 retail property transactions were conversions, making up 26 percent of sales. According to Sampath, the increasing prevalence of retail conversations is a result of two main factors. “The retail conversions mentioned, largely wholesale redevelopments, are functions of two key land use questions that are occurring across the country: how do we ‘de-mall’ existing retail centers, and how do we add density to the land to make it profitable and attractive for investment?”

And while the redevelopment of Northgate Mall is one example of retail conversions becoming more prominent, Sampath also thinks that several areas on the Eastside represent traditionally appealing investment opportunities for prospective tenants and buyers. “This is true on the Eastside as well, where areas with core assets like Spring District, downtown Kirkland, downtown Bellevue and Issaquah offer experiential retail plaza that are attractive investment opportunities,” he said.

Seattle and the Eastside are two areas that saw their fair share of retail activity in 2017, and Sampath thinks that these retail conversions, versus other investment opportunities, are somewhat determined by their geographic location and the needs of prospective tenants. “In the Seattle core, we see owners densifying office projects while incorporating retail that supports the additional office workers…in the outlying suburbs, these conversions are more drastic. Totem Lake in Kirkland added a multifamily tower to the existing center and restructured the surrounding retail to serve the needs of the new residents,” he said. Sampath was referring to The Village at Totem Lake Mall, a 26-acre property that is being redeveloped by CenterCal Properties.

The Village at Totem Lake is a mixed-use development located at 12560-12632 120th Ave. NE, that will eventually include 44,197 square feet of retail and restaurant space, a 35,000 square foot luxury movie theater and 650 luxury apartments. The project will also feature a public plaza, which will serve as the entrance to the movie theater, located within the mixed-use development, which is scheduled to open in late 2019 or early 2020.

As well as the increasing prevalence of retail conversions occurring—as developers look to maximize their ROI on potentially under-utilized malls across the region—the net absorption RSF statistics for the region’s submarket give a look into the strength off the region’s retail market. According to the report, the net absorption RSF was -164,548 for downtown Seattle; 447,667 for the Eastside; 101,837 for the Northend; and 241,275 for the Southend. And Sampath thinks the fact that Seattle experienced net negative absorption—while all of the other submarkets experienced positive absorption—is a result of respective rents in the different submarkets. “The negative absorption is a function of rents in core versus non-core assets. Retail rents in Seattle are high enough that it’s currently only conducive to banks and established retail institutions,” he said.

Data from the report highlights how average rents in Seattle’s downtown core exceed the rents in all of the other submarkets: the average rental rate in downtown Seattle for 2017 was $28.35, versus the $26.95 average rate on the Eastside. Downtown Seattle’s rental rate also dwarfs other submarkets: the Northend had an average rental rate of $18.17; the Southend’s rate averaged $18.89; and the average rental rate in Tacoma for 2017 was $16.36.

The vacancy rate in downtown Seattle was the lowest of any of the other submarkets in 2017: the vacancy rate was 2.3 percent in Seattle’s CBD; 2.5 percent on the Eastside; 4.1 percent in the Northend; 3.4 percent in the Southend; and 4.4 percent in Tacoma.

There were a number of significant sales last year highlighted in JLL’s report. Some of the larger retail sales in 2017 included Regency Centers’ December 2017 acquisition of the 147,818 square foot Roosevelt Square Mall in Seattle from TH Real Estate for $68.25 million (or approximately $462 per square foot), and Merlone Geier Management’s capture in March 2017 of the 612,150 square foot Commons at Federal Way Mall for $46.5 million (or $76 per square foot) from Canyon Partners Real Estate. Other notable sales included Koehler & Company’s acquisition of the 162,270 square foot Highland Hill Shopping Center in Tacoma from Retail Opportunity Investments Corporation for $47.35 million in May 2017, and A.F. Gilmore Co’s purchase in May 2017 of the 66,250 square foot Pier 54 in Seattle from Ivar’s Seafood for $39.5 million, or approximately $596 per square foot.

There are significant investment opportunities on the Eastside as well. As one example of the many investment opportunities in downtown Bellevue, The Shops at Bravern, a three-story 313,119 square foot retail complex located in the heart of the CBD, was put on the market in early April. Located at 11111 NE 8th St., the Shops at Bravern encompasses approximately 40 luxury and entertainment retail stores in a three-level open-air format setting. The retail village was developed in 2009 and is part of a larger mixed-use project that consists of 455 luxury residential units and 750,000 square feet of Class A office space, which is 100 percent leased to Redmond-based technology giant Microsoft. The development also includes the Meydenbauer Center (a convention center that attracts around 150,000 visitors per year) and a seven-story parking garage that contains 3,130 stalls.

Looking ahead, the retail market across the region will continue to evolve as developers increasingly focus on the provision of amenities for their prospective tenants. According to Sampath, the significant discrepancies in rental rates are in part due to Seattle’s advantageous location as a core asset—and changes are ahead in terms of how the retail market will evolve in the downtown core. “In core assets, these retail rents are indicative of a booming office/multifamily market. Looking ahead, the advent of lifestyle amenities such as high-end grocers and fitness boutiques within office towers will mark a change in how retail develops in Seattle,” he said. “More and more choices are made with the desires of employees in the adjacent/attached office buildings in mind and that will lead to retail that facilitates employee lifestyles rather than just banks or lunch spots.”