As the South Sound region experiences population growth with continued employment demand from companies such as Microsoft and Amazon, its commercial real estate market continues to stay strong in all sectors. Experts agree that while the overall market begins to wind down in preparation for an end to the current cycle, South Sound, with its population of approximately 1.3 million, is expected to maintain viability. On Tuesday, these experts shared why they believe this to be true as they gathered at the NAIOP Washington State Chapter’s monthly meeting titled South Sound Real Estate—Is It Keeping Up?
Jim Jensen, a senior director for Berkadia Real Estate Advisors LLC in Tacoma has seen strong multifamily rent growth since the last recession of 2008 and 2009. As rates continue to climb in Seattle, approaching as much as $5 per square foot in some neighborhoods, Tacoma is becoming an option that renters are strongly considering, said Jensen.
“We have the Puget Sound, and we have the mountains. South Sound is a great place to be.”
“The increased availability to mass transit has also become a great thing for those commuting to Seattle, as a result we are seeing a flood of Seattleites moving to Tacoma,” said Jensen. “It’s incredible. We’re the affordable bedroom community for Seattle.”
Jensen continued on to say that last year was the best that the area has seen, with roughly $5 billion in multifamily transactions. He believes this year is on pace to hit a lower number, possibly closer to $4 billion. However, the housing vacancy rate remains low at 4.4 percent, which is 2.6 percent lower than the national average rate.
Between now and 2018, Tacoma will see 1,400 residential units delivered to the market. If the city grew by only one percent during that time, Jensen believes it could cause a supply and demand problem. The result could mean a vacancy rate as low as two percent, which would cause rental rates to rise. “There has been a boom and bust every ten years for one hundred years, you can almost set a clock to it,” said Jensen. “I think we have more time, unless something unforeseeable happens. For now the area’s rent growth will continue, the economy will continue to strengthen and development will keep on going.”
The retail submarket has continued to grow over the last two years as it has also felt the effects of the shift downward from King County, according to Kyle Prosser, a broker for First Western Properties-Tacoma, Inc. “Retail is also getting more bang for its buck in Pierce County. Tacoma is considered to be underbuilt, so we’re still seeing this influx of growth because there is less competition. Retail trends start on the east coast and move westward to California, then they finally move north to Washington.”
Prosser believes that South Sound retail will see a few more years of growth as a result of ongoing housing construction. “We’re going to begin to see a lot more mixed-use product. There’s no more land to spread out into, so new construction is going to go up,” he added.
The industrial submarket has remained solid as well, with a total of 99 million square feet of space. It sits at a 6.6 percent vacancy rate, which is down slightly even after absorbing 918,139 square feet over the last year, according to Travis Hale, a senior development manager for Panattoni Development Company, Inc. in Renton. “Leasing rates are going up, it just isn’t getting any cheaper to build,” said Hale. “We’re all facing the same problems so we have to push somewhere. We went from an old market to a flat market, now we’re in a landlord market.” Hale added that technology also continues to change the industrial market, the need for more height increases as renters are looking to fit more cubes into the warehouses.
Even as more change continues to be seen in the industrial sector, location remains key. “I feel like we are going to see this more and more. Between the Port of Tacoma and the Air Force, there are going to be some very big boxes going in on very expensive dirt,” said Hale. “Someone’s paying because of the location. I feel like that’s really going to be solidified this round.”
In 2015, the Puget Sound region as a whole has absorbed 3.2 million square feet of office space into its market and has seen an increase of 61,900 new jobs. According to John Bauder, a vice president for CBRE in Tacoma, the South Sound has received a positive impact from this overall growth.
South Sound’s office vacancy rate is sitting at 20 percent, which Bauder believes is relative when considering absorption into the figure. “When we look at the different statistics, the rental rates, vacancy and absorption, the most telling one is absorption,” added Bauder. “When you look at downtown Seattle, their vacancy rates aren’t changing an awful lot. They are at 10 to 12 percent, but millions of square feet [are] being absorbed, so the vacancy rate is staying the same. Looking at just vacancy it won’t look like much has changed, but the absorption will show a significant positive impact.”
Nationally, the tech sector creates the majority of leasing activity and has increased from 11 to 18 percent from 2011 to 2015. Bauder says because of this growth the new trend has become that jobs follow people, instead of people moving to follow jobs. “What’s happening is people are moving where they want to go. We have the Puget Sound, and we have the mountains. South Sound is a great place to be.”