The following article was written by two real estate investment brokers at Kidder Matthews. Jason Rosauer and Rob Anderson (collectively Team Rosauer) lead an investment brokerage team that specializes in property sales of office, industrial, and retail buildings, as well as land development sites throughout the West Coast. They also?publish monthly market reports that detail the commercial real estate market in the greater Seattle area. The report offers an inside look at the current real estate trends around Seattle?s neighborhoods and projections for future trends. We?ve broken up the Team Rosauer August Market Report into three posts; the first looked at the trends in Interbay and Issaquah, the second will explore trends in Lake Union and Mercer Island.
Investment market in Mill Creek primed to follow positive retail outlook
Retail sales are on the rise nationally across the United States and locally across the Puget Sound. King County had 4.60% increases in retail sales in 2011; Snohomish County was up 3.56%. For investors looking at commercial real estate in Mill Creek, this is great news.
Mill Creek?s 730,000 square feet of retail space is a lot for its population. Within two miles of every commercial building in Mill Creek is a population ranging from 45,000 to 65,000 people with average household incomes between $64,000 and $80,000 per year.? These are not exactly ideal numbers for a good retail market; nevertheless, Mill Creek remains a healthy, stable market for retail sales in Snohomish County.
This may be due to the high end retail developments and boutique style focus of Mill Creek?s Town Center, or the influx of affordable, quality housing all around the Town Center. Regardless of the reason for Mill Creek?s retail health, the forecast continues to look strong. In 2003, the year before a solid four year push in Puget Sound retail investment activity, the investment dollar volume, number of transactions, and cap rate were very similar to the numbers in 2011 and trending in the same direction.
| ? | 2003 | 2011 |
| Dollar Volume | +/- $470 million | +/- $455 million |
| Number of Transactions | 25 | 28 |
| Cap Rate | 8.1% | 7.0% |
The face of the retail market has changed since 2003, but to investors the numbers are similar enough and are trending in the right direction. For Mill Creek, expect vacancies to continue to steadily drop and rents to increase slightly through the end of the year. Investment activity will begin to pick up by year?s end and continue through 2013.
Development demand in Northgate on the rise
This year marks the Northgate mall?s 62nd birthday, which, not coincidentally, has been the focal point of development in the area ever since opening. But, with construction scheduled this month to break ground on the Northgate Link Light Rail expansion, a new focus is beginning to take shape for development in Northgate.
Institutional investors and developers from all over the country have the Puget Sound on their radar. The recent explosion in the multifamily market and the positive trend for local businesses has produced a strange phenomenon for investors in the area: cash for commercial real estate investments but few places to spend. Only 8 properties traded hand in Seattle CBD since 1/1/2012 and only two of those properties sold for less than $100,000,000.
What does this mean in secondary markets like Northgate? An eventual influx of investor and developer dollars, and the city is making plans to ensure this happens. Last month the city council eased requirements for urban development in areas well served by transit, including Northgate, by no longer requiring multifamily developers to build structured parking for developments with 200 units or less. The city also exempted some larger developments from review under the State Environmental Policy Act. The goal for both of these policy changes: to lower the cost for developers and increase the demand for development.
Several federal sponsored studies are also underway with a purpose of creating recommendations for the city to increase height and density minimums in the zoning code. City Council is slated to vote on changes in the code within the next 12 to 18 months. The city is trying to prepare itself for the projected 15,200 plus riders that will visit the Northgate station daily by 2030.
Property values rise during apartment development boom in U District
There are no new commercial properties under construction or proposed in the University District. There are, however, over 357,500 square feet of apartment complexes either under construction or proposed, which will add about 670 new units to the area. There is also a link light rail station that will eventually stop right in the heart of the U District with 25,000 projected daily commuters by 2030. The University of Washington is also expanding in the U District with plans to increase its physical size as well as its student body. The combination of multifamily development, plans to greatly improve mass transit, and the growth of one of the region?s largest employers all mean one thing, rising property values in the U District.
Developers have had issues in the past assembling enough land in the U District to develop larger commercial projects. This has largely been due to fractional ownership (there are over 35 individual retail and office buildings on University Avenue between 42nd and 45th streets) and zoning issues that have prevented buildings above 65 feet. The result is a high cost to assemble land and the inability to build enough square footage to collect rent to cover the acquisition costs. The current zoning issues, however, are likely to change, and soon.
The city is currently performing studies around all of the new light rail stations with the intent to add depth and height. How much depth or height is another question, but the likely result will be a proposal to the Seattle City Council to increase both. The changes will likely be applied within the next one to two years in the U District, and the result will cause developers to again reassess the financials involved in assembling land in the area.
For current property owners in the area, expect values to rise. For developers and investors, now is the time to again take another long look at developing commercial property in the U District.
One thing is certain, it will not take until 2030, or even until 2021?the projected date to finalize the Northgate station?for investors to begin building and developing in the area. Look for property prices to steadily increase in this area over the next few years and new buildings to spring up and loom high above the Northgate Mall.
More to come?
Stay tuned for the September market reports with details about the greater Seattle commercial real estate market, brought to you by Team Rosauer at Kidder Matthews.
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