Seattle’s economy has been firing on all cylinders with job and population growth thanks to a strong base of powerhouse employers that include the likes of Amazon, Microsoft and Boeing along with Starbucks, Costco and REI. One of the big questions for developers and investors is whether that market is overheated – and overpriced – or if it still represents a good long-term play.
Downtown Seattle has already logged a lengthy building boom that kicked off in 2010, and that momentum shows no signs of slowing. In fact, according to a mid-year 2018 development report released by the Downtown Seattle Association (DSA), the current level of construction reached a new record high with $5.6 billion worth of public and private projects underway.
Seattle is home to several industry clusters ranging from retail and life sciences to manufacturing and maritime. It also is a growing hub for young tech talent that is continuing to pull jobs away from Silicon Valley. In addition to Amazon and Microsoft, the metro also is home to other big-name tech employers that include Facebook, Google, Expedia, F5 Networks and Nintendo. According to the CBRE’s annual ranking of tank talent in North America, Seattle rated second only behind the San Francisco Bay Area.
Development Hits Near Record Highs
Construction in Downtown Seattle has been surging across apartments, office and hospitality. In 2017, developers completed 5,672 residential units downtown and another 6,883 units were under construction at mid-year, according to the DSA. Yet the metro’s strong economy along with high costs in the single-family home market is supporting healthy fundamentals with rent growth that averaged 7.1% last year and vacancies that remain at an incredibly low 3.5%, according to Marcus & Millichap.
Strong performance and a continued positive outlook are fueling buyer demand for multifamily assets. According to Reonomy, apartment sales in the Seattle metro surged to $4.8 billion last year, well ahead of the $2.6 billion in sales recorded in 2016. Sales volume is lower, but still robust, with $1.5 million in apartment properties that have traded year-to-date.
Last year, Downtown Seattle saw more office construction than any other central business district in the U.S. Seattle has added approximately 12 million square feet since 2010. Currently, there is 6.5 million sf of space under construction and another 7.5 million sf planned or proposed, according to the DSA. So far, demand has been supporting development activity. Strong pre-leasing and net absorption have actually pushed vacancies down 20 basis points last year to 9.6%, while rents rose by 4%, according to Marcus & Millichap.
Before Amazon announced that it was looking for a second North American headquarters, the company had said it planned to expand its presence in Seattle over the next several years from 40,000 employees to 60,000. Understandably, the HQ2 announcement has made some real estate investors nervous as it is not clear just how much of the company’s expansion will remain in Seattle. However, Amazon is continuing to gobble up more space. According to a recent Bloomberg article, Amazon now occupies about 10 million square feet of office space in the city and has committed to leasing all of the office space in the new 58-story Rainier Square Tower currently under construction.
After two back-to-back years of strong office sales with transaction volume exceeding $3 billion in 2015 and 2016, sales did drop back to $2.0 billion in 2017. Sales are proceeding at a fairly steady clip in 2018 with $1.4 billion in properties that have closed year-to-date, according to Reonomy.
Downtown is expected to see a record high level of hotel completions this year with a total of 2,192 new hotel rooms opening by year-end, according to the DSA. Key drivers for that development include the city’s growing tourism along with a major expansion planned for the Washington State Convention Center. One of the largest hotel projects set to open this year is a new 1,260-room Hyatt Regency that will open on the block bounded by 8th and 9th avenues and Stewart and Howell streets near the convention center.
Major Projects Underway
Washington State Convention Center expansion:
This is by far the largest capital project in Downtown Seattle with an estimated cost of about $1.6 billion. The expansion will add 1.2 million sf of exhibition and meeting space along with a mixed-use component that includes a 30-story residential tower and 16-story office building. The project broke ground in August and is set for completion in 2022.
Rainier Square Tower:
The new 58-story tower will include office space, 200 luxury apartments, retail and an adjacent luxury hotel.
This new 28-story tower will feature 528,000 sf of Class A office space along with a 189-room luxury hotel. The project, which is set to open by early fall, is located in the heart of Midtown at 801 Fifth Avenue.
The company is building a new campus on a 40-acre site on Elliott Bay formerly owned by biotech firm Amgen. Expedia plans to move into its completed phase one by 2019.
Downtown Seattle has 224 projects currently in the pipeline — nearly as many as were completed in the previous eight years. Both developers and investors are watching absorption numbers carefully when underwriting new projects. In addition, Seattle is seeing some of the biggest increases in construction costs in the country due to the heightened demand for both materials and labor. Developers will need to re-check the math to see if the numbers still pencil out on planned projects, while office owners also will have to budget for higher tenant build-out costs.
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