Has Seattle CRE Reached Its Peak? Maybe Not

Seattle’s commercial real estate industry has been going strong for the last eight years. Is it time to get worried about a downturn?

Experts were split on the answer at Bisnow's recent Seattle State of the Market event at the Downtown Four Seasons. On one hand, good times can only last so long, so it is best to prepared for the downturn. On the other, Seattle’s situation is unique right now with strong office demand.

Urban Visions Director of Design and Construction Todd Lee erred on the side of caution, since every 10 years there is typically a construction slowdown. SolTerra’s President Brian Heather agreed.

“There is a sense of fatigue,” Heather said. “Residential isn’t going off the shelf like it would have a couple of years ago. But the office market is still strong.” 

Meanwhile, McKinstry Chief Market Officer Ash Awad is more optimistic.

Independent of any black swan event, the Seattle market may experience some softening in the near future but it is nowhere near a slowdown, he said. Rising interest rates could cramp development a bit.

There is high demand and low supply of condos due to liability issues. Legislation is underway to fix that, but until that happens general contractors will shy away from that sector, Lee said.

The panel agreed that developers should continue to implement strategies to make buildings more sustainable in the future.

Sustainable building technology and practices add about 5% or 6% to the cost of the building, Heather said.

“But it makes the operating expenses very, very low.”

In addition, tax rebates can bring costs down, which helps to justify the price.

“Sustainability is cost-effective when it’s done right,” Awad told the audience. “It has to be part of the design.”

Not only does it make sense financially, it is the right thing to do.

“Sustainability has generational effects,” he said.

The Living Building Challenge is a huge carrot for developers, Lee said. It allows for buildings to be taller and makes the environment inside the building healthier for its occupants.

One of Seattle’s construction problems is a lack of skilled labor.

“Subcontractors and suppliers of contractors are completely tapped,” Lee said.

In addition, new labor contracts will increase wages 18% over the next three years. Developers need to watch how that will affect projects.

“Proceed with caution,” Lee said.

Even if construction in Seattle temporarily slows down, the city is still a good investment for developers, citizenM Managing Director Ernest Lee said.

“Seattle has building blocks that are tremendous,” he said. “It’s a pretty business-friendly culture, but Seattle is on the way to being untenable because of the housing crisis and traffic. Densification has to occur in industrial zones.”

Nitze-Stagen Director of Acquisitions and Development Daniel Gallagher said density is critical to the city’s growth.

“The city is constrained on every side,” he said. Wedged in by single-family housing zoning, the waterfront and industrial zoning in SODO limits the space for people to live.

“Where are we going to put all these people?”

Nitze-Stagen’s Starbucks building houses 5,000 office workers. The building is an island of humanity in the middle of a sparsely populated industrial zone.

Gallagher believes the city needs to bring more people to the SODO area and make it safer.  Places like the Momentum Indoor Climbing bouldering gym is a good start, he said.

There is a need for after-work activities, Tom Douglas Seattle Kitchen CEO Pamela Hinckley said. For example, Tom Douglas Seattle Kitchen has a cooking class that continues to grow in popularity. Hinckley sees demand for more evening activities that get people out in the city.

If more people stay in the city after work, it will have a positive impact on the restaurants, she said.

“Right now, evening [restaurant] traffic is down and late-night traffic is down 40%,” she said. But the lunch numbers are “spectacular.”

Hinckley thinks the city needs to create more evening events, like the recent Borealis festival of light event, that encourage people to spend the evenings out on the town.