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December 2, 2011
Noting resets, refills and rebuilds in a sector this impactful would seem to be a leading indicator for the overall market.
Major retail players with either no previous presence downtown, or with presence they are improving, have made significant investments in the Puget Sound's largest urban core:
Target purchased the commercial portion of Pike Plaza at Second and Pike and is redeveloping that space into a multi-level mainstream store.
J.C. Penney's reported 48,000-square-foot lease at Third and Pike was also significant as it led to the building being purchased by a national retail investment firm.
Nordstrom Rack announced plans to open a new, expanded store on the lower level of Westlake Center, with construction under way.
Several notable restaurants opened in downtown — RN47, Pot Belly Sandwiches, Sullivan's — adding another layer of vibe to the streetscape.
Activity by major national retailers and restaurant operators — through significant operational moves and hefty economic investments — provides a jolt that reverberates and gives a renewed sense of energy at the street level. Notably, many more retail players are circling and looking for a place to land in downtown — a move that should continue the revitalization.
Suburban retail (especially development) may have taken the biggest brunt of the economic downturn that started in late 2007 and exhibited its full hurricane force in 2008–09.
Like a phoenix, however, it has found a way to begin resetting and refilling, as demonstrated in Bellevue's Kelsey Creek Center being redeveloped and released by PMF Investments. Long vacant, ownership has shown a grit and faith characteristic of the retail sector and moved forward with new tenants and major construction. Reborn as an attractive neighborhood center with new anchor tenants LA Fitness and Walmart, Kelsey Creek will provide a pleasant, attractive place to shop.
From the emerging edges of suburbia, we see Powell Development breaking ground and moving forward with the Fred Meyer-anchored Maple Valley Town Square. Joined by other national, regional and local retailers such as BECU, Chase Bank and Burger King, the decision to take flight on this project resembles hawkish tenacity: see the target and dive for it.
It is worth noting that these developers and major retailers are not solitary flyers. Hobby Lobby took flight and landed in Lynnwood, a first sighting in our state; Dick's Sporting Goods and Ross Dress for Less continue to expand their flock by refilling vacant storefronts; Sportsman's Warehouse dove back into the retail waters like a kingfisher with an old name and new owners; and Harbor Freight Tools swoops in like an eagle to tie up sites.
As a flock, these retailers could account for more than 350,000 square feet of leasing. Yes, these transactions may happen at reduced economies, but they remain deals of significance and impact.
Users and landlords were not alone in the retail skies. Investors flew and circled the retail landscape in search of viable deals large and small: Klahanie Village in Issaquah sells for $22 million to Gerrity Group of Solana Beach, Calif.; Lake Meridian Marketplace in Kent is placed under contract as a redevelopment opportunity; and Marysville Town Center sells to a California investment firm.
Smaller, unanchored retail centers throughout the Puget Sound trade at cap rates lower than 7 and higher than 9. A broad swath of investor interest signals the varied investment goals for different asset classes.
The resetting behind part of this investment proves painful at times, like a fledging chick shedding its down for new feathers. Certainly some owners and some tenants have borne the impacts of the global, national and regional economic turbulence with lost sales and lost equity.
As Rick Parks, vice president of TRF Pacific has noted, “Right now the focus is on filling existing vacancies. It's the only way we can get the rental market stabilized and then moving up toward a value that supports new development.”
Once stabilization exists and the current flight of investments has closed, a refilling of the development pipeline might commence in late 2012 or early 2013. Users like Chase Bank and Walmart are taking advantage of the value reset by buying land to secure viable positions for the long run at potentially reduced land prices.
Construction costs are another line item of importance in refilling of current space or new development.
According to Bill Valela, director of business development with S.D. Deacon Corp. of Washington, construction costs are anticipated to climb as activity increases.
Similar to developers and owners who saw a loss of book value for assets over the past few years, other firms involved in retail development hope to recapture losses as the market lifts. Interestingly, and somewhat market oppositional, construction prices have actually fallen since 2009, presenting a window on pricing that would seemingly support potential new development.
Soaring into 2012, retail should continue to see creative owners and users refilling vacant spaces, resetting their financial goals to strike at repositioning and development projects, and spreading their wings to catch the updrafts of investment and site opportunities.
Jane Lanford is senior vice president and interim managing director of Grubb & Ellis Co.'s Seattle office.
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