January 28, 2016

Real Estate Buzz: How long can this boom keep going?

The economy around here has been rolling for several years now, which makes everyone wonder: Is 2016 the year we slow down?

Lynn Michaelis, who was Weyerhaeuser's chief economist for many years and now is a partner at Forest Economic Advisors, said he doesn't think so.

“I don't see any end to the regional boom,” Michaelis said at a NAIOP forecasting event. “The problem now becomes how does one see the end of it coming?”

Michaelis said it's much harder to analyze the local economy than it used to be. In the past, all you really had to do was look at Boeing to get a good indicator of how the local economy would fare. Amazon.com is the dominant player today but there's a lot more diversity in the economy.

Michaelis also said Amazon's secretive nature makes it difficult to tell how the company is doing. Amazon won't say how many people it employs locally, only nationally. Traditional metrics like stock price and profits don't give a good indication either because Amazon is looking to grow and capture as much market share as possible.

One segment that hasn't been booming is single-family construction. Single-family houses make up only about a third of all residential building permits in Seattle, Tacoma and Bellevue right now as multifamily continues to dominate. Michaelis said this is a complete reversal from 10 years ago, when two-thirds of residential permits were for single-family houses.

Multifamily production doesn't appear to be slowing. Colliers International's 2016 Seattle Apartment Market Study shows 80,042 apartments are in the pipeline for King County, up from 65,489 in December 2014.

More than 10,000 new units opened in King and Snohomish counties in 2015, according to the report. Despite all those new units, vacancy rose less than 1 percent in 38 of 40 submarkets. Almost half of the markets — 18 to be exact — saw vacancy rates fall last year.

The bulk of the production is going to “urban King County,” the Colliers study shows, where 58,473 units are planned. Urban King County includes major Seattle neighborhoods bounded by Greenlake/Wallingford/Fremont on the north, Rainier Valley and West Seattle in the south, and West Bellevue and Kirkland to the east.

Nearly a quarter of the urban King County development pipeline is in South Lake Union, with 13,133 units planned. Downtown Seattle, West Bellevue and Belltown are the next most popular areas for development.

Bellevue office vacancy: 12% and climbing

For the last few years tenants who wanted to come to downtown Bellevue haven't been able to find office space, but that's changing — fast.

A new report on the Bellevue office market from Colliers International shows the vacancy rate increased by 50 percent in 2015 and now sits at 12.1 percent. Vacancy is expected to keep rising with 1.1 million square feet of office space under construction.

Expedia will vacate 500,000 square feet in 2019 when it moves to the Amgen campus in Seattle. Microsoft is expected to give back approximately 290,000 square feet at The Bravern Office Commons and Civica Office Commons in 2018, and Puget Sound Energy is likely to vacate 100,000 square feet at The Summit.

Add in the new construction and you get approximately 2.35 million square feet of additional office space available in downtown, the equivalent of 29 percent of all existing Class A space in downtown.

“The question isn't if vacancy in the Bellevue CBD will rise, but when and by how much,” the report's author Sam Wayne wrote.

Based on different leasing scenarios, the report predicts vacancy could be anywhere from 16 percent to 24 percent by 2018.

This may cause landlords to cut rents and boost concessions, according to the report.

But Colliers' report about the downtown Bellevue office market isn't all grim. Past reports have pointed out that few spaces over 50,000 square feet have been available in recent years. This has created some pent-up demand, so now might be the time for those tenants to pounce. A different fourth quarter Colliers report finds 3.3 million square feet of demand from Eastside tenants in the market right now.

This wouldn't be the first time downtown Bellevue's office market has hit a rough patch. Vacancy in the second quarter of 2002 was 22.3 percent, and in the second quarter of 2010 it was 14.9 percent. It took a few years, but both times vacancy fell well below 10 percent.

So will tenants soak up all this new space? Will the vacancy rate top 20 percent? How long will it take to come back down?

If the Buzz knew the answers to these questions we'd be in the real estate business, not writing about it.

Got a tip? Contact DJC real estate editor Brian Miller at brian.miller@djc.com or call him at (206) 219-6517.

Previous columns:

• Real Estate Buzz: Onni's massive SLU project still on track, 01-14-2016
• Real Estate Buzz: There's a lot of buzz about the waterfront, 01-07-2016
• Real Estate Buzz: Tight site, unique design challenge crews who are building First and Stewart project, 12-31-2015
• Real Estate Buzz: Self-funding helps Skanska stand out, 12-17-2015
• Real Estate Buzz: Amazon complex, Alley24 are for sale, 12-03-2015
• Real Estate Buzz: B.C. homebuilder sets up shop here, 11-12-2015
• Real Estate Buzz: Shapiro ready for Harvard Exit's next act, 11-05-2015
• Real Estate Buzz: Perseverance pays off at Point Ruston, 10-22-2015