February 18, 2016

NAIOP panel forecasts blue skies for Seattle area real estate in 2016

Lenders and investors are still high on Seattle — including the booming apartment sector — despite the forest of cranes along the skyline.

NAIOP offered a capital markets forecast yesterday that asked the question: “More blue sky or are storm clouds on the horizon?” The panel — two lenders and one investment broker — leaned toward the blue sky.

Prudential Mortgage Capital Co. has funded projects in Seattle for decades, and Jaime Zadra has overseen the firm's Seattle lending portfolio since 2009. During that time, Zadra said she's never lost money on a deal in the Puget Sound region. Multifamily and office lead Prudential's lending portfolio here and nationwide, and Zadra said she wants to find more industrial properties to finance.

“We continue to see attractive opportunities in Seattle, and we view Seattle as one of our top performing markets in the country,” Zadra said.

Apartments and office properties also dominated sales in 2015. Lori Hill of Jones Lang LaSalle said there were $10.1 billion in sales among the region's “four major food groups”: multifamily, office, industrial and retail. Multifamily and office accounted for $8.4 billion. Few retail properties traded last year, not because no one wanted them, but because property owners weren't interested in selling.

Hill contrasted this boom with 2007, when more than $15 billion sold, including almost $10 billion for office properties alone. Large portfolio deals characterized that era, while this run is more about single buildings.

Hill said Seattle has become a top U.S. market because of the deep roster of companies based here. Seattle used to be a Boeing town; then Microsoft added another dimension. Today Amazon is the big driver, but other companies are growing as well. Hill said Amazon's employment here is only about half that of Microsoft and a third of Boeing's local workforce.

“They're not an 800-pound gorilla in terms of bodies yet, though they hope to be that someday,” Hill said.

All the people Amazon and other growing companies are bringing to Seattle fuels the multifamily market. Thousands of new units are opening every year, and Hill said investors are out there looking for multifamily sites.

Jay Thomas of the commercial real estate lending firm Walker & Dunlop said one way he evaluates the apartment market is by looking at new units versus net absorption. In 2010, tenants took about two units for every new one that opened, he said. Absorption continued to exceed new construction, he said, until 2014.

“There is a lot of new product coming on line, but I think up until this year it's really just been catching up with the lack of product coming on line during the first few years of the credit crisis,” he said.

Thomas said he expects the multifamily market to remain healthy, though he doesn't expect 10 percent rent increases and 3 percent vacancy rates will continue as the wave of new units opens.

One thing that has prevented a slowdown in construction is the availability of capital. For years investors have fought each other to get in on Seattle's real estate boom. Hill called it a “rotation,” where buyers who lost out on deals a couple of years ago might have a better shot now since their competitors have already invested in other projects.