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February 23, 2017

Seattle real estate market faces 3 big risks

  • A recent report says the skilled labor shortage may be the largest risk factor this year.
  • By PAT CALLAHAN
    Urban Renaissance Group

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    Callahan

    The end of January marked the start of the Chinese New Year, which proclaimed 2017 as the Year of the Rooster. For those who may not know, the rooster’s personality is known to be confident, resourceful, talented — and even a bit boastful.

    Given the way our economy has roared the last few years, sounds to me like Seattle’s office market might mirror the rooster persona.

    While I imagine most reading this article would agree with that assessment, let’s remind ourselves why:

    • According to Colliers, the Seattle/Puget Sound office market ended 2016 with a regional vacancy rate of 8.6 percent, following 4.4 million square feet of deliveries since the beginning of the year. Net absorption for the fourth quarter alone surpassed 1.4 million square feet and our region enjoyed its 27th straight quarter of positive absorption.

    • The Urban Land Institute ranked Seattle its No. 4 overall market to watch in 2017 and the Washington State Employment Security Department recorded 53,500 new jobs in the Seattle-Bellevue-Everett metro area from November 2015-2016 alone. Rumors continue to fly that Cisco, Alibaba, eBay and Apple are all looking for space in the market. This is of course in addition to 2016 expansions by Facebook, Google, Amazon, Tableau, Salesforce, WeWork and more.

    • Jones Lang LaSalle reports projects totaling 5.2 million square feet of new space are scheduled to open in the next 18 months, with just over half of this space pre-leased. That said, there are multiple prospects in the market — as mentioned above — that could fill the space not currently pre-leased.

    Hot like a rooster, right?

    Well, if I were to read the tea leaves, I would speculate our real estate market is in uncharted — even risky — territory.

    Here’s why.

    The first risk factor is the word every real estate deal hates to hear: Uncertainty.

    With a new president at the helm in Washington, D.C., and globalization on the back burner, it’s unclear what this means for our nation’s GDP, interest rates and inflation. According to a recent Wall Street Journal article, speculation persists that the Federal Reserve could “move faster to raise interest rates in order to prevent the economy from overheating if growth began to accelerate and stirred inflation.”

    Short-term rates rose twice since 2015 and additional increases are forecast in the months ahead.

    The White House has repeatedly pointed to a forthcoming jobs plan, regulatory roll-back and tax cuts to grow the national economy and stave off “reflation” and rising interest rates. Some would caution, however, that the likely core of this jobs plan centers on increased military spending, infrastructure expansion and tax cuts that could add jobs — but will also significantly increase the federal deficit.

    Perhaps the most concerning uncertainty is the White House’s move toward nationalism, which would put global trade at risk and create new imbalances in the import-export market.

    Most of these moves could lead to sharp cost increases for U.S. goods and services — and a lot of uncertainty.

    The second risk factor: Rising costs.

    In addition to potential rising interest rates and inflation, a shortage of skilled labor across the country combined with rising construction costs and other soft cost increases continue to slowly drive up overall project budgets. For example, Turner Construction’s fourth quarter 2016 Building Cost Index for non-residential U.S. construction showed a 1.11 percent increase from the third quarter 2016 and a 4.9 percent yearly increase from the fourth quarter 2015.

    According to the Urban Land Institute’s recent Emerging Trends report, the skilled labor shortage may be the largest 2017 risk factor for real estate. They site several complex factors, including tighter immigration, a massive wave of retiring skilled-labor baby boomers, multiple sectors siphoning off key talent and an overall dearth of project managers.

    Locally, the labor shortage is tighter and the impacts on real estate projects and costs are more significant.

    The final risk factor: Our over-abundance of “rooster” optimism.

    While former President Franklin D. Roosevelt would caution that “the only thing we have to fear is fear itself,” a healthy amount of fear in the face of unbridled good news is, in my opinion, a good thing.

    Perhaps the Seattle commercial real estate slogan for 2017 should be: Proceed quickly, with eyes wide open.

    The truth is, our city is not just experiencing sustained growth — it’s fundamentally changing.

    Take the changes to our downtown street grid happening from 2018—2023 alone. In five years, the following will transpire: closure of the downtown bus tunnel and subsequent addition of 500 buses back to our CBD surface streets; $1.6 billion convention center expansion; First Avenue streetcar construction/opening; Alaskan Way Viaduct demolition and construction of the new Alaskan Way surface street; construction of the 26-block central waterfront park; construction and opening of Madison Street bus rapid transit; and construction of new protected bike lanes in the CBD.

    Whoa.

    Dramatic growth has dramatic impacts. This is evident in Seattle’s collective focus on finding tools to create greater housing affordability amidst rapid change in a land-locked region, as well as acknowledging our shortcomings and ongoing needs to address Seattle’s growing homeless population. Both issues will persist and continue to need attention, resources and partnership between the business community and our local governments.

    But more change is coming.

    And if we’re not diligent and steadfast — with eyes wide open — as the year unfolds, perhaps our largest risk factor is our own success.


    Pat Callahan is founder and CEO of Seattle-based commercial real estate company Urban Renaissance Group, which has an operating platform of more than 10 million square feet across Seattle, Bellevue, Portland and Denver.


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