October 6, 2005

5 mega-trends for Puget Sound real estate

  • A look at forces that will affect your decision- making in the coming years.
    Greenfield Advisors

    At its most basic level, the topic of urban development comes down to property values. What is the land worth with current use? What is its value under highest and best use? How much will it cost to get it to that next level? What other factors — size and characteristics of property, government regulations and dictates, scarcity and demand, environmental contamination, trends, issues, etc. — will impact value and determine what we can do?

    As a firm that specializes in the valuation of complex real estate transactions, we regularly answer such questions. But we also have to factor in other much broader considerations and how these macro trends affect micro evaluations. Consider these five mega-trends and their impact on the Puget Sound real estate market in the coming years.

    1.Global trade

    Thanks to our Pacific Rim location and our deep natural harbor, a spectacular level of deep-draft tonnage passes through our ports every day. With the continued explosion of trade, and Panama's inability to finance an increase in canal capacity, the demand on northwestern ports will continue to grow.

    While this is mainly a transportation infrastructure problem, it clearly has major ramifications for real estate. For example, due to terrorism's disruptions of global just-in-time manufacturing and the seasonal nature of trade, the need for additional warehousing and other infrastructure space has become critical. We are already seeing significant demand for additional warehousing space in our region. Where are we going to accommodate this growing demand?

    2. Shifting demographics

    Four major demographic factors are causing population growth to be a significant issue for Puget Sound:

  • Enhanced trans-Pacific and Latin American immigration

  • The huge baby-boom cohort coupled with our growing aging population

  • A rapid rise in single-person households, particularly in urban areas

  • The nation's population is shifting toward the coasts

    Real estate and infrastructure has not kept pace with this population growth. Witness the demand for housing and our overtaxed highways, which are just the tip of the population iceberg. When you couple an ever-increasing population with a real estate supply that is constrained both by geography and by regulation, it becomes obvious that we will require a vastly different decision making paradigm and a greater level of creativity than we've exhibited in the past.

    For example, Greenfield Advisors recently assisted several planned communities and urban-infill projects, both within and without our region, which show an outside-the-box level of thinking on finding places for the next generation to live.

    3. Shifting legal structures

    For more than a decade, land-use planning in the Puget Sound has lived under the mantle of growth management. While directing growth has proven to be a handy tool for planners, it may have questionable value from an economic and property rights perspective.

    Look at our neighbor to the south. Oregon's Measure 37 was just one shot fired in what is now a nationwide backlash to Kelo v. City of New London, in which the U.S. Supreme Court greatly expanded the definition of eminent domain. Many analysts believe that eminent domain, inverse condemnation and other property rights issues will be some of the most significant cases which will be heard by the Supreme Court in coming years.

    4. Environmental cleanups, adaptive reuse

    One hundred-plus years of industrial activity in the core of our region's major cities has left major environmental problems. As environmentally harmful industrial activity has become more efficient and less space-intensive — or just moved to other locales — we are left with broad expanses of reusable space which is very well located for housing and other "people-intensive" uses.

    Unfortunately, adaptive reuse of brownfields is still a field in its infancy. While major changes to federal law and EPA regulations have made brownfield rehabilitation a more palatable undertaking for developers nationally, Washington state law has not followed suit. Based on our experience, Greenfield Advisors believes that only true public-private partnerships can successfully solve these problems.

    5. The unknown

    Whether it's an earthquake that turns the Alaskan Way Viaduct into a pile of rubble, Mt. Rainier sending a river of mud flowing down the valley or a winter storm that sinks the 520 bridge, we know more natural disasters are coming. Look at what Hurricane Katrina did to New Orleans. What makes us think we are any better in responding?

    Besides Mother Nature we have to worry about another terrorist attack on the United States — with a major seaport city like Seattle as the likely target.

    Our infrastructure is incredibly fragile to these sorts of shocks. For example, a loss of the 520 bridge would have an extraordinary effect on real estate and housing patterns. Many East King County residents would find it extremely difficult to get to their work in Seattle. A major north-south arterial loss (e.g. the viaduct or a disruption of I-5) would not only choke commuter traffic but also have an impact on the flow of goods through the ports. In each of these scenarios it will take many years for us to rehabilitate.

    Yet, the real estate market has to think about these things. How should businesses and governments react to such shocks, knowing full well that virtually all of these things will predictably happen in the near future, plus many more that aren't even on the radar.

    In several recent catastrophe cases, such as Hurricane Katrina and the London transit bombings, our firm has been called in by private-sector interests immediately after the event to assess the real estate impacts and determine the optimum solutions — repair, replace, rebuild, revalue, relocate, etc.

    What does it take to answer those questions and many more? The tools we use include a comprehensive nationwide database of comparable property case studies and transactions, proprietary statistical analysis tools and geographic information systems support, coupled with our in-depth expertise in survey research methods.

    The law of unintended consequences

    The common theme through all of these critical trends is the law of unintended consequences — that actions often have reactions which are far removed from what was planned. As we move into the future, managing the unexpected — the unintended consequences — will be the most critical element for success in the real estate market.

    John A. Kilpatrick, Ph.D., MRICS, is president of Greenfield Advisors in Seattle, analysts and consultants for complex real estate matters. Greenfield formerly was Mundy Associates.

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