It's Raining Potential in Washington and Oregon

In the nation's Pacific Northwest states of Washington and Oregon, much of the area's commercial real estate brings low vacancy rates, rising rents, and good investment potential—if owners are willing to sell or development is possible amid firm growth controls. The region sat out the worst of the recession that plagued other parts of the country not long ago and has benefited greatly from its growth as a high-tech industry mecca.

'Super' Economy in Washington
In the Evergreen State's largest city of Seattle, Gregory A. Laycock, CCIM, of Grubb & Ellis Co., calls the local economy "super" because of international trade and business influences and the software industry. Certainly, hometown giants such as Boeing and Microsoft and the other technology companies that the area has spawned haven't hurt. "The Seattle real estate market has outperformed most other markets in terms of performance, racking up solid near-term returns," the Compass National Market Report for 1997 reports.

Tight Washington Office
Last year was a record year for Seattle's CBD office market, with 95 percent-plus occupancies and rising rents contributing to dramatically improved investment values, according to a Seattle-based Unico Properties, Inc., market report. Land-use regulations and geography have concentrated commercial activity in the area's urban core, according to a Richard Ellis, Inc., report, and because no new CBD office projects are under construction or expected soon, rents should continue to rise and investor interest should remain intense. Opportunities, though, will remain limited, as many properties are controlled by well-financed long-term owners not typically interested in selling.

James Osgood, CCIM, of James Osgood Commercial Real Estate in Seattle, reports on his OfficeFinder Web site ( that class A rentals are increasing into the low $20 psf range annually. "With the overall vacancy rate at 7 percent, many landlords barely have enough space to satisfy existing tenants' expansion requirements," Osgood says. But despite the tight market, he reports that tenants seeking 20,000 sf or less still have some choices.

Hot Multifamily Market
Laycock forecasts Seattle's near-term multifamily market as "The hottest market since World War II." In Seattle, where unemployment is around 3.8 percent and jobs are expected to increase by 100,000 a year for the next few years, multifamily "sales activity is significantly higher over last year, with cap rates falling and price per unit and price psf increasing," Laycock says. Prices have exceeded $100,000 per unit, he says.

Multifamily vacancy rates are at their lowest levels in five years, and overall rents are expected to increase 24 percent over the next two years, he reports. Forecasted new construction is about 4,500 units, "which will only satisfy 50 percent of the anticipated demand," Laycock reports.

In Spokane, Washington, Alvin J. Wolff, Jr., CCIM, of Alvin J. Wolff, Inc., says that the multifamily market is steady, but sales are off after peaking in 1994. Occupancies are down slightly, to about 93 percent. The area has seen a number of sales of 10- to 20-year-old properties for $40 to $45 psf, but few sales of newer properties, Wolff says.

Strong Washington Retail
"Retail development is very strong, with well over one million feet coming online the next few months, including a new regional mall and several big-box and category-killer entrants into the market," says Dan Cromwell, CCIM, of Janek Commercial in Spokane. Spokane's retail lease rates average $14 psf per year triple net, with newer in-line space leasing for $22-plus psf. Most area retail properties are owned by local investors, he says. "Our market has only recently been discovered by institutional investors."

Retail construction activity has been very strong in Spokane County and along the Post Falls/Coeur d'Alene corridor, with more than one million sf coming on line this summer, Cromwell says. "Most of the new development has occurred in the outlying, suburban areas at the expense of downtown," he notes. However, an $80 million redevelopment project has begun in downtown Spokane anchored by Nordstrom, he says.

Seattle's retail vacancies are near 4 percent, according to Marcus & Millichap's National Investment Market Report 1997 Forecast. Rents and sales prices have leveled off as the myriad construction from 1994-95 has come online, but the positive job market and income growth have helped absorb the new space, according to the report. Several large retail developments and renovations are underway downtown.

1990s Good to Industrial
Spokane "has enjoyed a strong industrial market through the 1990s," reports Tracy Lucas, CCIM, of Kiemle & Hagood Co. "The industrial market is very tight for buildings that are for sale," Lucas says. "In fact, of the current vacancy [rate] of 5.9 percent, approximately 1 percent of that is buildings for sale. With this low inventory, the sale prices have increased over the last several years, and a user can expect to pay approximately $20 to $28 psf for a building plus the land." Several spec office/warehouse distribution facilities are being constructed in Spokane, he says. Typical industrial lease rates for new construction range between $0.30 psf to $0.40 psf per month, triple net for warehouse. Lease rates for existing such industrial space range from $0.15 to $0.30 psf per month, triple net.

Douglas H. Sylvester, CCIM, of Mercer Island-based Invesgro, just east of Seattle, sees strong industrial demand from distribution and transportation companies. He says occupancies range from 2 percent to 8.7 percent. Prices range from $40 psf to $70 psf for newer warehouse properties, $4.50 psf to $11 psf for land, and $90 psf to $130 psf for high-tech buildings.

Oregon: Controlled Growth
Just south of Washington in the Beaver State, Joanna Tompkin, CCIM, of Peregrine Properties, Ltd., in Beaverton, Oregon, says it's important to note that all developments are planned, "whether or not developers and users wish [it]," she says. "The state of Oregon has a 20-year comprehensive plan which details precisely where alternative uses may expand in the future. If one's project is not on the plan, it may be near impossible to accomplish a change of use. This control helps prevent an uncontrolled expansion-and-bust syndrome as seen in the L.A. and Phoenix markets."

Along those lines, a recent report from CCIM Gene Bentley's company, Norris, Beggs, & Simpson, characterizes Portland, Oregon, as "a place of continued growth and prosperity, of careful planning and measured progress." Bentley's report calls the office market in Portland a textbook example: "Increased demand + decreased supply = increased prices." Downtown vacancies are about 5.7 percent and rental rates have risen, with class A space going for around $18 psf. Suburban office vacancies have stayed under 5 percent.

Multifamily Prices Up
"Current activity is straining to meet investor demand for properties," says Mike Merrifield, CCIM, an investment real estate broker in Portland, of the multifamily market there. "Land is in short supply due to an urban growth boundary, coupled with a doubling of price in the last five years. Five years ago, Portland was in the top five cities for affordable housing in the country; currently we are in the bottom 10. I don't see this market cooling off for several years."

Multifamily occupancies in the Portland area run from 93 percent to 98 percent, depending on the submarket, he says. Seasoned properties lease for between $0.60 psf to $0.80 psf per month and newer properties from $0.75 psf to $1 psf, Merrifield says. Sales prices range from $42 psf to $60 psf on seasoned properties to more than $70 for new construction.

In the Salem, Oregon, area, "With the passage of two property tax limitation measures, multifamily owners have experienced greater bottom lines, making most unwilling to sell until some capital gains relief is passed," says Doug Nelson, CCIM, of Coldwell Banker Commercial. Small properties (6 to 20 units) are the most frequently sold, recently averaging $35 to $45 psf. "The market is dominated by private rather than institutional ownership," Nelson says. "REITs are actively searching in this market now—and could become a major player within 12 to 24 months."

Retail and Industrial Expansion
In Michael Slewitzke's Eugene, Oregon, retail market, "Inmigration by companies is occurring and existing companies in our area are expanding." Retail occupancy in Eugene averages 95 percent, higher than previous years, says Slewitzke, a CCIM with Northland Real Estate, Inc. Lease rates run $5.50 psf per year gross basis to $15.60 psf per year, triple net, depending on size and location. Sales prices are up, ranging from $88 to $95 psf, and financing is readily available, he says.

In Portland, "New retail space cannot seem to be built fast enough in the metropolitan area," according to Bentley's report. Norris, Beggs, & Simpson projects retail vacancies of between 4 percent and 6 percent through the rest of the decade.

Portland's industrial market has been very active, says Terry N. Tolls, CCIM, of T.N. Tolls Co. Vacancies average 6 percent, but range from 1 percent to 14 percent, he says. Basic shell space leases for $0.31 psf to $0.33 psf triple net per month for larger product, with smaller spaces substantially higher, and the few remaining close-in sites commanding a substantial premium. Sales prices "have been going up so quickly that this is a very difficult item to keep tabs on," Tolls says. "In addition to the normal rise in labor and construction costs for various materials nationwide, we have the added problem of having to compete with an enormous amount of microprocessor plant construction. That is sucking up rock, concrete, and some labor categories (specialty trades such as electricians) at such a rate that overall construction costs have really gone up—which pushes the costs of existing buildings up too."

Still, substantial new construction is underway, he says. "We will no doubt get some glut in a few of these areas for a while, but our land supply is running short, thus the speculative development will slow," Tolls says.

Pacific Northwest Hospitality
Reports on the region's hospitality market vary by segment. Michael S. Courtney, CCIM, of Merlin, Oregon, calls the recreational property market—including recreational vehicle (RV) parks and campgrounds—strong. "There are many buyers looking for the lifestyle (mom-and-pop operators), investors looking for large, quality parks, and membership clubs seeking well-located parks for their members," he says. "Prices are all over the board because of the uniqueness of each property," Courtney says.

About 1,800 new hotel rooms are forecast for development in downtown Seattle and more than 1,000 rooms forecast for the East Side/Bellevue, says Laycock, who expects more new construction downtown, as well as an expansion of the convention center. "I only hope that the hotel owners and developers don't overbuild the marketplace," he says. Seattle's hotel occupancies are near 78 percent, up from 72 percent in 1994, he reports.

However, Richard Glanz, CCIM, of International Motel Brokers, Inc., in Vancouver, Washington, is less optimistic about the motel business. "Based on motel business to recreational areas, people are staying home," says Glanz, who adds that room income for most motel properties outside the major metropolitan peaked in 1994.

Seattle and Portland at a Glance

Seattle Portland
Metro Population 1.6 million 1.7 million
Selected Major Employers The Boeing Co.
Microsoft Corp.
Intel Corp.
Fred Meyer, Inc.
Kaiser Permanente

Sources: Greater Seattle Chamber of Commerce; Seattle-King County News Bureau; Norris, Beggs, & Simpson