Built to Last

As we enter into 2019, we do so with much uncertainty in a variety of markets – to name a few: political, economic, social, and capital. In the Seattle region, despite national or global headwinds / concerns, we’ve benefited from a near-endless stream of “good news” for almost the entire decade.

The Great Recession is nearly 10 years past, and as most of the rest of the world (our nation included) dug itself out of economic gluttony and misguidance, our region sprinted not just back to economic health, but outsized growth and prosperity. From A to Z (Amazon to Zillow), our home-grown companies put Seattle on the global map.

Yet by mid-2018, envy-inducing headlines of “record-setting high real estate values, low vacancy rates, and accelerating rental rates,” shifted to more dour news.

No longer did ULI or Zillow rank us as the “top-performing real estate market”. Dupre + Scott (our best-in-class apartment data providers) left us without guidance. Even Amazon pursued other cities looking for growth opportunities.

What has become of Seattle? Where will 2019 leave us?

Most commercial real estate investors with whom I speak want answers, they want some certainty – and in the least, they want some data to give them a sense of where we are headed.

In the following update I will address what to expect in the near term and how to plan for the long term.


As real estate investors, we are constantly scouring data and news sources to understand what is happening, and what is forecast to happen, across the market. The challenge is that there is so much “noise” in the current market – and little of what we see and read is that lovely “good” news that allows us to sleep so well at night.

When apartment investors see headlines that “rents grew 6% in Seattle year over year,” it assuages concerns, pacifies equity investors and banks alike, and makes us feel like financial wizards at dinner parties.

But what happens when the news is not so good?

Panic.

Yet, just because rents grew last year does not mean they will grow next year. And just because 10,000 apartment buildings opened at the same time and are having trouble finding tenants at a record pace does not mean that its time to head to ULI’s next-best real estate market.

The arbiter of all the above is time, but we never seem to have enough of that either.

We need to make real estate decisions NOW.

Playing the Cycle

However misguided it is to make future decisions based on today’s data, that is often what we do. For most real estate investors, the implications of today’s decisions play out over many years, often 5 – 7 (along with the debt cycle), and even much longer. Whether you are an investor or a developer, I can almost guarantee that somewhere in your analysis is a 10-year model.

So why are we so worried about what they said in the news today?

Because that is what our partners read, our lenders read, and our friends read. Face it, commercial real estate is nothing if not self-referencing.

Amid uncertainty – both political and economic – despite a lack of good information, in the near future and long term, the prescient investor must have conviction. We are increasingly trained to make decisions based on “consensus”. All good news pointing in the same direction made the last 5 – 7 years much easier than it felt at the time.

That is no longer the case. Now what?

Looking out over a very long-run of time makes the task of making decisions for today much easier than it feels.

Here are some educated predictions in the short run:

Rental Rates:

  • Urban Core: for stabilized buildings, rents will remain mostly flat with up to 2.5% growth
    (except for buildings where rents were not previously maximized)
  • Suburban Markets: rents will increase 4 – 5%

Vacancy Rates:

  • Urban Core: for stabilized buildings, vacancy will climb to 5 – 6%, and lease-up will take longer than expected
  • Suburban Markets: vacancy will hit 4 – 5% as owners continue to push rental rates

 

Here are some educated predictions for the long run:

Rental Rates:

  • Urban Core: rents will grow 5 – 6%
  • Suburban Markets: rents will increase 3.5 – 4.5%

Vacancy Rates:

  • Urban Core: vacancy will shrink to 3.5% – 4.5%
  • Suburban Markets: vacancy will stabilize at 4 – 5%

 

For the next many years, our region will see terrific job growth, a lot of developers trying to capitalize on that growth, and white-collar income growth outpacing that of blue-collar income growth, explaining the outperformance of rental rates over time.

If you disagree, go look at the Bay Area’s market fluctuations over the last 20 years.

One will logically inquire, “How long is the ‘short-run’ and the ‘long-run’?” – and you may not like my answer, yet it is largely correct: it doesn’t matter.

Combined, both periods fall within the general holding period of commercial, income-producing real assets.

Built to Last

Our region is Built to Last. Whether you want to focus on Boeing or Microsoft, Amazon or Tableau, we have terrific companies that are poised for outperformance of other global economies. Supply constraints (and construction costs) will temper development over time and political pressures will shrink and swell (if you don’t believe me, again, look at San Francisco’s politics and its gleaming high-rise towers with the highest rental rates in the nation).

We have a litany of issues ahead of us, both good and challenging:

  • Job growth – good
  • Inflation – challenging
  • Unemployment rate – good
  • City/national politics – challenging
  • Multiplier effect for jobs – good
  • Inverting yield curve – challenging

We are beyond the time in the market where every headline bolsters conviction behind each investment, which is good news to those seeking to maximize return. As we’ve all seen, as the news commoditized to all “good news” investment returns so too commoditized to “not that exciting”.

Now is the time to have individual conviction, a personal investment thesis and an opinion.

Simply put, place a bet and go forward – you will do great. How to go about placing those bets? Well, that’s what we are here to help you do. Call us for a valuation of your property and to discuss how we can work together. Allow us to Turn Our Expertise into Your Profit!

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