Marcus & Millichap

Seattle Retail Market Report

Seattle-Tacoma Metro Area, Third Quarter 2016

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Redeveloping Malls Transforming Retail Landscape

Suburban retail centers are being redeveloped into more pedestrian-oriented facilities. Changing customer shopping habits and lifestyle preferences for more walkable neighborhoods as well as rising land costs and the lack of available space are resulting in some suburban malls being transformed into mixed-use developments. Throughout the region, underutilized portions of parking lots in retail centers are being developed. In many cases restaurants or small strip centers are sprouting in a seldom-used areas, while in the Redmond Town Center and Crossroads Bellevue mall, mixed-use apartment buildings are planned. At Totem Lake Malls, meanwhile, a portion of the center is being demolished to make way for a higher-density mixed-use development that will integrate residential and office space with retail and entertainment uses, creating a built-in customer base. This trend will likely continue as more suburbs try to meet the growing need for housing with higher-density walkable developments that include retail and dining options. Increased demand for retail space amid a restrained construction pipeline will continue to tighten vacancy during 2016 and push rent growth.

The robust economy and surging population growth attract investors from around the globe to the metro. Many investors are exchange buyers under time pressure to redeploy capital. This is driving up transaction activity and prices as a strong opening offer is needed to ensure a successful bid. Net-leased assets along prime transit corridors or near retail hubs are especially desired at cap rates that will dip below 4 percent for the most sought after properties. Other buyers are looking for value-add opportunities in transforming neighborhoods. Retail buildings along planned light-rail extensions or near mixed-use apartments are targeted. Some of these buildings are being purchased for the land or are being combined with adjacent parcels for larger redevelopment projects. Yield-seeking investors, meanwhile, will find opportunities in multi-tenant centers in south King County or Tacoma where vacancy is higher and cap rates are generally in the 6 percent range.

2016 Retail Forecast

Employment: Employers will create 57,750 jobs throughout the metro during 2016, a 3.0 percent expansion. Last year, 55,000 positions were generated. Robust hiring in tech companies contributed to more than 10,200 additional workers in the professional and business services sector during this time.

Construction: Builders are expected to complete 300,000 square feet of retail space throughout the metro during 2016 with the greatest portion of the projects in Snohomish County. Last year, 460,000 square feet was delivered marketwide.

Vacancy: The vacancy rate will contract 40 basis points to 4.0 percent in 2016 due mainly to a restrained construction pipeline amid rising tenant demand. The rate moved down 60 basis points last year as net absorption approached 1.3 million square feet.

Rents: Following a 0.6 percent advance in rent for available space last year, a tightening vacancy rate and a slowing construction pipeline will push rents higher. The average asking rent will climb an average of 4.1 percent during 2016 to $19.38 per square foot.

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