>From grunge to glamorous, the market has transformed itself with booming economic growth. Abooming national and local economy, influx of new population to take advantage of new jobs and an abundance of investment capital make the real estate outlook for the Greater Seattle area an exciting one. Values are going up and vacancies down. The only rub is that, in most sectors, demand is much greater than supply. Although considerable building is either going on or projected to meet this demand, it appears that various growth management, environmental and other constraints will keep the current gap between demand and supply from closing for some time.

The regional economy is now exceeding 3%. Even more significantly, the job growth is projected to be 3.3% this year and 2.9% in 1998. "The job growth has been phenomenal, especially when the rest of the country has been experiencing negative job growth," says Michael Allmon, senior associate, investments services, The Norman Co., Seattle. This has been the result of a city learning its lesson.

"Our regional economy is expected to grow at nearly twice the national rate for the remainder of the decade," says Tom Cain, president, Cain and Scott, Seattle.

Downtown sees retail construction "To make a broad statement, a lot is happening in downtown Seattle," says Allmon. "There's over $1 billion worth of construction going on, none of it in office buildings, which is not to say that the office market isn't hot from an investment perspective. But all of the building is going into retail, hotels, the convention center, and sports stadium, with retail being the most important."

"The Nordstrom move into the vacated Frederick & Nelson building is the single most important factor in creating other retail opportunities for development in the downtown core," says Dan McGinnis, retail leasing specialist, Colliers Macaulay Nicolls International.

This in-fill strategy "is a smart move, due to the constrained supply," says Tom Lindquist, executive vice president, Trammell Crow, Seattle. But opportunities for this type of move are quickly drying up, he adds.

"The most significant planned developments are centered around the completion of Told Development's Meridian West and Meridian East as well as the highly touted Pacific Place," says McGinnis. "These projects have a common objective to combine theme dining with entertainment and first-run theater."

What has happened, says Allmon, is that an area in the center of downtown is becoming an entertainment/arts center. This, along with the influx of restaurants, interactive high-tech Game Works, Sega, a 16-screen movie theater and more, means that Seattle is being transformed from a city that stays open 24 hours a day, he adds.

Peter B. Truex, senior vice president, Grubb & Ellis, Seattle, predicts that downtown Seattle will "continue to be the hot bed of activity and absorb 1 million sq. ft. of retail space by year-end 1997." He predicts lease rates in the downtown core area will range from $30 to $80 per sq. ft. and adds that retail sales in the entire Puget Sound have grown from $27.5 billion in 1993 to a projected $33 billion in 1997 and vacancy rates are down to about 3.4%.

Industrial tops the charts Many of the market segments, but especially industrial, "have been characterized by a very aggressive group of buyers pursuing a limited number of properties," says Joe Shephard, northwest division president, Koll Real Estate Group, Seattle.

In fact, says Lisa Stewart, the Norman Co.'s senior leasing associate, the prosperous economy and great demand has put the Seattle area "on top of everybody's radar screen, whether from pension funds, foreign investors or other investors from outside the area."

Much of the industrial activity is outside of Seattle Proper. A key area is a 61.5 million sq. ft. industrial market, including Renton, Tukwila, Kent and Auburn. This area absorbed 1.5 million sq. ft. of space during 1996 with new construction topping 3 million sq. ft., and vacancy rates at about 5.5%, reports Grubb & Ellis' Truex.

The Northend/Eastside market is considered the heart of Seattle's high-technology market. Vacancy rates are in the 7% range. The Eastside markets continue to be strong due to the growth of high-tech industries. "The Underwood Group at Redmond East had the biggest deal of the year, with Genie Industries preleasing 400,000 sq. ft. of space," Truex says.

Hotels catch developers' eye The occupancy rate of hotels in 1996 approached an impressive 80%, while the average daily rates increased between 6% and 10%, says Craig Schafer, president, Colliers International Hotel Realty, Seattle. "As the result of this strength, there is a lot of interest in developing new hotels, from limited service to extended stay and a few full-service hotels," Schafer says. "We expect to see over 2,500 new rooms in the marketplace between now and the end of the decade."

This is the first time there has been a sufficient supply increase since the early-1980s, Schafer says. Last fall two hotels, Cavanaugh's and Paramount, opened with a combined 450 rooms. On the way are two Monaco hotels, which will take existing buildings and renovate them. Three hotels have been announced, which would add 1,004 rooms to the market.

Schafer says that downtown Seattle's 1996 value per room increased by 7% and is projected to increase 5% in 1997.

There are, in fact, several barriers to any new building in general -- and hotels in particular. Land prices have increased over 50% over the past five years, and there are three to four qualified developers for every available site. Each hotel project will take six to 24 months to obtain entitlements. Therefore, the bulk of the development will not come out of the ground until 1998 to 2000.

Schafer expects to see rates continue to rise 5% to 8% over the next two years with the high occupancy rate maintaining itself. Schafer adds that south of Seattle in the Seatac/Southcenter areas, values per room should continue upward, and investors have high expectations for continued value growth due to significant constraints to new hotel supply.

Office makes a comeback "Office buildings, the preferred investment of the mid-1980s, are coming back with a roar after experiencing a breathtaking drop in value, demand and capital attraction," says Timothy B. Good, a vice president at Grubb & Ellis.

The turnabout has been dramatic with about 20 million sq. ft. of office space filled as opposed to about 4 million sq. ft. from 1988 to 1990. The vacancy rate, Stewart says, is about 5%.

"The first signs of rebound surfaced in late-1995 with the sale of Key Tower to the city of Seattle at $100 per sq. ft., a price many thought to be excessive," Good says. "Subsequently, there have been several trades at increasing prices per sq. ft., and at lower capitalization rates."

Good says that prices per sq. ft. are approaching replacement costs for suburban buildings.

Seattle's CBD is headed in that direction, but it still has some distance to go. The sales of the Marsh McLennan Building at $132 per sq. ft. and 520 Pike at $150 per sq. ft. demonstrate the steep increase in the short period since the Key Tower Transaction. The southend office market, traditionally slower to respond, is not being left behind either -- recent acquisitions by astute investors illustrate the underlying strength and promise of that market.

Multifamily demand increases Mike Scott, a partner at Dupre + Scott Apartment Advisors Inc., Seattle, says the vacancy rates are dropping so rapidly that concessions are virtually disappearing. "The job growth migration into the area has increased the demand for apartments, but they are not building enough units to keep up with that demand," he says.

He says that last year began with a demand for 5,000 units, but less than 3,000 were built. This year, the demand is in the 6,000- to 8,000-unit range, but only about 4,000 new units will be opened up.

Referring to his recent survey, Scott says that lenders reported closing at least $1.5 billion of apartment loans in western Washington last year. "This is an increase from just over $1 billion in 1995. Six closed more than $100 million each, up from three lenders a year ago," he adds.

Cain says that the vacancy rates are less than 5% and as low as 2% to 3%. "When the economy was growing about 1% a year from 1990 to 1995, owners were not able to raise rent, so there was a limited amount of product to buy," he says. "But now that owners are raising rents and values are rising, most people perceive the average price per unit at the start of a growth cycle. This is one of the hottest markets to invest in nationally."

Michael Major is an Anacortes, Wash.-based writer.