The Pacific Northwest has felt the sting of the economic downturn: The area was hit by the collapse of the tech bubble and Boeing has eliminated 18,000 jobs, and — adding insult to injury — has moved its headquarters to Chicago. Retail construction in the major markets of Oregon and Washington has waned, and rent rates bump along, devoid of significant growth hopes over the next few years.
But the region retains the fundamental strengths that make it attractive to retailers, and investors continue to pay hefty prices for infill properties in need of rehabilitation or redevelopment. Circuit City, Best Buy, Staples and Top Foods are a few retailers adding locations in the Puget Sound region, according to Dan Durr, principal and president of First Western Properties in Washington, which has offices in Tacoma and Kirkland.
San Francisco, Calif.-based Marcus & Millichap estimates that 1.8 million sq. ft. of retail construction will be completed this year in the Seattle area — down from more than 2 million sq. ft. the year before — and major projects include Lake Oswego, Ore.-based MBK Northwest's $80 million endeavor to re-cast an enclosed 1 million-sq.-ft. mall into the 800,000-sq.-ft. open-air Lakewood Towne Center.
In Portland, Marcus & Millichap predicts that about 875,000 sq. ft. of new retail will be completed this year, which is down a bit from last year and way off 1999's total of roughly 2 million sq. ft. Large-scale developments there include the $250 million Brewery Blocks mixed-use infill project that is adding 200,000 sq. ft. of retail to downtown's Pearl District, a former industrial area that has become a residential and business neighborhood.
Retailers and developers are attracted to the Pacific Northwest by long-term policy and population trends. First, laws limiting growth and natural physical boundaries in both states have checked overbuilding, keeping supply constrained. Second, the region continues to attract relatively affluent and well-educated consumers from other parts of the United States.
Add it up, and the region offers a sunny climate for retail development. “All is not bleak and blue and cloudy in the Northwest,” says Craig Hill, vice president of investment sales with Grubb & Ellis in the Seattle area.
Between 2000 and 2001, Washington's population grew by nearly 81,000 to almost 6 million people, according to estimates by the state's Office of Financial Management. The office estimates that the Puget Sound, with a population of about 3 million, accounted for some 70% of that growth. According to Grubb & Ellis, in 2001, annual median household income in the Seattle area topped $60,000, some $20,000 above the nationwide figure. In 2000, people in and around the city shelled out about $34 billion to retailers.
Oregon has experienced similar growth. Between 2000 and 2001, the state gained about 50,000 people to reach a total population of almost 3.5 million, according to the Oregon Economic & Development Department. The Portland/Vancouver metro area, meanwhile, added about 64,000 people and stands at nearly 2 million, according to the department. Grubb & Ellis pegged the annual median income in the Portland area at just more than $50,000 in 2001, and in 2000 the metro population spent about $25 billion for goods.
The biggest long-term influence over development in the Pacific Northwest stems from growth restrictions, which have produced expectations of rising rents and rapid property appreciation.
Portland's rents increased on par with inflation during the late 1990s, but last year rents gained less than 2% and are expected to remain flat this year, according to Marcus & Millichap, which tallied the area's average rate at a little more than $18 per sq. ft. In the Puget Sound, after rising from roughly $16 to nearly $20 per sq. ft. between 1997 and 2000, average rents have steadied or even decreased a bit, according to First Western Properties.
For well-located property throughout the Pacific Northwest, however, retailers continue to pay healthy rents, which range between $15 and $25 per sq. ft. for large tenants and between the mid-$20s and low-$30s per sq. ft. ranges for small tenants, says Mason Frank, president of MBK Northwest.
He expects retailers to pay higher prices as growth restrictions make structured parking alongside new shopping centers more common. “That changes the whole rent structure, and that's what retailers are going to be grappling with here,” Frank says. “It remains to be seen whether it will work financially.”
Indeed, real estate observers in the area might have to wait a little longer to determine the feasibility of marrying garages and retail. Last year Federal Realty Investment Trust of Rockville, Md., planned to build two garages to serve its Shops at Tanasbourne, a proposed $60 million, 400,000-sq.-ft. “Main Street” open-air mall in the Portland suburb of Hillsboro. This spring, however, the company shifted its focus to grocery-anchored assets and put the project on hold.
Unlike rents, prices for shopping centers are anything but flat. Early in the year, demand for real estate started growing wildly and pushed prices higher in only a matter of days. Principal Group, for example, recently sold Meeker Square, a 26-year-old, 120,000-sq.-ft. neighborhood center in Kent, Wash., for $10.75 million to a group of local investors.
The property offers some serious value-added potential because rents are well below the $16-per-sq.-ft. prevalent in that market. The transaction, which values Meeker Square at roughly $90 per sq. ft. compares favorably to a similar transaction in suburban South Carolina, where a comparably-tenanted center sold for $80 per sq. ft.
“I thought that was an extremely attractive price for the seller,” says Hill, who represented Principal Group in the deal. “If I could find some other retail product for sale, I could sell it.”
But do the stories of rents and prices really stem from growth restrictions? After all, rents generally increased throughout the country during the last half of the 1990s.
And the hike in shopping center prices is a function of two behaviors converging in a sour economy. Money is abandoning the stock market and targeting all kinds of real estate nationwide in hopes of finding decent returns. But property owners generally are refusing to sell because of a lack of attractive investment vehicles in which to put their gains, says Bernard Haddigan, managing and national director of the national retail group within Marcus & Millichap.
Despite the rent and price parallels between the Pacific Northwest and the rest of the country, over the long haul investors and industry observers expect Pacific Northwest growth restriction logic to play out: Less property equals more valuable property. “That's one of the things we like about Portland,” says Matt Golden, director of acquisitions for Carlsbad, Calif.-based GMS Realty, which is working to complete a purchase of two Portland neighborhood centers of about 90,000 sq. ft. each. In late 2000, GMS made its first foray into the Pacific Northwest when it acquired two neighborhood centers in the Seattle area.
“If you have the right kind of center, with the right space and right anchor,” he continues, “you're potentially going to have little new competition, so you'll be able to push the shop space rent.”
The key, says Durr, is finding the right piece of property. Even with growth restrictions, some projects simply lack any near-term hope of turning around or generating investment interest. “Any underperforming property in this market is going to be razed or redeveloped, but it's got to be in a good location,” he says. “The poorer stuff will still be sitting here a couple of years from now.”
PACIFIC NW STATS
Oregon
population (2001): 3.472 million
population (percent change 1990-2000): 20.4%
unemployment rate (May 2002): 7.3%
unemployment rate (December 2001): 7.8%
per capita income (2000): $27,660
Washington
population (2001): 5.987million
population (1990): 1.235 million
unemployment rate (May 2002): 7.1%
unemployment rate (December 2001): 7.4%
per capita income (2000): $31,230
Source: U.S. Bureau of Economic Analysis