Our preconstruction teams at Sellen have been actively tracking seven main building and market trends for the Pacific Northwest over the past year. These trends will contribute to the upswing in development activity that we predict for 2021-2023.
Market exhaustion is currently being felt by our industry, and it will continue through 2020 and worsen when 2021-2023 activity picks up. The amount of available resources in the Pacific Northwest will be strained as contractors respond to projects in the 2021-2023 pipeline.
Our industry is already seeing significant growth from the current and future development activity in the Eastside, encouraged by the recent rezoning of Bellevue, as well as multiple, large office and transit-oriented developments. Additionally, the Eastside tech market is experiencing a resurgence with major players such as Amazon, Microsoft, Google and Facebook moving into Kirkland, Redmond and Bellevue, as well as the major modernization planned for Microsoft’s campus. This trend is a primary factor contributing to our predicted activity in 2021-2023.
With Amazon and Microsoft leading the tech charge in the Northwest, more and more tech firms are opening offices in our region. In the race for talent recruitment and retention, design aesthetics and office amenities are playing a larger role than ever before as firms use them to differentiate themselves and attract employees.
However, this trend changes the building market, specifically for developers striving to market to tech tenants. It’s hard to predict what a tenant might want, and many new buildings have required major renovations after a tenant is secured. With buildings becoming more unique and sophisticated, they can become less economically viable and may be higher risk.
Seattle continues to garner interest from atypical investment sources, primarily foreign and out-of-state investments. While the interest has been somewhat tempered by Seattle’s relatively low real estate returns, it’s still enough to transition Seattle to a first-tier city in terms of real estate investment capital. Tempering this is Seattle’s relatively high construction costs with relatively low rental rates in contrast to some other first-tier markets, such as San Francisco, New York and Los Angeles.
Labor costs are increasing. As the market grows busier, we expect this trend to continue. The cost of living in the Northwest remains high, as does the expectations for higher wages.
The Federal Reserve has switched back and forth this year between suggesting that interest rates were “near neutral” to being a “long way from neutral.” With Seattle’s generally low rates of return driven by relatively low rental rates and continuing cost increases, the interest rate uncertainty makes private development even more of a challenge. In some cases, it has even stalled projects.
Global macro-economic factors are proving to be increasingly hard to predict, and they have the ability to completely derail every other cost variable and trend. These include potential tariffs, currencies, Chinese divestments, and continued Canadian investments. The primary thing we can do is remain vigilant in tracking these factors and their potential effects on the Northwest’s real estate market.