Boasting an enviable quality of life, strong in-migration, and a vibrant economy powered by technology, aerospace, and other industries, the Pacific Northwest remains one of the America’s real estate sweet spots.
Northern California has a diverse range of economic drivers that makes the region successful, with technology and life science–based businesses leading the way, says Matthew J. Reidy, partner at San Francisco–based Fremont Realty Capital.
“California’s Bay Area has become a 21st-century knowledge-based metropolis thriving thanks to a virtuous circle of innovation, culture, leading academic institutions, and quality of life,” Reidy says. “This is further enhanced by the area’s well-established entrepreneurial support systems and investor infrastructure.”
In Oregon, high levels of in-migration are helping drive growth, says Anna C. Langley, senior vice president, investment, at Portland-based Langley Investment Properties, a privately held real estate investment firm.
“You can see and feel the momentum increase month over month,” she says. “Recent commitments from out-of-state companies—such as Google—add to Portland’s growing talent and economic base. Almost undetectable in the last economic cycle, the technology sector is currently the largest demand generator in the central city.”
Farther north, the Seattle-area economy is seeing major public infrastructure projects that are expected to be a catalyst for future sustainable and human-focused development and higher-quality mixed-use development that will enable greater creativity and community-responsive design, says Mark Sindell, principal of landscape architecture and interim business development director at Seattle-based integrated design firm GGLO. “Seattle is becoming a truly cosmopolitan city with a sustainability-based methodology,” he says.
Real estate activity in the Pacific Northwest, including northern California, Oregon, and Washington, remains robust, with strong multifamily development, increased industrial activity, and steady retail construction. Although some clouds are appearing on the horizon, the region’s real estate momentum continues.
Sustainability and renewable energy remain ongoing themes in the Golden State and especially in the Sacramento region, thanks to an increased focus on green development and operations by the business community, says Troy Givans, director of economic development and marketing for Sacramento County. That emphasis is expected to result in additional development activity.
“The Sacramento real estate market should continue positive trends for the entire region for the coming year,” Givans says. “The improved economy should continue to have positive impact on vacancy rates and lease rates.”
Technology continues to propel real estate demand in San Francisco, Silicon Valley, and the peninsula, says Barry DiRaimondo, chief executive officer at SteelWave (formerly Legacy Partners), a real estate investment manager, owner, and operator in Foster City, California. While there is a lot of new commercial space being built, he adds, current tenant demand is more than adequate to absorb it.
“Much of the current supply is pre-leased to established high-credit users, including Apple, Google, Samsung, Salesforce, Erickson, and other companies,” DiRaimondo says. “That compares to the 1980s, when high levels of new supply cannibalized the market. Rents today are trending up a very steep slope. In San Francisco, rents have gotten to such a level that we are starting to see some migration to the East Bay for tenants who don’t have to be in San Francisco.”
To meet this demand, SteelWave is developing the first phase of Tech Place at 101, a 200,000-square-foot (18,600 sq m), six-story office building fronting Highway 101 near Mineta San Jose International Airport. The firm is also about to break ground on the second phase of America Center, a 440,000-square-foot (41,000 sq m), two-building office project, also in San Jose, DiRaimondo says. “Demand continues to be strong for new space,” he adds.
Multifamily development in northern California remains extremely solid, too, says Sean K. Slater, principal at ELS Architecture and Urban Design in Berkeley. Several megaprojects under construction or planned in the region—including Hunter’s Point, Parkmerced, Treasure Island, and Pier 70, all in San Francisco—will add tens of thousands of housing units. “The scarcity of land and the paucity of housing have created a perfect storm of property values rising and construction costs inflating,” Slater says.
Developers are taking advantage of Berkeley’s Downtown Area Plan, which calls for up to five new mid-rise projects, he says. The first, 2211 Harold Way—also called the Residences at Berkeley Plaza—with 302 units, has passed several key hurdles and is now awaiting final approval by the Landmarks Preservation Commission, the Zoning Adjustments Board, and City Council, Slater says.
Office and multifamily activity also is spurring retail construction and renovation. Among ELS Architecture’s current projects is conversion of a 300,000-square-foot (28,000 sq m) 1950s-era Sears store into an urban retail/entertainment plaza at Hillsdale Shopping Center in San Mateo.
With the second digital gold rush continuing to attract migration to San Francisco and the Bay Area, new business formation remains healthy and will continue to drive the need for additional office space, says Reidy. “However, current and new supply under construction appears to be enough or possibly more than enough to satisfy current and forecast office demand,” he says. “Some developers are telling us that there’s not much profit left, given the significant rise in both land prices and construction costs. This, combined with historically low interest rates, would suggest that we are entering a peak pricing phase.”
Some developers remain cautious. “What has happened in the Bay Area in past years is rents inflate to a point where it becomes economically unfeasible for many startups to expand or companies to locate businesses there,” says John S. Grassi, chairman and chief executive officer of San Francisco–based Spear Street Capital. “Growing and sustaining business in such a high-cost area becomes problematic.”
At the beginning, startups are not focused on the cost of doing business, he adds. “They are concentrating on growth or recognition or eyeballs or some other metric,” Grassi says. “Eventually, they focus on expense management. When they do, they start questioning paying $60 a square foot [$645 per sq m] in rent when they could get space for 20 to 30 percent less elsewhere. Spear Street Capital is a large landlord in Austin, and we’re seeing a lot of companies leaving California for Texas because rents are lower on a relative basis. Taxes are lower, too, and so is the cost of doing business.”
Portland may benefit from businesses leaving high-rent regions. The Rose City is poised for additional growth because Seattle and San Francisco remain cost prohibitive for many companies and the quality of life in Oregon appeals to millennials, families, and retiring baby boomers, says Langley.
“Portland’s office market vacancy rates are currently around 6 percent, and tenants looking for blocks of space 30,000 square feet [2,800 sq m] or greater are game changers for a city where, historically, the average deal in downtown has been 3,000 square feet [279 sq m],” she says.
Statistics bear this out. Portland’s downtown office market has maintained healthy fundamentals during the past several years while the suburban office market is seeing increasing activity, adds Patricia Raicht, senior vice president of research for Pacific Northwest markets at real estate firm JLL. “In 2014, suburban leasing activity accounted for 61 percent of all office market activity,” she explains. “These improving market fundamentals have not gone unnoticed, and institutional investment interest in suburban assets has increased dramatically.”
Thanks to continuing strong demand, Langley Investments is involved with a number of new developments, including the construction of a 132-unit hospitality and transit-oriented multifamily development in southwest Portland, pre-development of an industrial project in the northwest area of the city, and pre-development of the repositioning of a historic building in southeast Portland.
One reason Portland’s real estate sector has remained resilient is millennials, says Kurt Schultz, principal at SERA Architects, a local multidiscipline sustainable design firm. Portland is one of the top U.S. cities for young people to relocate to, he says.
“Individuals 20 to 35 years old move here because of the proximity to the beach, the mountains, and the outdoors,” he continues. “Since most millennials want to be close in and live in a sustainable community, they are driving urban infill development.”
SERA is involved with 15 to 20 multifamily projects, primarily in downtown Portland and typically along transit lines. The firm is working on a number of projects with Dallas-based Mill Creek Residential Trust (formerly Trammell Crow Residential), including the nine-story Modera Pearl, which is under construction, Schultz says. The project, which will have 290 rental apartments, including live/work spaces at ground level, is expected to be finished in 2017.
“We’re also planning Modera Belmont—202 units in a six-story full block—which will also open in 2017,” he said. “In addition, we designed Capstone Development’s 130-unit Burnside26 in close-in east Portland, which is a booming neighborhood for new transplants.”
Like Portland, Seattle is experiencing strong multifamily development, particularly in neighborhoods with multiple transportation options, says Ken Lederman, a partner in the Seattle office of the Foster Pepper law firm.
“This growth in multifamily is providing benefits to other sectors, such as office and industrial,” he says. “Investments in the region, from within Washington, across the country, and internationally, are fueling a strong base for future development.”
For example, Google’s new campus in Kirkland and the recently announced University of Washington/Tsinghua University of Beijing joint venture to operate a graduate institute focused on technology and innovation are expected to bolster Seattle’s Spring District, Lederman says. “With a $40 million community investment from Microsoft and direct access to Sound Transit’s light-rail expansion, the exciting developments within the Spring District are going to be a key driver on Seattle’s east side,” he adds.
Foster Pepper is working with real estate firm Wright Runstad & Company on the redevelopment of Rainier Square in downtown Seattle. The property is part of the University of Washington’s metropolitan tract and will include 1.15 million square feet (107,000 sq m) of office, multifamily, and retail space, plus a luxury hotel. First occupancy is slated for late 2017, says Lederman.
Foster Pepper also is working on the expansion of the Washington State Convention Center, a $1 billion project that will add 1.23 million square feet (114,000 sq m) to the existing structure.
Locally based firms such as Amazon are also fueling Seattle’s growth. International design and architectural firm NBBJ is designing Amazon’s new 3.3 million-square-foot (307,000 sq m) expansion of its corporate office campus, notes John Savo, a principal in NBBJ’s Seattle office. In addition to four high-rise structures, the project includes a large meeting center and a combination office building/nature conservatory.
“Amazon continues to grow at a phenomenal pace,” says Savo. “Their decision to locate in Seattle’s urban core has been a boon to development. Amazon is leasing space, building for themselves, and encouraging residential and retail development around the structures they occupy. This is creating new mixed-use neighborhoods with significant public amenities. Amazon is acting as a magnet for other high-tech companies to move into the region, especially the city center.”
NBBJ is designing two commercial projects in Seattle, each with 1.2 million square feet (111,000 sq m) of space, for privately owned real estate development firm Urban Visions—888 Second, a 900-foot-high (274 m) office tower with a 39-story atrium, and the S, six mid-rise buildings in a campus setting.
As is the case in other major metro areas in the Pacific Northwest, multifamily is hot in Seattle. The city is reporting an increase in multifamily housing development, a decrease in mid-rise development, and a surge in mixed-use, tall building projects in the city core, says GGLO’s Sindell. “Over the coming year, we will see stabilization in market-rate, multifamily housing, where we are currently cresting on the explosive growth over the past three years,” he says. “Hospitality development will rise, as well as office, tempered by a few large projects that will affect supply and demand when they are completed and leased.”
GGLO is involved in a number of area developments, including 624 Yale Apartments, which is expected to be completed later this year or early in 2016; AvalonBay Newcastle, a mixed-use development with anticipated completion in 2017; and Eastern Washington University’s new Sustainability Center, currently in the design phase.
Seattle’s increased development activity has a downside, cautions Jeff Foster, managing principal at GGLO. “Construction costs have risen dramatically,” he says. “It has also become increasingly difficult to find contractors to even bid on new projects. Some smaller developers have already elected to take a breather, largely due to the steep increase in the cost of land needed to proceed with projects.”
Mike Sheridan is a freelance writer in Parsippany, New Jersey.