What's Going On?
March 2, 2021
With many of us living our lives in a manner similar to that of Tom Hanks in the film Castaway – there’s a gap in communications leaving tenants, investors, and landlords without good information and insights.
So here’s what’s going on…
Leasing
Leasing activity in the Puget Sound is essentially a “Tale of Many Cities” rather than just two. It’s difficult to say where the contrasts are more stark: Is it Seattle vs the Eastside or Office vs. Industrial?
Industrial – The industrial market shows a vibrancy that is arguably greater than what we saw prior to the pandemic. COVID has changed our lives in ways that we have not yet fully understood but in this evolution, it has highlighted the need for reduced offshore manufacturing, improved food delivery infrastructure, and expanded e-commerce. All of these examples have caused industrial properties to have sustained demand since the start of the pandemic.
If you are a Tenant looking to lease industrial properties, do not assume that there’s a COVID deal to be found. Landlords are remaining aggressive - and they should (because they can). Assuming there is not another large/unforeseeable event that impacts the industrial sector, like the pandemic affected offices, the industrial market will remain competitive for the foreseeable future. This foresight is supported not just by those in the market, but by the data relating to supply, vacancy rates, and recent lease transactions (see market reports available for download below). The lack of available subleases is another indicator of the strength and those are few and far between.
Office – Office leasing has been predictably slow as both large and small blocks of space have been put up for sublease. The Seattle Central Business District (CBD) sublease market increased approximately 71% between Q4 2019 and Q4 2020 and the Bellevue CBD sublease space has increased nearly 400% in that same amount of time. As astonishing as these statistics are, they don’t reflect recent changes in Tenant behavior. It is notable that most Tenants in the market over the past several months have shown a preference to move away from Seattle and towards Bellevue, and the surrounding markets such as Redmond and Bothell.
It was a Landlord’s market for a long time, and now the tables are turned. Although this is great for Tenants, it is also a reflection of the COVID world we’re living in. The sooner we can get to healthy levels of vacancy (around 8% to 10%), the more “normal” the world will feel.
Sales
The sales market tells a very different story than the leasing market. In March 2020 the financial market indicators were ominous and the Fed attempted to prevent excessive economic damage by again embracing “Quantitative Easing" (QE), just as they did during the 2008/2009 Financial Crisis. On March 15th, 2020, interest rates were dropped to near 0% and the Federal Reserve committed to low rates through 2023. Without question, low rates provide an opportunity for buyers – assuming you can find a lender willing to take on the risk. Lenders have shown preferences that shy away from investment properties and focus primarily on owner-user sales. This is because owner-user purchases are the only types of transactions lenders can get true visibility into the occupant’s financial health.
Industrial – Owner-user sales in 2018/2019 accounted for 32% of all transactions in the region while in 2020 a whopping 43% were owner-user. That’s nearly a 35% increase reflecting both the demand for owner-user properties and lenders preference for risk.
On the industrial buy-side - If you’re an investor, this could be a great time to find properties that are a great value (depending on your lender relationships). Owner-user opportunities remain difficult to find and continue to fetch higher and higher prices.
On the industrial sell-side – If you have been holding out on a disposition, this could be a great time to take action.
Office – Office sales took a much bigger hit than commercial properties. The number of 2020 office sales decreased 31% compared to the blended 2018/2019 average. Some demand remains but work-from-home policies and a “shelter in place” mandates have resulted in a 36% decrease in owner-user transaction volume compared to the 2018/2019 average. The impact of the pandemic on office properties will continue to evolve and will hinge on modifications in human behavior, corporate work from home policies, and companies ability to develop office culture from a distance. The Wall Street Journal recently released an article “Another Remote-Work Year Looms as Office-Reopening Plans Are Delayed” (link below).
On the office buy-side – This is a great time to find a property. Financing might require some additional legwork but if you’re bullish on the “new normal” being the same as “the old normal” – then it’s a good time to get into the market. Owner-users looking to purchase should consider the same. The SBA has a lot of programs to assist small businesses during the pandemic including waiving some of the fees associated with loan origination.
On the office sell-side – If you’re an owner-user and your practices going forward are going to be centered around work from home policies, you need to weigh your priorities such as cash flow, company culture, and corporate presence (to name a few). If you'd like to hear what I'm seeing companies do - let's talk.
The decision-making process for investors will certainly entail the existing tenant mix and their remaining term. For those that purchased prior to 2018 – selling will not necessarily mean you’ll be at a loss. If you are debating readjusting your investment strategy, I highly encourage you to evaluate your outlook on office space and contrast it with your long-term goals. I would welcome the opportunity to have a conversation about this.
NOTEWORTHY ARTICLES ON WORKING FROM HOME
WSJ - Another Remote-Work Year Looms as Office-Reopening Plans Are Delayed
CBC - Goldman Sachs CEO Solomon Calls Working From Home an 'Aberration'
If you have any questions about the commentary above or the market reports below, let's talk.
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By email: [email protected]
By Phone: 206-963-0957
Founder of Hummel Architects, pc and Toad Holler Woodworks
4 年Wiiillllsoooonnn! ?? Good read. I personally don't see recovery until 2023 at best. I also don't see or at least I hope I don't see a return to "normal". We've been moving away from that for years, but business resisted it. The Pandemic forced it and I think the new normal is here to stay. Less office space for businesses and more work from home with a come in once or twice a week for meetings, etc. type lifestyle. No dedicated desks so much as flexible work stations for people to use on those 'in office' days kinda like a WeWorks environment. The environmental, health and social benefits of the new normal far outweigh the old system. Imagine not sitting in your car or on the ferry five days a week? It takes that many more cars off the road each day plus your saving time and money and the mental strain of commuting. There will always be those that like that lifestyle, but I think this pandemic has proved that there is another way and it can be just as productive and better for everyone then the old way. Business needs to stop trying to think that someday we'll get back to that and start thinking about how we embrace this and make it better.