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Year In Review
Unemployment Projection
This report examines where the Pacific Northwest (PNW) commercial real estate (CRE) industry stands after a harrowing year. The following pages contain data and insights from Colliers Experts that help to clarify what transpired—or not—in a year that showcased dramatically uneven impacts and a long road to recovery.
A lot Happened in 2020
The resilience of the PNW has consistently revealed itself through a year marred by wildfires, a reckoning on racism, the most expensive election cycle in US history, and most notably, a virulent pandemic that has left more than a quarter of a million Americans dead. Through it all, residents and businesses have kept strong, working together to make the best of an awful situation. For many, approaching the final days of 2020 is like preparing for a big exhale. There is a palpable sense of relief in knowing a clean, new, not-2020 year is on the horizon. That said, what happened in 2020 is going to follow us personally and professionally for decades to come.
Forecast, 2019 – 2024
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Oxford Economics provides metro-level 5-year forecasts for major US cities, including PNW anchors Seattle and Portland. Gross Domestic Product (GDP), a measure of an area’s economic output, dropped 9.1% in Portland and 10.7% in Seattle just this year. The most noticeable economic metric that changed and remains sensitive to pandemic-related shutdowns, is employment. The unemployment rate at the end of 2019 in Seattle was 3.3% and was 3.5% in Portland. Fast forward a few months and it shoots up to historic highs, only to come down by the end of 2020 to 8.8% in Seattle and 8.0% in Portland (projected by Oxford Economics). Seattle is likely to recover slightly faster, gaining a full employment recovery in Q2 2022, while Portland’s recovery will come a quarter later in Q3 2022. Reasons for a fast employment recovery, compared to the Great Financial Crisis, is that PNW industry diversity is strong, with no industry sector boasting more than 20% of the region’s GDP, although, thanks to Amazon, Information comes close in Seattle with 20%.. The bedrocks of manufacturing, FIRE (finance, insurance, and real estate), business services, and wholesale-retail all account for 10% or more of their region’s GDP in both Seattle and Portland. While that level of industry diversity is impressive and important, it does not defray all economic risks. The share of China-bound Oregon exports is higher than any other state, meaning trade wars cost the state dearly. Seattle was catapulted to global market status, in part, because of Amazon’s meteoric success, however, that means the market is sensitive to the behavior of large firms.
Seattle Economic Forecast
Portland Economic Forecast
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Puget Sound Pulse Economic Indicators Report
Portland Pulse Economic Indicators Report
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US office markets have all taken a hit this year. Seattle and Portland are no exception, but they were impacted differently. Seattle sits among the Top 10 US Office Markets, nearly qualifying as a Gateway Market. Portland, in the Top 25 US Office Markets, is comfortably considered a Creative Market, characterized as a secondary market with a young, educated, STEM-focused workforce. Among Top 10 US office markets, Seattle has the lowest vacancy, tied with Manhattan, at 7.6%. Portland’s sublease availability is lower than 13 of the other 25 Top US Office Markets in Q2, at 1.0% (tied with Miami and Phoenix). Going forward, how market fundamentals behaved during this period will impact how investors and companies evaluate potential cities to do business in. Seattle and Portland outperform similar markets across the country, which bodes well for the future of PNW office leasing.
Multimarket Comparison
2020-2024 Projected GDP & Employment Growth
Graph
VACANCY - Gateway Markets
VACANCY - Creative Markets
Evolution of Office Amenities
Portland Q4 Office Report Coming Soon!
Seattle Sublease Report November
National Top 25 Office Report
Bellevue Sublease Report November
Portland Availability Report November
Office
Accelerating the largest work from home experiment in history, the COVID-19 pandemic forced companies to rapidly adapt. While it may bring lasting change to the office sector, the real impact is yet to be determined and will likely look different across sectors and regions. Tech’s dominant presence in Seattle may inspire other markets to consider what companies there—namely, Amazon, Microsoft, and Starbucks—do before evaluating their own policies. Portland’s metro economy is dominated by sports apparel—Nike, Columbia, and Adidas—and high-tech manufacturing—Intel and Precision Castparts—which currently appear unlikely to implement wide-ranging work from home policies once a return to work is announced, presumably in Q3 2021.
SUBLEASE AVAILABILITY - Gateway Markets
SUBLEASE AVAILABILITY - Creative Markets
Outlook
Recovery will depend on widespread adoption of the COVID-19 vaccine. Once workers are safe to return to the office, it remains to be seen how companies will handle flexible workplace strategies. Some will allow employees to work from home permanently, but this will not be the norm. Most employees and employers want to return to the office, although perhaps not five days per week. Occupancy will vary by industry and company.
National Top 10 Office Report
Top 20 Major U.S. Metros - GDP Growth, 2020-2024
Economic Comparison
With Q3 leasing activity down 57% in Seattle CBD, 71% in Portland CBD, and 46% in Bellevue CBD from the prior year, downtowns have struggled mightily during the pandemic. It will take gains in employment and GDP to bring major leasing activity back. Puget Sound (represented by Seattle on the graph) is expected to outperform most other markets in terms of both employment growth and GDP. With San Francisco projected to see weaker employment growth and Sun Belt cities unlikely to see major increases to their GDP, the greater Seattle area is poised to perform incredibly well over the next 5 years. Portland (not pictured in graph), is also expected to outperform other markets, particularly in terms of employment, which is forecasted to drop below 4% by 2024. These economic fundamentals provide optimism for PNW’s recovery, relative to other parts of the US. The technology and information sector-dominant markets are expected to show much larger GDP gains than markets with below average technology and information employment. Seattle ranks #4 nationally, in terms of GDP growth forecasts, likely because of its predominance in the sector. Portland, however, has technology and information employment below the national average.
Puget Sound Q4 Office Report Coming Soon!
Industrial
Long the most competitive property type for investors, industrial assets continue to outperform their peers in 2020. While deal volume is down 26% YoY for industrial assets, that is significantly less than the 44% dip in office, 47% in retail, and 40% in apartments, according to Real Capital Analytics. With more people shopping from home, more deliveries are made, increasing demand for warehouse space and last-mile delivery. This trend was increasing prior to the pandemic and has accelerated, offering long-term stability. In land-constrained markets like Seattle (by the Puget Sound) and Portland (by the Urban Growth Boundary), this trend is amplified.
The Northend and Eastside markets of Puget Sound continue to push rates and drop vacancy. Northend, in particular, has seen tremendous activity from developers local and national interested in hundreds of acres of developable sites. While the beleaguered aerospace industry used to be one of the more active sectors in the Northend, e-commerce, distribution and other manufacturing companies more than picked up the slack.
Derek Heed
The rapid shift from shopping in-person to e-commerce this year led to mega-deals and increased activity in Frederickson, Lacey, and DuPont. These fulfillment users require large, functional, and generally newer buildings to maximize efficiency. This bodes incredibly well for Thurston and Pierce Counties, which are home to most of the region’s development pipeline.
Bill Condon
We have a number of strong submarkets such NE Portland and Tualatin all of which lack adequate market supply for the roaring leasing demand we are seeing. However, the real paradigm shift of 2020, is the inclusion of Marion County and the northern parts of SW Washington (Centralia) in everyday conversation regarding the “Greater Portland Industrial Market”
Jerry Matson
Vacancy
Development Pipeline (as % of Inventory)
Puget Sound Q4 Industrial Report Coming Soon!
Seattle hits the US national average vacancy, which is 5.8%, while Portland remains 1.2% below at 4.6%. Compared to other markets in the Northwest and Mountain regions, Seattle comes in above the average regional vacancy of 5.4% while Portland sits comfortably below it. Looking to the future, the development pipelines for six of the nine major Northwest and Mountain regional markets are above the national average, as a percent of inventory. Nationally, industrial developments make up 1.9% of existing supply. In Puget Sound, the development pipeline 2.4% of existing supply, and Portland’s is 2.0%. Oakland/Eastbay is showing that its capacity to provide more space is limited, with the development pipeline representing only 0.9% of existing supply compared to Denver, which is the highest in the region at 3.2%. Note: Vacancy includes owner-user supply, unlike typical market reports, in order to more accurately compare markets across seven states. To see what each market reports, based on national data standards, please visit colliers.com/research and navigate to the market in question.
The future of industrial real estate is bright. Even once people are allowed to go out and shop in stores, many will continue to order online, requiring significant investments in warehouse space and last-mile fulfillment. As global supply chains adjust and create domestic redundancies, there will be increased demand for specialty industrial products, like cold storage. This creates opportunities for adaptively reusing defunct industrial product, such as older warehouses or manufacturing buildings, and newly purchased development sites in the long term.
Portalnd Q4 Industrial Report Coming Soon!
Multifamily
After industrial, most market observers cite multifamily investment as the most stable asset class throughout 2020. Despite activity dropping 40% YoY, prices have risen 7.2%. Concessions predictably shot up in luxury, downtown buildings and remained stable or decreased in suburban areas. Occupancy challenges will remain until employees are expected back in the office. As some people took advantage of remote working to enjoy potentially greener pastures elsewhere, buildings in downtown areas across the country saw vacancies rise along with concessions. Even as companies adopt flexible work from home policies, many of these people are expected to return to their job’s metro area. It remains to be seen how long it will take for downtown submarkets to recover, but consumer preferences for high quality retail, walkability, and amenities has not changed. The need for increased space, both inside and outside, however, is likely to give a short-term advantage to suburban assets.
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Concession Trends
Portland
Multi-Market Comparison - Occupancy
Multi-Market Comparison - Effective Rent & Concessions
Puget Sound
Given demographic trends, showing Millennial’s and Gen Z’s preferences for urban, walkable, transit-oriented communities, it makes sense that the desirable PNW cities of Seattle and Portland are out-performing national metrics, including occupancy and effective rent. Puget Sound and Portland coincidentally have the same occupancy rate: 93.1%, which is 0.3% above the national average of 92.8%. In terms of effective rent, Seattle’s $1,664/month is 24% higher than the US average of $1,341/month. Portland only surpasses the national average by 2%, posting $1,364/month. Inventory is also important to consider. Puget Sound’s nearly 300,000 units is the largest inventory across the Northwest and Mountain regions. Additionally, Puget Sound is increasing its inventory by 5.9%, considering the existing development pipeline as a percent of current inventory. Across the US, multifamily supply as a percent of existing inventory is set to increase by 3.5%, which is coincidentally the same amount as Portland, which is also the 4th largest market in the Northwest or Mountain regions, boasting 190,187 units. Concessions are highest in the markets with the highest rents: San Francisco/East Bay and Silicon Valley, which report concession rates of 1.9% and 2.4%, respectively. The lowest concessions are found in Sacramento, Reno, and Boise, all under the national average of 1.2%. Sacramento’s $1,479/month effective rent is close in value to Portland’s, although concessions are less than half 1.3%. All markets studied are highly desirable.
While a return to work in Q2 or Q3 2021 will likely mean a return to the main employment centers (Bay Area and Puget Sound) for most workers, there will be some who plant roots in their newfound, less expensive markets. Understanding the development pipeline of those areas suggests that Boise and Reno are well-covered to absorb that demand. As the economy opens up after the COVID-19 vaccine becomes widespread, people will again flock to highly amenitized, urban environments. The return of retail amenities, concerts, and festivals will once again provide a centripetal force to the populations of Puget Sound and Portland, both of which boast some of the most livable places in the country.
Effective Rent - Puget Sound
Q3 2020
Area
% Change
largest Increase
largest Decrease
Average Change
Tacoma
+4.5%
$1,281
Seattle
$1,824
-5.6%
$1,666
-1.8%
$1,226
$1,932
$1,697
Q3 2019
$1,441
$1,379
$1,375
Wilsonville
Portland Metro
$1,367
$1,433
$1,369
+5.4%
-3.8%
+0.4%
Effective Rent - Portland
US Average Effective Rent: $1,341
Concession Rate - Puget Sound
US Average Concession Rate: 1.2%
Concession Rate - Portland
Uncommon separation
3.7%
0.5%
1.6%
Redmond
Auburn
1.4%
0.9%
+164%
-44%
+78%
2.2%
0.7%
1.3%
Tigard
+144%
-46%
+44%
Occupancy Rate - Puget Sound
US Average Occupancy Rate: 92.8%
Occupancy Rate - Portland
88.9%
91.7%
93.2%
Bellevue
87.3%
95.4%
94.1%
+1.6%
-3.7%
-0.9%
96.2%
90.8%
Vancouver
92.9%
93.5%
93.7%
+3.3%
-2.7%
-0.5%
Puget Sound leads all markets in product under construction (as a percent of their existing inventory), except Boise, with an astounding 12.3% of their existing inventory under construction, although their inventory is only 25,560 units, compared to nearly 300,000 in Puget Sound.
Concession Rate
Occupancy Rate
The largest increase and decrease for each metric are called out on the graph.
Puget Sound Q4 Multifamily Report Coming Soon!
Portalnd Q4 Multifamily Report Coming Soon!
Availabilty Rate
Rents (NNN)
Retail
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Northwest Retail Report Fall 2020
Because of consumers’ inability to spend on certain services and travel, retail spending in 2020 beat expectations and grew 2.2%, and GlobalData analysis expects it to accelerate in 2021, growing another 3.2%. As in-store sales declined 3.2% this year, there is significant room for growth next year.While E-commerce may have filled some of the consumer spending gap caused by closing in-person retail stores, it still only represents 14.3% of all retail sales, according to the US Census Bureau. This may increase, but will never fully replace the shopping experience people who are stuck at home crave. Flattening the curve will save lives, and closing retail stores as part of that imperative hurts. The faster COVID-19 is under control, the better for retailers.
e-commerce spending increased by 36.7% from Q3 2019 to Q3 2020
Mulitmarket Comparison
Puget Sound and Portland have the lowest availability rates across the Northwest and Mountain regions. Part of this is due to incredibly low supply in PNW and limited development pipeline of retail inventory. Portland only has 217,032 SF of retail product under construction, which is the lowest of any Northwest or Mountain region market, comprising 0.2% of existing supply. Puget Sound’s is not much larger with 553,566 SF under construction, comprising 0.4% of existing inventory. This market dynamic will keep retail property values in PNW higher than most US markets that are overbuilt. For context, across the US, there is currently 50M SF of retail product under construction, which represents 0.5% of existing inventory.In all markets except Salt Lake City, Boise, and Reno, NNN rental rates are above the national average of $16.02. Clearly, San Francisco and Silicon Valley outpace the rest of the pack, with rents north of $36 and $33, respectively. Puget Sound’s retail market posts rents 30% above the national average at $20.71 and Portland is not far behind at 20% above the national average, at $19.16. Pricing is traditionally a function of supply and demand. In the world of retail, part of demand relies partially on income. The most expensive markets to lease retail space in also happen to have the highest incomes, by far. The median household income (median income) of Silicon Valley is $115,893 and is $123,859 in San Francisco. Boise has the lowest rents ($11.81) and median income ($53,942). Puget Sound is the third highest income market in the Northwest and Mountain regions, but significantly below the Bay Area, with a median income of $78,687. Portland follows closely at $78,439, making it the 4th highest paid market in the Northwest and Mountain regions.
Despite ideas in some circles that “retail is dead,” physical footprints will continue to be an important part of the retail landscape, although less so in downtown areas until workers return to the office. In fact, GlobalData analysis shows that 79.4% of consumers miss visiting shops and malls for the social interaction and 62.8% miss having somewhere to go, other than home. This foreshadows the future strength, in particular, of suburban lifestyle centers. According to Colliers International retail research analyst Nicole Larson, “The pandemic has accelerated the redevelopment of the retail landscape as we begin to see more and more retail properties repurposed. Currently, the US is over-retailed with an estimated 23 square feet per person,” compared to five square feet per person in much of Europe and Asia. Overbuilt retail segments will start to show signs of transformation in the coming years as standards for rapid delivery become faster and faster.
Changes In Total Retail Spend By Location 2020 Over Prior Year
Online Sales As A Percentage Of All Retail Sales (2019-2024)
Fall 2020 US Retail Spotlight Report
H1 Single Tenant US Net Lease Report
Winter 2020 US Retail Spotlight Report
Part of this is due to incredibly low supply in PNW and limited development pipeline of retail inventory. Portland only has 217,032 SF of retail product under construction, which is the lowest of any Northwest or Mountain region market, comprising 0.2% of existing supply. Puget Sound’s is not much larger with 553,566 SF under construction, comprising 0.4% of existing inventory. This market dynamic will keep retail property values in PNW higher than most US markets that are overbuilt. For context, across the US, there is currently 50M SF of retail product under construction, which represents 0.5% of existing inventory.
Spendig By Location