Seattle Daily Journal of Commerce REALREAL ESTATEESTATE MARKETPLACEMARKETPLACE NORTHWESTNORTHWEST February 25, 2016 Page 2 REAL ESTATE MARKETPLACE NORTHWEST Institutional owners move in on local market Ownership goals of industrial projects have changed from short-term to long-term, thanks to the institutions. f the 26 years I’ve been industrial owners are institution- streams that grow over time. current success, the growth of cess would kick off a flurry of in commercial real estate, al. Additionally, more than 90 One of the best ways to discipline in the market has led speculative developments. When O 15 have been focused percent of the purchasers and ensure a continuous, growing to the best landlord market I’ve the market was at its peak, some solely on the Puget Sound indus- developers of industrial invest- income stream is to make sure seen in 15 years, and probably new developments were built trial market. During this time I’ve ment properties are either insti- supply and demand stay in ever. with disregard to competition in seen Seattle tutions or funded by institutional check. Institutional owners are Since 2012, 24 buildings con- the pipeline. Today only seven mature into partners. first and foremost concerned taining 6 million square feet additional buildings totaling 1.9 one of the What does this ownership with supply matching demand. have been completed in the million square feet are slated to most desired structure mean for the Seattle They constantly monitor the Kent Valley, which is the larg- start construction in 2016. industrial industrial market? It means market to make sure there est industrial submarket in the In short, the new breed of deci- markets in industrial developers are mak- is enough demand to support Pacific Northwest. As of January, sion makers is showing restraint. the United ing more disciplined new project the current development pipe- 5.35 million square feet of this As a result, overall vacancies are States. The decisions. line. These institutional owners space, or approximately 89 per- at historically low levels and it’s result of our In past Puget Sound cycles, are also in the market for the cent, has been leased and active becoming common to see tenants city’s growth private developers completed long-term; which makes decid- negotiations continue. Remain- competing for new Class A space. By PATRICK GEMMA is a change in most industrial developments. ing not to build a comfortable ing vacancy is primarily small More importantly, we’re witness- DCT Industrial owner compo- The motivation of these private decision. portions of larger buildings, with ing the strongest rent growth the sition. developments was short-term Institutional owners are also the biggest vacancy being only Puget Sound has ever seen. In the early 2000s, ownership profits: The goal was to lease conservative because of their 135,000 square feet. Seattle’s industrial market has was a mixture of private parties and sell the projects as soon internal structure. Institutions These statistics are strong evi- matured into a shining star on and institu- as possible after completion of answer to Wall Street (REITs), dence of a market that is in the national stage. With recent tional entities construction. The thought was internal boards (sovereign balance. strong demand continuing into (real estate that more development would wealth funds) and fiduciary rela- During the first quarter of 2016, the new year and supply being investment lead to more profit. The problem tionships (pension fund advi- another eight buildings contain- restrained by institutional deci- trusts like becomes evident at the end of sors). These parties value steadi- ing 2.4 million square feet will be sion makers, it looks as though DCT Indus- cycles, when absorption slows to ly growing returns over time. delivered. As of January, approxi- the health of the market will stay trial, pension a crawl and large industrial build- These returns are accomplished mately 1 million square feet, or strong through 2016 and beyond. fund advisors ings are left vacant, sometimes by making smart decisions. 42 percent, of this space has and sovereign for long periods of time. This institutional conserva- been pre-leased. This level of As senior vice president for wealth funds). In contrast, the motivation tism with a focus on long-term pre-leasing is unprecedented in DCT, Patrick Gemma oversees Fast forward behind institutional industrial objectives is prevalent in the the Seattle industrial market and development and capital deploy- to 2016, the development is a long-term ben- Seattle market. While demand speaks to the lack of larger Class ment in the Seattle market, overwhelm- efit to the market. Institutional fundamentals do play a role in A options available. Gemma has over 26 years of INDUSTRIAL ing majority of owners value long-term income the Seattle industrial market’s In past cycles, this kind of suc- real estate experience. WE’RE ON YOUR TEAM. When you work with Star Rentals, you add powerful players to your project team—pros that are skilled, knowledgeable, and easy to work with. Star Rentals employees are the most experienced in the industry. 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Ray Slyfield Heavy Equipment Service Manager 20 years experience Auburn • Bellevue • Bremerton • Eugene • Everett • Hillsboro • Longview • Olympia • Pasco • Portland • Salem • Seattle • Spokane • Tacoma • Vancouver • Wenatchee • Yakima SEATTLE DAILY JOURNAL OF COMMERCE • THURSDAY, FEBRUARY 25, 2016 REAL ESTATE MARKETPLACE NORTHWEST Page xx3 Get ready for a soft landing in lodging Hotels across the U.S. reached a milestone in 2015: annualized occupancies exceeded 65 percent and the average daily rate was $120. t ceases to amaze me that just daily rate, consumer demand growth, something no one a few short years ago the hotel is at an all-time high, and we thought possible. Forecasts I industry across the U.S. was, will go from a virtual standstill estimate 2016 will set another for the most part, on life support. in new construction to a peak record in occupancy on a national Perhaps development phase unseen in basis and many markets, includ- most owners recent history. ing the Northwest, are predicted of commercial Hotel investors who bought into to exceed 90 straight months of real estate felt the euphoria between 2010 and RevPAR growth through 2017. this way. Con- 2015 reaped unheard of returns With that said, for the first time sumers were (think Hotel 1000). since 2009, both PKF and Smith all but nonex- To say things are strong in the Travel expect a slowdown in year- istent, group hotel space is an understate- over-year RevPAR growth both and corporate ment, but as with any segment regionally and nationally. travel had of commercial real estate there It is difficult to continue to By CHRIS BURDETT been paired are always storm clouds on the make such predictions and CBRE Hotels to nothing, horizon. postulate over the enormous resorts were success of our industry with- virtually giving rooms away, loan Record setting pace out thinking about when it will delinquencies were at historic end — especially given the cur- highs and owners of hundred- As 2015 came to an end, rent forecast that growth (albeit million-dollar hotels across the U.S. reached slower) will continue for the fore- hotels were a milestone never seen: annual- seeable future! mailing their ized occupancies exceeded 65 Recent sales transactions in keys back to percent and the average daily Portland, Bellevue and Seattle their lenders. rate was $120, according to that have set all-time highs on Fast-forward PKF Hospitality Research and a price-per-room basis suggest a half-dozen Smith Travel. Here in the North- investors don’t believe it will end years and our west, both Seattle and Portland soon. How often can a hotelier industry is on reached unseen levels of 76 buy and sell a hotel in the space the verge of percent at $150 and 74 percent of 18 months and return over $1 setting records at $128, respectively. million a month to its investors? in both nation- Our industry has experienced Consumers willing to pay al occupancy 72 straight months of RevPAR HOTELand average (revenue per available room) LODGING — PAGE 5 Moody National REIT II earlier this month paid $74.1 million for Marriott SpringHill Suites-South Lake Union on Yale Avenue. Photo by Matthew Behrens INSIDE Institutional owners move in on local market ---------------------2 Get ready for a soft landing in lodging -------------------------3 Office market shows no signs of slowing down - - - - - - - - - -4 For apartments: Go West young man, go Northwest! ----------------6 10 questions developers should ask an architect ------------------8 10 questions developers should ask a contractor ------------------9 Greenbacks available for local brownfields ---------------------10 Fighting blight? Condemnation may be the way to go --------------13 3 projects are putting a new face on the Denny Triangle -----------14 2016 DJC Real Estate Market Surveys -------------------------15 ON THE COVER Hill7, a 285,000-square-foot office building, is one of many develop- ments changing the face of Seattle’s Denny Triangle. Find out what’s behind the transformation on page 14. Photo by Benjamin Benschneider 2016 Real Estate Marketplace Northwest Section editor: Benjamin Minnick • Section design: Jeffrey Miller Web design: Lisa Lannigan • Advertising: Matt Brown Surveys: Lynn Porter, Jon Silver, Nat Levy, Sam Bennett SEATTLE DAILY JOURNAL OF COMMERCE • THURSDAY, FEBRUARY 25, 2016 Page 4 REAL ESTATE MARKETPLACE NORTHWEST Office market shows no signs of slowing down Total sales volume should exceed $3 billion this year and the record for pricing per square foot will fall for the seventh consecutive year.