Seattle’s commercial-property market, one of the hottest in the U.S., is getting a boost from a 7,000-ton tunnel-boring machine nicknamed Bertha.
The world’s largest tunnel driller last week began work on a 1.7-mile (2.5-kilometer) underground freeway along the city’s downtown waterfront, the centerpiece of a $3 billion redevelopment plan that will bring new parks and public areas, along with residential and commercial developments.
“It’ll improve transportation, amenities and quality of life,” said Kevin Shannon, head of western U.S. office sales for CBRE Group Inc., the largest commercial real estate brokerage. “Those things all help Seattle improve its credibility as a key gateway coastal market.”
A modernized transportation network is poised to attract more investment to a city that’s already seen a surge in demand for commercial properties, according to Dan Fasulo, managing director of Real Capital Analytics Inc. Seattle, with its growing population and increased hiring at companies from Amazon.com Inc. to Boeing Co., has surpassed larger markets such as Washington and Chicago for office-building sales since the start of last year, while apartment rents are growing at the fastest pace in the country.
The city trailed only Manhattan, Los Angeles and San Francisco in U.S. office-property sales from January 2012 to June 2013, with more than $6.5 billion of transactions, according to New York-based Real Capital. The total was boosted by Amazon’s purchase last year of its headquarters campus from developer Vulcan Inc. for $1.16 billion.
Investors are willing to pay a premium for Seattle buildings, as demonstrated by the March sale of the 47-story Wells Fargo Center for $390 million, Fasulo said. Chicago-based Callahan Capital Partners, on behalf of Canadian real estate investor Ivanhoe Cambridge Inc., paid the equivalent of a 4.5 percent investment yield for the building, matching capitalization rates for Manhattan office towers during the market peak in 2007, according to Fasulo.
“Seattle’s trading like one of the gateway cities,” he said, referring to the most attractive areas for real estate investors because of their steady returns. Real Capital designates New York, Boston, Washington, Chicago, San Francisco and Los Angeles as major markets.
Seattle-area unemployment of less than 6 percent and population growth help make real estate attractive in the Northwest’s largest city, said Lisa Picard, Seattle-based executive vice president and regional manager for the U.S. development unit of Swedish construction company Skanska AB. It’s also a cheaper place to live than West Coast areas such as San Francisco and Silicon Valley, where property prices are surging.
“We have an amazing amount of skilled labor, entrepreneurialism and the opportunity to not spend your entire paycheck on housing, which is a major issue in other metro areas,” said Picard.
Seattle’s new tunnel, set to start service by early 2016, will replace the Alaskan Way Viaduct, a two-tier, 60-year-old elevated highway that was damaged in a 2001 earthquake. The viaduct is part of State Route 99, the second-busiest north-south highway running through Seattle, after Interstate 5.
The drilling machine boring the new artery was named for Bertha Knight Landes, who was elected mayor of Seattle in 1926 and the first woman to lead a major American city, according to the office of the city clerk.
The tunnel will lead to 20 acres (8 hectares) of new parks and recreation areas, some of which will be designed by the same firm behind New York’s High Line, which turned a defunct elevated railway into a mile-long green park and brought new residents and tourists to lower west Manhattan.
Residential and retail developments are also in the works to replace the parking lots and low-rise buildings that line the waterfront now, which may create as many as 1,000 new housing units, said Marshall Foster, city planning director at the Seattle Department of Planning and Development.
“We’re trying to create a neighborhood on the waterfront,” he said. There will be “residents walking their dogs at six in the morning and out there having a drink in the evening.”
Seattle took the lead from San Francisco for the biggest increase in U.S. apartment rents in the fourth quarter and has held it since, with a 6.2 percent gain during the three months ended June in effective rent growth, or what tenants paid after any landlord price breaks, according to Reis Inc., a property-research firm based in New York.
Hartz Mountain Industries Inc. last month acquired the 184-unit Alto Apartments in Seattle in its first West Coast real estate purchase. The Secaucus, New Jersey-based company, which began buying and developing multifamily properties in 2010, paid about $62 million for the complex, located five blocks from Elliott Bay, according to the King County record of sale. The purchase was done at a cap rate just above 4 percent, the lowest the company has ever paid for real estate, said Emanuel Stern, president and chief operating officer.
“Long term, we like the demographics of the city and the infrastructure,” Stern said.
Seattle-based Amazon boosted employment 57 percent last year, adding 32,200 full- and part-time workers worldwide, according to its annual report. The headquarters of the world’s largest online retailer dominates the technology and medical hub of South Lake Union, located north of the main downtown area.
Department-store operator Nordstrom Inc., also based in Seattle, increased hiring 8 percent last year; Issaquah, Washington-based membership-warehouse retailer Costco Inc. added 6 percent more employees; and employment at Boeing, the world’s largest planemaker, increased 2 percent, according to those companies’ annual reports. Boeing, which does most of its commercial airplane assembly north of Seattle at its Everett, Washington, plant, added about 4,500 workers in Washington state last year, a 5.5 percent increase, according to the company.
Job growth is making Seattle one of the most attractive U.S. markets for real estate investment, said Len O’Donnell, president and chief executive officer of USAA Real Estate Co., a unit of the insurer that oversees more than $12 billion of assets. The company recently purchased land adjacent to Amazon’s headquarters and is considering developing an office building without any tenants in place, he said in an interview this week at Bloomberg’s New York headquarters.
“Of all the markets in which we might consider speculative development, Seattle is at the top of the list,” he said.
While property values are jumping, deals may slow in the city as interest rates increase, boosting financing costs for borrowers, said Matthew Gardner, chief executive officer of Gardner Economics LLC, which advises clients including pension funds and developers on land use, real estate and economics.
“My one concern is if interest rates start rising at a faster rate than expected,” Gardner said. “That’s going to put pressure on acquisitions.”
Seattle’s new tunnel has drawn parallels to Boston’s Central Artery/Tunnel project, popularly known as the Big Dig, the more-than-15-year project that rerouted traffic through three new tunnels, Fasulo said. While that project was marred by cost overruns and delays, it helped contribute to a revitalization of south Boston’s waterfront.
Related Beal, a partnership of New York-based developer Related Cos. and Boston’s Beal Cos. that has been active in Boston’s waterfront construction, is considering a project in the Seattle area, said Peter Spellios, executive vice president.
In Boston, the venture is building a new world headquarters for Nike Inc.’s Converse unit by renovating a historic mill building on the north waterfront. It is part of the firm’s $250 million Lovejoy Wharf project that also will include a new public wharf and a 200,000-square-foot (18,600-square-meter) residential building on which construction will begin next year.
“Leasing activity is overwhelming,” as a result of the upgraded infrastructure, Spellios said. “Maybe 12 million square feet is under development in Boston, and it wouldn’t surprise me to know that more than half of it is sitting in areas that benefited directly from the Big Dig.”
As with Boston, “part of the vibrancy of Seattle is its location on the waterfront,” Spellios said. The development that Related Beal is considering would encompass offices and residences near the waterfront and would be the company’s first in that city, he said.
Unico Properties LLC, a downtown Seattle office landlord, in May paid about $31 million for a six-story building at 51 University St. next to the viaduct, more than double what the building sold for two years earlier.
“Redevelopment of the waterfront will deliver unobstructed views of Elliott Bay and improved access,” Unico said on its website. The seller of 51 University St. was Chicago-based apartment landlord Equity Residential, which had bought the building for $11.8 million in 2011.
Lease Crutcher Lewis, one of Seattle’s largest construction companies, in June purchased a 50 percent stake in 2200 Western Ave., near the north end of the waterfront, that it plans to redevelop as its new headquarters by summer 2014. The purchase of the building, completed in 1910 as a stable to house horses that drew streetcars and fire engines, “gives us a chance to be connected to the waterfront redevelopment,” Chairman Bill Lewis said in a June statement.
“In terms of fundamentals and overall credit quality of the employment base in the Western United States, Seattle is higher than any other market I cover,” said CBRE’s Shannon, who has worked on transactions including the $480 million sale of Russell Investments Center, the former Washington Mutual Inc. headquarters, in April 2012. “It’s clearly gotten more popular.”