Seattle Ordinance Paves Way for Conversion of Commercial Properties into Housing

According to the Puget Sound Business Journal, The Seattle City Council unanimously approved an ordinance to ease the conversion of office and commercial buildings into housing in specific zones, expediting development by exempting these projects from design review requirements. Estimated to create 1,000 to 2,000 housing units over seven years, the bill, which is part of Mayor Bruce Harrell's Downtown Activation Plan, allows permit applications before the law takes effect and mandates tracking project numbers. While developers gained many of their desired incentives, an exemption from the city's Mandatory Housing Affordability (MHA) requirements for downtown zones was removed, pending a review of MHA's performance. Councilmember Tanya Woo expressed optimism that the ordinance will help revitalize downtown by converting vacant buildings into housing.

Commentary from Brian Burmester, SMARTCAP's Director of Acquisitions

High-quality buildings with amenities are currently the most attractive to tenants. This trend is evident in the significant discrepancy in vacancy rates between Class A properties and the rest of the market. According to CoStar, Downtown Seattle's Class A buildings have a vacancy rate of 14.64%, compared to 23.84% for older buildings. As we progress through this office cycle, the gap in vacancy rates is expected to widen further. This underscores the importance of the recently passed bill in Seattle, which facilitates new capital investments aimed at repurposing older office buildings that are less desirable to future occupants. Additionally, Seattle faces a growing need for more housing options, and converting these outdated office buildings into new apartments could significantly help address this demand. 

Prologis to embark on $50MM redevelopment of industrial holding in port of tacoma

Prologis Inc. plans a redevelopment of one of its industrial buildings in the Port of Tacoma, according to documents filed with the city. The San Francisco-based real estate company submitted pre-application documents for the project, named Building 9, which involves replacing a 204,000-square-foot structure built in 1962. The redevelopment aims to meet the demand for modern, sustainable logistics facilities with port access. The project is in the early planning stages, with construction expected to start in November 2025. Prologis intends to support local businesses and the economy through this redevelopment.

Commentary from Dominic Vinti, SMARTCAP's Acquisitions Manager

Prologis is progressing toward the redevelopment of their Land Leased Property with The Port of Tacoma. The redevelopment of the "functionally obsolete building" is estimated to come in around $50MM.  The development is expected to start in November of 2025. The goal is to build a new state of the art logistics facility that will better accommodate the needs of users that need next door access to the Port of Tacoma. 

There are roughly 10.7MM SF of industrial product in the heart of the Port. Due to the scarcity of functional buildings to service the port's logistical functions there is a need for new industrial product in an A+ location. Since 2015, 2.6MM SF of industrial facilities have been delivered showing redevelopment of old and obsolete industrial facilities has been taking place for close to a decade. Prologis currently owns three other buildings inside the SR-509 loop, along with nearby Prologis Park Trans-Pacific & Prologis Park Tacoma.

puget sound industrial market shows signs of life

In the Industrial Advisors podcast linked above, Bill Condon and Matt McGregor review Q2 2024 in the Puget Sound industrial market. Despite a slow start with increased vacancies, they discuss the "slow churn" gaining momentum for a promising second half of the year.

Highlights from the podcast, according to SMARTCAP Acquisition Manager Spencer Esau:

• Market momentum is changing, and vacancy is ticking up at a slower pace, but it is still up in all submarkets (-1.3MM absorption in first half of 2024)
  • Pointing out that Colliers numbers don’t match up with Costar (+250,000 absorption) is noteworthy, as Colliers moved to an accrued vacancy metric (mark from when deal is signed vs. when occupied).
• Properties under 25,000 sq ft that boast docks are still the darling of the market. This size segment may begin to tighten again by the end of 2024.
• The highest vacancy rate is seen in the big box sector at 9.6%, but this is about to drop. A few whales are about to sign, which will bring that number down and shift the highest vacancy range to 100k sq ft to 200k sq ft (currently 9.2%).
• The 1MM-sq ft Milton Building is close to signing, and Soundview is in the process of signing Boeing. With just these deals, we’re looking at net positive absorption of 700,000 sq ft for the next few quarters.
• There will be far more trades in second half of 2024, and investor demand will be centered on newer Class A buildings with shorter weighted average lease terms. However, a growing demand for stability is evident for the first time in years. There have been twenty-five transactions year to date, which is far better than what the market has seen lately. That said, 14 of those sales were owner user and, interestingly, were cash. In last owner-user boom (2005 to 2008), most deals heavily utilized financing.
  • Expect investors to begin outpacing users in the second half, though Condon and McGregor disagreed on how exactly this will play out – McGregor thinks it will be 50/50.