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February 06, 2015

Region rises as place where institutions need to invest

Puget Sound Business Journal

Jason Bacaj

Institutional investors have taken notice of Seattle's diversifying economy and positioned themselves as drivers of the area's industrial real estate market.

Investment from such entities as Morgan Stanley has pushed Seattle's industrial sector to become the second-most promising in the country, according to the Emerging Trends in Real Estate 2015 report by nonprofit research group Urban Land Institute and global accounting firm PwC.

The report, based on surveys and interviews of more than 1,400 investors, developers and other real estate professionals, shows that when asked if investors would buy, sell or hold their warehouses, distribution centers and manufacturing facilities, more than 50 percent would buy those property types.

Local experts attribute the attraction to the area's warehouses and industrial properties to the city's robust and diversifying economy and the need to deliver goods on same-day and next-day time tables. They are cautiously optimistic about the market's long-term promise.

The value of industrial properties began to rise after 2010 when the overall economy emerged from the trough of the Great Recession, said Brian Bruininks, partner with the Andover Co.

Around that time companies with pent up cash held during the economic squeeze started to look for ways to put that money to work. Many of those buyers weren't organizations that needed to take on big portfolios to get into the market, he explained, but rather those who looked to step into a number of projects with the knowledge that a collection of properties could build value over time.

"As the herd goes, once somebody put their toe in the water everybody else was in," Bruininks said. "Development happened sooner than anyone could have predicted in large part because of the institutional money."

Also driving the interest in the greater Seattle area is that the region is constrained geographically by water and mountains, said Tony Miltenberger, office and industrial properties broker with Kidder Mathews.

"It's not like you can keep expanding and expanding," he said.

He believes that institutional investors push markets in a parallel course with the inexorable pace of the overall economy. With the general trend increasing, he advises local industrial tenants to lock in a long-term lease now.

"If you're a local landlord you might get a guy who says, 'I like Joe Bob and his business, he pays on time, he's never missed a payment, I just like him in there,'" Miltenberger said. "The institutional guys they look at it and say, 'Hey I have other people that I answer to.'"

Miltenberger added that more investors are regularly entering the market.

"You still have people coming in wanting to deploy money here. And then we're also seeing tenants that, you know, there was a time where if they had a few locations they were consolidating into one or two. These guys are now spending money," he said. "They've been limping along with whatever for long enough, so they're like hey for us to remain competitive we need to spend the resources now to keep going."

Businesses may have to maneuver quickly around the commercial real estate market for long-term competitive success if the alliance formed this fall between the ports of Seattle and Tacoma fulfills its lofty goals. Both Bruininks and Miltenberger believe the alliance could drive an increase in the volume of business and goods moving through the area.

It won't happen overnight, Bruininks said, and time will tell if the partnership pays off or is simply a superficial pairing.

"Everyone can get excited about the fact that they announced it, (but) the next five to 10 years... are really going to speak volumes about how effective those guys are at working together," Bruininks said.

What he expects will impact the overall stability in Seattle area commercial real estate more than the Seaport Alliance is the continued impact of the recession.

It was a painful way to cleanse the area of marginally capitalized businesses. But businesses with stronger credit stepped up to replace those more leveraged companies, easing fears of those who work in real estate.

"We're finally starting to see a true recovery from the small to medium sized companies, which is a good sign that the (market is experiencing) an upward trend that isn't fleeting," Bruininks said. "Hopefully that is going to create more stability in real estate as well."

For the full story, go to Puget Sound Business Journal.

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