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December 4, 2020
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Seattle Retail Market Slowed by Covid, but Doing Well Relative to the Nation as a Whole


This report was provided by real estate services firm Kidder Mathews

3rd Quarter 2020

The third quarter is marked by the gradual re-opening of businesses as different areas progress in meeting health standards. Covid-19 is persistent, but Washington has done well relative to the nation as a whole.


In the third quarter, the direct vacancy rate increased 24 basis points to 2.93%. King County saw the largest vacancy increase, going from 2.53% in the 2nd quarter to 2.91% in the 3rd quarter, an increase of 38 basis points. Pierce County vacancy increased by 33 basis points. Total available space (total vacant as well as occupied but available) increased 15 basis points from 3.18% to 3.33%. The Covid-19 impact on vacancy will continue to be felt through the remainder of 2020 and likely well into 2021. Vacancy is expected to rise significantly. In the last recession, vacancy increased from 3.8% to 5.9%. The most significant pullback so far is 24 Hour Fitness, which closed seven stores in the region.


Rent growth was 3.2% year over year in the third quarter 2020, however, that growth is not fully impacted by Covid-19. The Covid-19 impact will increase vacancy and decrease rents. Costar is projecting a 3% to 4% decline by early 2021 before seeing a recovery start. In the last recession, average asking rents decreased from 25%. In addition, concessions (free rent and TIs) increased.

Lessors are working with tenants through Covid-19 in some combination of rent relief, rent deferral and lease restructuring. Owners are seeing 40% to 60% of tenants seeking rent relief. Negotiating these amendments is a case by case basis, but by the end of the 2nd quarter, a trend had developed for typical rent deferral being two to four months of base rent to be paid back in six to 12 months starting in 2021. Tenants are typically required to keep paying NNN recoveries.

For some tenants that owners want to keep but who are struggling (e.g. fitness), lessors are providing abatement instead of deferral. We have seen cases where term was added or where tenants exercised options to extend in exchange for relief. Rent collections were 50% to 60% of contract in April but improved in the third quarter.


Retail development activity is moderately slowing as developers and tenants gauge the Covid-19 impact. Smaller scale developments are more prevalent - whether it is build-to-suits for single tenants or smaller buildings built for two or three expanding tenants.


Net absorption was positive pre-Covid. As expected, absorption turned negative, at over 500k sf in the 2nd and 3rd quarters, leading to the increased vacancy rate. On the positive side, expect to see Amazon taking spaces for food stores and larger Amazon Go formats. On the negative side, there will likely be continuing closures of full-service restaurants, especially in locations dependent on daytime employment. Apparel retailers, particularly department stores, are struggling.


Cap rates for single tenant properties for businesses not impacted by Covid (e.g. fast food, drugstores, food stores) remain low due to strong investor demand. Cap rates have increased for B and C quality centers. The PwC Investor survey shows a year over year increase in cap rates of 75 basis points for malls and 41 basis points for power centers. The average cap rate for strip centers, which includes daily needs anchored centers, is up 7 basis points. Regional sales activity has slowed in 2020.

In the 3rd quarter, there were 29 sales of retail properties of $2 mil or more in the Puget Sound region. Seven of these are covered land plays or redevelopments. Of the 22 remaining, three are owner-user purchases. For 36 retail investor purchases in Washington and Oregon in the 3rd quarter, cap rates ranged from 4.50% to 9.16%, but only two were above 7.00%. Six of the 36 sales are multitenant, while 30 are single-tenant properties. Most of the single-tenant sales had eight years or more of remaining lease term.


ANDY ROBINSON, MAI Managing Director, Shareholder Valuation Advisory Services, Kidder Mathews

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