‘Placemaking in Tacoma’: Economic Drivers Shaping the City

The Registry Puget Sound Estate

Posted In — News & Press | In the News
Tacoma WA

“There’s over $1 billion of investment in the downtown area…you can see three cranes from I-5 in downtown Tacoma, which we haven’t seen before. The last crane we saw was when the Columbia Bank Building was constructed around 20 years ago,” said Will Frame, vice president with Kidder Mathews‘ Tacoma office. “The majority of this investment in downtown is multifamily, which is bringing bodies downtown, which brings retail, which then brings density and office product, as well.”
Tacoma, a city south of Seattle on the southern edge of Commencement Bay, is a city on the move: an increasingly active multifamily market, a commercial market characterized by decreasing vacancy rates and increasing rental rates, and an extremely tight industrial market are all factors increasing the appeal and subsequent investment in downtown Tacoma, the Port of Tacoma and the surrounding areas of the city.
Investment activity in downtown Tacoma, in particular, has in large part been driven by a confluence of factors occurring simultaneously in the downtown core, according to Gloria Fletcher, business development manager with the city of Tacoma. “There are a lot of things happening here…one is the affordability, which started with residential. People up north are looking at Tacoma and the perception is slowly changing as far as how it used to be,” Fletcher said. “We’re trying to leverage that; the next step is providing people a place to work, so that they aren’t having to commute two hours a day to their jobs,” she said.
In recent years, one of the factors that has driven investment in the city’s downtown core was the decision of the University of Washington to settle in Tacoma, according to Fletcher.
“I think the decision of UW to locate downtown was certainly a driver, which happened over 20 years ago,” she said. UW Tacoma opened its doors in 1990 to a class of 187 students and was established by the state legislature to help meet the wider regional demand for more 4-year degree opportunities, according to the institution’s web site.
Kim Bedier, acting director with the city of Tacoma’s office of community and economic development, emphasized how much of the activity in the downtown core was impacted by the influence of longer-term influence of UW Tacoma. “Everything UW Tacoma has done on their campus has been a catalyst for other development around it,” Bedier said.
And while historically UW Tacoma has been playing a role in this evolution, other developments in recent years have continued to shape the landscape of the city, according to Fletcher. “The most influential timeline has been over the last 2 to 3 years, with the city sites becoming available for development: the Town Center, the Convention Center and Hotel were catalytic,” she said. In early August 2017, Yareton Investment and Management LLC broke ground on a hotel adjacent to the Tacoma Convention Center-located at 1500 Commerce St.-which will bring a 22-story, 300-room structure in the hopes of attracting larger gatherings to the city’s convention center.
Further afield, foreign investment is occurring in Tacoma and spurring growth in the downtown core. The Convention Center Hotel project is being developed by Shanghai, China-based investment firm Mintong Real Estate Co. Ltd. (MIG). Conducted without public subsidy, the $85 million project is the largest privately-funded development in downtown Tacoma in the city’s history and is one of the first major foreign direct investments in a commercial project on publicly-owned land in Tacoma, according to the city’s web site. The project, estimated to cost approximately $150 million in total, will be completed in two phases: the first phase involves the construction of a 300-room hotel with a 10,000 square foot grand ballroom, retail and other functions, while the second phase, expected to cost $65 million, will bring a project with 200 apartments/condos and associated retail once the hotel is operational. The project is expected to draw on the existing Tacoma Convention Center and is expected to generate approximately 1,000 construction jobs and 200 full-time hotel-related jobs.
On the heels of the first phase of the large-scale hotel project, North America Asset Management Group LLC in October 2017 broke ground on the EB-5 Town Center Project in the heart of the city’s brewery district. The $125 million project, located along Jefferson Avenue from 21st-23rd Streets, will bring 600 residential units, up to 200,000 square feet of retail space and at least 50,000 square feet of office space over the next three to five years, according to the web site for the project.
In addition to the Town Center and Hotel Convention Center developments, significant activity is occurring in the healthcare sector as well, according to Fletcher. “There is a lot of healthcare activity happening as well. There’s a planned expansion for Multicare Behavioral Health facility, and there’s also an expansion of the technical colleges and expanding workforce training in the healthcare field,” she said.
Additionally, on the retail and restaurant front, Tacoma is increasingly viewed as an attractive proposition for prospective tenants looking to locate in the city’s downtown core, according to Bedier. “We’re seeing a lot of relocations and openings of satellites of restaurants that were traditionally only located in Seattle. So, I think people are finally recognizing that Tacoma is a great place to live and to work,” she said. “Eighteen months to 24 months ago is when we really saw the tipping point in our community; that’s when a lot of those projects got underway, and now they’re starting to open.” said.
And as investment in Tacoma continues to occur in the retail, hotel and residential sectors, people are beginning to view the city as a viable housing option in relation to Seattle further north, according to Bedier. “We’re really feeling the compression of Seattle in that people can’t really afford to live there, but they can still [afford to] live here,” she said, adding that one of the challenges the city is currently facing is how to keep people in Tacoma for the longer term. “We’ve got a lot of talent here, but a high percentage of it is still leaving town to go to work. We would obviously want to shift that equation and make sure that they can live and work in this community…if Seattle is driving business our way, that’s great, we’ll take it.”
Similarly to the investment activity in Seattle, which is affected by rising costs, in Tacoma, the commercial market is experiencing a sustained period of growth. According to Frame of Kidder Mathews, the vacancy rate in downtown Tacoma averages around 6.5 percent, while average commercial rents are also on the rise.
And activity in Tacoma’s commercial market has been highlighted by a number of recent sales in the region. On June 20th, an office building adjacent to the Tacoma Mall sold for $16.55 million, or approximately $143 per square foot, when M & M Tacoma Investments IV LLC acquired the property from Transpacific Investments LLC. Also on June 20th, Heritage Bank acquired a 76,828 square foot medical office building in Tacoma from Gig Harbor, Washington-based The Rush Companies for $11.625 million, or approximately $151 per square foot. And Frame thinks that Heritage Bank’s acquisition of the property signals that Tacoma represents an increasingly appealing option for larger companies. “[The sale] indicates to me that a $5 billion company [Heritage Bank] decided to locate their headquarters in Pierce County in Tacoma, and they’re doing that to please their employees. They’re factoring in growth and pulling employees…companies are buying off on Tacoma as a long-term plan,” he said.
Over the last couple of years, the office market in downtown Tacoma is on the rise, due in part to the sustained action occurring in cities further north. “In the last 18 months to 2 years, the downtown market has outperformed the suburban market in terms of rent-growth and tenant activity…Seattle and Bellevue are performing the best they have historically, so these companies are leasing satellite offices or relocating and expanding into Tacoma,” he said. In another example of a company looking to settle in Tacoma, biotechnology and pharmaceutical company Econet Inc. sold a 109,347 square foot office/medical building in downtown Seattle for $21.5 million-and has since opened a 20,000 square foot lab in suburban Tacoma at 19th and State Street, according to Frame.
In the longer term, Frame thinks that Tacoma’s office market will continue to grow and expand due to the increasing prevalence of technology companies in the city. “Downtown Tacoma is reaping the benefits, because when people are looking at Seattle and Bellevue…they like the flash, but still want to be in downtown Tacoma, which is the next best option,” he said. According to Frame, InfoBlox was the only tech company in downtown Tacoma active in the market over the last five years. However, by the middle of 2019, there will be five technology companies occupying commercial space in Tacoma. The favorable rental rates in Tacoma, relative to rates further north, mean that Tacoma will continue to represent an appealing prospect, according to Frame. “Investors can get into this market for less than $200/foot, where Seattle is now approaching $1,000 per foot for investment properties,” he said.
Another trend that characterizes the Tacoma office market is that potential investors are looking to redevelop the available office product with a view to staying longer-term in the market.
“There’s a lot of redevelopment of product. Right now, there are Class B/C office buildings in great locations…but they are 20 to 30 years old in terms of exterior finishes,” Frame said. “Value-add investors are coming in and purchasing these for around $100 per foot, completely renovating the building and going out to the market to aggressively pursue tenants,” he said. According to Frame, 75 percent of the Class B office buildings in the Tacoma area have been renovated over the last two years as investors pursue Class A-level tenants.
“Our exponential and rapid growth would be like a snail compared to Seattle or Bellevue. But it is growth when the majority of the market has been stagnant over the last few years. We’re seeing 6 percent rent growth per year, which is double really what it has been in the previous ten years,” Frame added.
The multifamily market in Tacoma is increasingly influenced by the rising cost of living and activity in the Seattle market, according to Austin Kelley, a member of Kidder Mathews‘ multifamily team in Tacoma. “In terms of multifamily in Tacoma downtown, where the market is the hottest, what we’ve seen is that when you’re one or two bubbles outside of the Seattle market, you are greatly affected by what happens inside that market,” he said. Kelley added how the restrictive cost of living in downtown Seattle over the last several years means that Tacoma is an increasingly appealing option for millennials looking to settle in Tacoma. “There’s a bit of a concession war in downtown Seattle, where there are 4- and 5-star apartments being finished at the same time…landlords are having trouble for the first time since 2012 filling up their vacancies just to get these leases signed.”
The high cost of living in Seattle means that millennials, among other demographics, are looking further south as a result. “People get pushed down to the Tacoma market, and things are moving fast here. For the first time pretty much in the history of Tacoma, there are rents over $3 per square foot for apartments in the downtown area,” Kelley said. According to the city’s web site, there are over 1,200 new multifamily units under construction or being planned for delivery in downtown Tacoma.
Looking ahead, Kelley does not predict growth in the multifamily market to slow anytime soon, as demand for multifamily properties-especially in the city’s Stadium District-continues. “There aren’t really many signs of things slowing too much. I would look at this market with a pretty optimistic eye. Some people are looking at where the end of the road [has been] since 2012…and while I think it’s true that construction costs and interest rates are on the rise, properties in Tacoma are still trading for record prices,” he said.
In the broader context of growth in Tacoma, Kelley thinks that the time is right for the city to capitalize on the growth that in order to continue fostering its individual identity in relation to neighboring cities like Seattle. “This is a time for Tacoma to jump on this development train and really take steps forward and become its own [city] rather than just a Seattle suburb, [to become] an attractive place where people can live less expensively than in Seattle [and] with similar amenities,” he said. In the longer-term, Kelley predicts that rents will eventually begin flattening out, even in the face of increasing demand. “At a certain point, rents can only go so high; I do see them flattening out or increasing by smaller percentages on an annual basis,” he said.
Another perspective on the implications of the red-hot housing market in Tacoma is that the current high demand signals worrying implications about the lack of available inventory in the city, according to Tyler Stanek, associate vice president in Kidder Mathews‘ Tacoma multifamily office, who emphasized that supply in the multifamily market is still struggling to keep up with demand. “There’s a fair amount of the market that is still kind of catching up. There’s no housing, and apartments are fully-occupied. Tacoma has been and continues to be very affordable in the Puget Sound region,” Stanek said. “But cap rates have been historically low; they’ve almost either stayed the same or even lower, so it’s been a bit of a challenging situation for buyers. I don’t think supply will keep up with demand in the short-term,” he said.
Given the rising rents in Tacoma, Stanek thinks that more work needs to be done by city municipalities to resolve the rising issues of housing affordability in the city and across the region. “There’s a huge need for affordable housing and also housing in general. I think the municipalities need to get together to figure out how it can become an easier process for development,” he said. “Because in the end, the consumer gets hurt, and I think that’s what’s affecting a lot of these renters; they’re having to move further and further out, because there just isn’t enough available inventory.”
In the wider context of investment activity in Tacoma, Stanek thinks that not enough is done when an inordinate amount of focus is paid to Seattle at the expense of its neighbor further south. “We’re never going to feel the [affordability concerns] like Seattle, but there’s definitely some concern. With the changes and gentrification, we’re seeing some neighborhoods turn over where they used to be affordable,” he said. “With the lag of investment down in Tacoma and the rental increases…It’s all been focused more on Seattle where the Chinese money has hit hard…but it hasn’t his Pierce County as much yet.”
The lack of available inventory in the city means more needs to be done to change the permitting process to entice developers to build more in the city, according to Stanek. “I think we’ll maybe see Tacoma talk about rent control, but I don’t think that’s the way to go about it at all. That deters investors. The way to do it is to make the permitting process easier to entice developers to come down,” Stanek said. He believes the city of Tacoma could learn something the city of Seattle to the north, which is impacted by a housing permitting process that doesn’t adequately allow supply to keep up with demand in the longer term. “One of the challenges with Seattle is that you start the process of building an apartment building, and it won’t be done for four years. That’s just brutal, especially at a time when we need housing quickly. That’s not good for anybody, either the developer, the end-user or the city,” he said. “Tacoma has been good at creating tax incentives in the past but [needs to] increase those opportunities. Tacoma Housing Authority has done a great job.”
Along with the constrained housing market-which is characterized by high demand and low inventory-the industrial market in Tacoma, too, according to Matt McGregor, senior vice president in Colliers International’s Seattle office. “It’s definitely a very tight industrial market; there’s not a lot of product coming online based on what’s been leased [in Tacoma],” he said.
“It’s very difficult to find large pieces of land to do anything of significance with; that’s why we’re seeing the push down south.” As a result, some developers are pursuing speculative and built-to-suit development projects in areas like Fredericksen-roughly 14 miles south of Tacoma-and Lacey.
McGregor thinks that the lack of available industrial inventory will continue beyond 12 to 18 months, with the land that is available comprising a challenging prospect for prospective developments. “The few large land parcels that we have remaining that would service the Port of Tacoma are really just very difficult to entitle, whether because of legal action, access issues and massive outright expenses to entitle them,” he said. “At this point in the cycle, there’s a historic land grab going on right now between developers,” he said.
The current industrial product in the pipeline in Tacoma includes Portside 55 Buildings A &C-a two-part project comprising 375,460 square feet scheduled for delivery between third and fourth quarter 2018-and DCT Industrial’s Blair Logistics Center Buildings A & B, a 961,000 square foot development also scheduled for delivery towards the end of this year.
In spite of the current lack of available inventory, McGregor predicts that the Port of Tacoma will continue to encourage activity in the industrial market in the region. “No question, Tacoma has become the most viable port here; it’s the most active port in the U.S., and the future is there with the overall capacity of the port and availability of land,” he said. At the Prologis Park Tacoma-an 80-acre industrial warehouse development located at the Port of Tacoma-for example, there is currently 317,040 square feet of space available for lease, according to Prologis’ web site.
And even though the industrial market is relatively constrained for space, it has been active over the last couple of months. On April 12th, 2018 NKF Capital Markets completed the sale of the Fife I-5 Commerce Center-a newly-developed, 250,490 square foot industrial distribution facility near the Port of Tacoma that is fully leased to Associated Materials Inc.-on behalf of the seller, a joint venture between Trammell Crow Company and the Carlyle Group. As another recent example of activity near the water, CenterPoint Properties on June 4th acquired 13.9 acres adjacent to the Port for $16.7 million, and the company plans to reposition the site as a best-in-class container storage facility.
And the advantageous geographical location of Tacoma will continue to play a role moving forward. “The warehouse/production labor pool in Tacoma is more favorable from a logistics and transportation perspective than Seattle. So, Tacoma is definitely seen as our core industrial market area now, as opposed to years ago when focus was on the Kent Valley and Seattle,” he said.
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