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Seattle Construction And Development: Demand Is Still Strong, But Developers Are Squeezed By Costs

At this point in the Seattle real estate cycle, the positives are still strong, according to the speakers at our Seattle Construction and Development event, such as high demand for office and residential space. But the negatives are strong as well, such as rising construction costs and public infrastructure that is not keeping up.

Seattle Construction And Development: Demand Is Still Strong, But Developers Are Squeezed By Costs
Cairncross & Hempelmann attorney Lindsey Pflugrath, who moderated, Downtown Seattle Association CEO Jon Scholes, Mack Urban Vice President T.J. Lehman and the Schuster Group Chairman Mark Schuster

The speakers on the downtown innovations panel were largely in agreement that the single biggest challenge facing development in Seattle is construction costs, which have been rising faster than rents for a number of years. The market needs more housing, and the demand is there, but it is getting harder to fill the pipeline. Land costs are a challenge as well. It is not clear whether costs will rise so high that construction will slow significantly, but it is possible over the next 12 months.

Also, and especially specific to Downtown, public infrastructure is not keeping up with with office and residential growth. There are no public schools Downtown, for instance, and the parks are aging, so the desirability of Downtown over the next 10 or 20 years is at risk, especially for people who want to start families but not move to the suburbs.

Population growth means there is not enough housing, Downtown or in other submarkets, the speakers said. Developers are ready to build, but land is constrained, and that zoning needs to change to free up more sites.

Seattle Construction And Development: Demand Is Still Strong, But Developers Are Squeezed By Costs
DCI Engineers President and Chief Operating Officer Roger Heeringa, who moderated, Wireless Information Networks Senior Technical Sales Manager Chukwuma Agba, Continental Properties President Claudio Guincher and Polaris Pacific Project Director Josh Nasvik

One factor keeping multifamily development strong locally is that foreign capital is still coming into Seattle, multifamily panel speakers said. There is a big push to get capital out of China. As long as that is the case, money will come here, because of the health of the local economy. Successful Chinese money is partnering with local developers, and helping provide the housing Seattle needs.

There was a pause among foreign investors right after the election, but it did not last long, and they are still eager to invest in Seattle.

Even though demand is strong, new apartments still need to attract tenants, speakers said. Technology in a residential building, such as high bandwidth and rock-solid cellular service, is important to support the live-work-play paradigm. Outside of tech, buildings need a good floor plan to attract not only millennials but also empty nesters.

A more communal environment is critical as well. Common spaces need to be attractive, because not all living is done between the four walls of an apartment anymore. 

Seattle Construction And Development: Demand Is Still Strong, But Developers Are Squeezed By Costs
CBRE First Vice President Dave Young, who moderated, GSA Senior Lease Contracting Officer James Coffelt, Panattoni Development Partner Bart Brynestad and Abbott Construction President and CEO Troy Stedman

One panel was devoted to the development of the 300K SF Federal Aviation Administration regional HQ in Des Moines, which will open next year. The FAA case study speakers stressed that federal procurement — in this case, a major office development for an important federal agency — is a process governed tightly by rules. It is complex and takes a lot of time, but deals do get done. 

The new FAA regional headquarters in Des Moines is a build-to-suit. The entire process took 10 years overall, starting and stopping for a variety of reasons. 

The process started in 2006, and because of the size of the project, needed congressional approval, which came a few years later. The agency went to market looking for 500K SF in 2010, and looked at a lot of sites. It paused for a while to better understand what it needed, and rightsize the project to 300K SF. The GSA worked with the FAA to reduce its real estate costs and increase its workplace efficiencies as part of a national initiative strategically integrating space, people and technology.

The FAA went back to market in 2014, releasing a request for lease proposal, and the process began again. Ultimately the GSA signed a new 20-year lease agreement with Panattoni Development Co. in partnership with MetLife on behalf of the FAA. The agency will occupy the five-story office space in the spring of 2018, which will provide workspace for about 1,600 people.

CollinsWoerman Seattle Architects designed the building, and Abbott Construction is building it. The structure is the second of three phases for The Des Moines Creek Business Park, an 87-acre property that will include flexible-use, manufacturing, office, distribution and industrial business park buildings. The FAA project is expected to complete all of Phase 2 of the business park.