Seattle: Now A Global City, But With Plenty Of Challenges Ahead
Seattle has evolved into one of the country's major growth markets, but now the city has to deal with the various headaches of success, according to the speakers at our Seattle Forecast event. The most salient challenges involve continuing to attract talent to the city, and keeping the city affordable to lower- and middle-income residents.
Pine Street Group principal Matt Griffin kicked off the event, talking about Seattle in the next 20 years, rather than a short-term outlook. He asked attendees to remember what 6th and Pine was like in 1994: boarded up. Now it is one of the better corners in Downtown, through the efforts of far-sighted people like Norm Rice and Rick Redman and the Nordstrom family and others, Griffin said. Now we have to ask, what kind future do we want?
Companies are locating more people in Downtown Seattle, the better to keep their talent, he said. That is the kind of environment Seattle needs to foster: one that is attractive to talent. With that in mind, Griffin listed some of the challenges the city faces.
For instance, Seattle needs to do more about traffic, but there has been progress in transit so far, and Downtown's population growth has not brought in as many cars as feared. Also, the city needs more open space, and is getting that on the waterfront. Affordability will be a drag on growth, but it will not stop the engine.
But what happens to young workers when they start to raise families? Talent is the driving engine for the economy and keeping real estate healthy, and these young workers are going to start families like the generations before them, though maybe a little later in life. Public schools are the Achilles' heel of the city, Griffin said. It will not be fixed easily.
Seattle is lagging behind other parts of the region, and if the city does not fix the education system over the long run, talent will not be attracted to Seattle over the next 10 to 20 years as it is now, Griffin said, and the companies who hire them will not follow.
Ten-X vice president Thatcher Milholland said the health of the Seattle commercial real estate market, which has done so well with the expansion of tech industries, will continue to depend on that expansion in the near term. That is especially true with the sizable development of new space in recent years. If the current up cycle persists, the market will absorb the new supply, but if not, commercial real estate will have a down cycle as well.
The speakers on our Development and Regulation panel were decidedly not in agreement about some things, especially what to do about the problem of affordable housing in Seattle. The topic is especially timely — the city council approved an upzone for the University District that will, among other things, allow taller buildings in the neighborhood. The measure is the first upzone to trigger a new requirement that developers include affordable apartments in their projects, or pay into a fund to help develop them elsewhere.
Smart Growth Seattle director Roger Valdez, whose organization advocates for higher urban density and other measures, said the affordability crisis is self-imposed through regulation and would be ameliorated through density. Without more density, he said, prices will continue to rise, which will lead to more regulation. "If Seattle isn't careful, it will enter a Bay Area-like death spiral," he said.
Billionaire developer Martin Selig also criticized some of the city's approach to zoning, especially regarding residential development. He also had a pithy introduction for himself: "I'm an immigrant to this country, and the rest is history."
City of Seattle council member Rob Johnson offered a spirited defense of the city's approach to affordability, including the Mandatory Housing Affordability program, which requires new development to pay into a fund for affordable housing, with the amount depending on the cost of construction in the neighborhood and the rate of displacement.
Low- and middle-income households are important to the social fabric of the city, Johnson said, and thoughtful regulation is necessary to prevent them from being displaced. Supply isn't the only answer, he said. "It's a hell of a hard job. We're fighting like hell to find the right solution, and not let everyone that's poor and middle class move out of the city."
Seattle has been a focus of commercial property investment by foreign entities in recent years, with trophy properties in particular selling to international investors, according to the speakers on the overseas investment panel. Seattle has attracted the world's attention, and companies are coming to be near Amazon, Microsoft and Boeing, and the talent they represent. Seattle also has strong fundamentals, with a diversified economy — more than previously appreciated, with a lower cost of living than San Francisco. All of these are factors in attracting capital.
Pension-like funds are diversifying beyond their domestic markets looking for returns, and the U.S. is still the preferred destination. Core real estate in the principal markets has benefited from that movement of capital, but as those opportunities decline, there will be niche strategies, and some investment in non-core markets.
Offshore capital has been coming here for a number of decades, but the pace has picked up recently. There has been about $5B in direct equity investment in Seattle in the last two years. Overseas investors like condos and hotels here especially, and also office, though that property type is harder to get the returns from.