Understanding Seattle Commercial Real Estate
Seattle Commercial Real Estate Asset Classes
Commercial real estate in Seattle is a very broad term. Like residential real estate, you can narrow down commercial properties by price or by neighborhood, but commercial real estate has additional categories often referred to as “asset class” or “property type.” A Wall Street investor will tell you an “asset class” is a group of financial instruments such as stock, bonds or even real estate. Thus, the argument is the subsets of real estate cannot also be asset classes. Nonetheless, Seattle commercial real estate brokers often use this term, so we will too. Seattle commercial real estate “Asset Class” includes the four main categories: retail, office, industrial, and multi-family. In addition, there are many others such as land, mixed-use, and business opportunities. We will look at these commercial real estate Seattle asset classes.
Retail real estate are properties where goods are sold to the public in small quantities for use or consumption. This includes boutique clothing shops to large regional malls. In addition, retail properties consists of service related business such as beauty salons or a dry cleaner. Furthermore, while some commercial real estate brokers consider restaurants a part of the ‘hospitality’ asset class, restaurants are often considered retail. This is especially the case since Seattle restaurants compete for the same storefronts/properties that retailers use. With the growing popularity of online shopping for retail goods, service related businesses have dominated the Seattle retail properties. For example, while you can buy shoes on Zappos you cannot buy a haircut on Amazon.
Common Retail Leases
In Seattle, a typical retail lease for a neighborhood shop or Seattle restaurant space is generally a five year lease with at least one 5-year option. In addition the leases are usually triple net leases (NNN). NNN leases means that the tenant pays for the property taxes, property insurance, and for common area maintenance (ex. janitorial for commons areas) if there is any. Thus, if the tenant leases 50% of the space they would pay for 50% of each of those charges. In addition, the tenant would pay for their share of utilities. Finally, in some cases, tenants would also pay a percentage of revenue over a base amount. This is more common for large retail properties like shopping malls.
Seattle is fortunate to have neighborhoods that have their own retail core areas. Ballard and Capitol Hill have large areas with plenty of Seattle retail spaces, but so do many Seattle neighborhoods. For example, Magnolia has the “Magnolia Village” or Madrona’s retail core centers around 34th and Union. In other areas, West Seattle has more than one “junction” with Seattle retail properties and Columbia City has its commercial retail core in South Seattle along Rainier Avenue.
Office properties can be a single tenant building or multi-tenant office buildings. Unlike retail leases, office lease, especially multi-tenant buildings, are gross leases. Gross leases are all often all-inclusive. This means that the tenant generally pays a higher flat rate, likely with yearly escalations, which incorporates all expenses including utilities and janitorial.
Belltown,, Downtown Seattle, and South Lake Union have the largest Seattle commercial office properties although Seattle office space is found in many neighborhoods. Downtown Bellevue also has large office buildings and has benefitted from Seattle’s employee head tax which has threatened to push large employers across Lake Washington. Downtown Bellevue and Seattle office buildings can be in excess of a million square feet in size. Suburban office buildings are usually smaller and sometimes grouped in office parks.
Commercial real estate can be classified as Class A, B, and C, but this terminology is generally most widely used locally in Seattle and Bellevue with office space. Class A are the most prestigious office buildings with high-quality finishes, state of the art systems and they compete for premier Bellevue and Seattle office space users. Class B office buildings rent in the average range with fair to good finishes. Finally, Class C office real estate has functional space for very competitive rates.
Industrial real estate equals properties used for industrial purposes. This asset class includes different types of properties including heavy industrial buildings, manufacturing facilities, warehouses, data hosting centers, cold storage buildings, research & development, and flex buildings. Most of these categories are self-explanatory. For example, manufacturing facilities are industrial commercial buildings used by companies to manufacture steel or products such as automobiles. These commercial facilities usually have areas to store raw materials to build the product as well as commercial space to store the finished goods. These commercial properties are often expensive to convert to other commercial uses.
Other industrial real estate categories may not be so apparent. For instance commercial flex spaces are a newer concept. This type of industrial commercial real estate has more than one use and can accommodate space for office, R&D, light manufacturing, etc. They are generally flexible and can be adjusted to fit the changing needs of businesses.
Seattle industrial space is more limited in locations than Seattle retail and Seattle office properties, but industrial real estate can be found in many Seattle neighborhoods. For example, Ballard industrial can be found close to the ship canal, but SODO and the Seattle Industrial District (pictured above) have the most industrial real estate in Seattle.
Multi-family is a property with more than one residential unit. Condominiums fit this definition, but are not considered multi-family since the units sell separately as single-family homes. In addition, if a multi-family building is four units or less (duplex, triplex, or four-plex) then financing is generally easier since they can qualify for conventional loans if the owner lives there. Multi-family, aka apartment buildings, of five units or more are considered commercial properties. Leases in most cases are one year which allows rents to be adjusted with the market, although Seattle apartments have strict laws that protect tenants for raising rents too aggressively.
Multi-family is the most abundant commercial real estate in Seattle. Almost all Seattle neighborhoods have Seattle apartment buildings. Seattle developers have built a ton of apartment buildings to keep up with the job market. Furthermore, condo law discourages Seattle condo buildings because their liability extended years after the building completion. Thus Seattle multi-family outpaced condos to meet the housing demand.
Commercial land includes anything zoned for commercial use. Seattle commercial real estate has several zoning categories. For example, NC stands for Neighborhood Commercial while C stands for Commercial. Beyond the differences in these designations, there are different levels for each categories. For example, there can be NC1, NC2, and NC3. The higher the number, the larger the building can be on the same size lots. In addition, Seattle recently passed a law which taxes the developer per square foot of what they build. The tax varies depends on the neighborhood.
Seattle commercial land is vast since it covers all the commercial property asset classes. Wherever you can build a Seattle retail space, a Seattle office building, a Seattle warehouse, or a Seattle apartment building it is a commercial land parcel.
Mixed-use is not really an Asset Class. It is when one property has more than one asset class. For example, a Seattle apartment building with retail on the ground floor is a mixed-used commercial building. Mixed-use properties are popular with many commercial real estate investors because it spreads the risk. Taking the example above, apartments are generally one year leases so can fluctuate quicker with the market, while retail leases generally are 5 year leases so owners can rely on them for longer periods. Furthermore, asset classes do not always follow the same ups and downs in the Seattle commercial real estate market. For instance, when COVID hit in 2020, most Seattle commercial real estate asset classes felt the pain, but apartments faired better than both office and retail properties in Greater Seattle.
One can find Seattle mixed-use buildings in the smallest Seattle neighborhood commercial districts to the largest buildings in Downtown Seattle.
A “Business Opportunity” is the sale or acquisition of a business. This includes either the existing business or the assets of the business. A good example of the latter is a franchise arrangement, including retail stores, automotive service businesses, restaurants and more. Like mixed-use, business opportunities are not a real estate asset class. Nevertheless, Washington State law requires that a person who represents another in a transaction regarding the lease, exchange, purchase, or sale of a business opportunity must have a real estate license when real estate is part of the transaction. Thus, we include business opportunities here. Furthermore, real estate is defined broadly to include leases; thus, an exchange of a business opportunity is very likely to need a commercial real estate broker.
One can find Seattle business opportunities throughout the city. For example, Seattle neighborhoods such as Queen Anne and Fremont, are just two examples of advantageous areas for business opportunities due to their heavy foot traffic and amount of nearby residences.
Where Can I Find A Seattle Commercial Real Estate Broker?
Each of these real estate asset classes have their own advantages and risks. Thus, it is best to diversify risk by investing in different commercial property asset class . To best do this investors should seek expert advice on Seattle commercial real estate properties. There are many Seattle real estate companies, but Ewing & Clark has been providing our city with real estate service since 1900. Feel free to reach out to Ewing and Clark or one of our Seattle real estate agent that knows the Seattle commercial real estate market. If you prefer, start today on our Greater Seattle commercial MLS search and let us know what you want to see.