Pacific North Best: Why It’s Raining Dollars in Seattle


“It rains nine months of the year in Seattle!” proclaimed David Hyde Pierce’s character in the movie “Sleepless in Seattle.”

“I KNOW!” Meg Ryan’s character, who lives in Baltimore, replied.

SEE ALSO: CMBS Delinquency Rate Drops in January

But a few drops of pesky precipitation didn’t stop her from crossing the country to meet Tom Hanks, and it hasn’t stopped a deluge of investment and lending activity in the Emerald City, either. 

“Seattle has become, I would say, a top-five market,” Christopher Moyer, a managing director at Cushman & Wakefield, said. “A lot of investors are targeting it at this point, and it’s become much easier to explain the dynamics of the local market to them.”

Seattle has long been known as the market turbo-charged by Microsoft and Amazon and fueled by Starbucks. In recent years it has also attracted other tech titans including Facebook, Google and Apple to its neighborhoods, and with them, a myriad of eager investors both domestic and foreign. 

Case in point, Moyer and his C&W team just arranged a $450 million construction loan for First Light, a 47-story luxury condo tower in Downtown Seattle, with an international twist. The developer is Vancouver-based Westbank, and the lender is London-based firm The Children’s Investment Fund. 

Seattle is one of four core cities Westbank has chosen as an area of focus, along with Vancouver, Toronto and Tokyo. “We’ve been drawn to Seattle because we see an opportunity to contribute positively at a pivotal moment in the city’s build-out. We have three projects currently under development, including the residential tower First Light, and we’re continuing to explore opportunities,” Westbank’s Ian Duke told CO. 

Perhaps understandably, from a proximity perspective — Vancouver, for example, is a mere 45-minute seaplane ride away — Canadian lenders and investors are the most active foreign capital sources in Seattle, Moyer said. “I think for the Canadians it’s a very easy sell to come down to Seattle.” 

Moyer negotiated a similar-sized financing in Bellevue, which sits across Lake Washington, in 2015, a $526 million construction-to-permanent loan for Kemper Development’s Lincoln Square Expansion project. The debt — a gargantuan financing for the market at the time —  was ultimately provided by the Canada Pension Plan Investment Board, but the marketing of that deal was a trickier process back then. 

“It was one of the largest loans in the market,” Moyer said of the deal. “And for that reason, we took it mostly to international lenders. Large offshore lenders — just like the Children’s Investment Fund, in the case of this recent condo project — have larger balance sheets to handle these types of deals, and if they’re coming all the way to Seattle to do a deal, they’re going to do a big deal.” 

The team did a lot of the marketing of the Lincoln Square transaction in the Middle East and in Asia: “It was interesting when we were making the presentation because it was kind of like: ‘Here’s a map of the U.S. Here’s San Francisco. Here’s Seattle relative to San Francisco and L.A.,’ because everybody knows San Francisco and L.A. But even five years ago, it was hard to explain to foreign investors what Seattle was. And the deal we did was in Bellevue. So it was like: ‘Okay, here’s Seattle. And we’re asking you to put money into a small city across the lake from Seattle, which you may or may not have heard of.’ ”

How times have changed for that small city across the lake — the third largest in the Seattle metropolitan area — now a firmly established, booming tech hub. Amazon opened its first Bellevue office in 2017 and — despite the company’s reported clashes with city officials over taxes as well as its giant corporate footprint — shows no sign of retreating. The Seattle Times first reported news of the 1-million-square-foot, 43-story skyscraper the e-commerce giant is planning at 600 Bellevue. The development plants a stake in the ground that seemingly underscores Amazon’s sights being set on Bellevue as a city to house its future growth.

“Amazon’s behavior in Seattle has been interesting, being the behemoth in Seattle that it is and then hitting the pause button,” Warren de Haan, a founder and managing director of ACORE Capital, said. “Amazon has expanded in Bellevue, but I’d say the focus is really coming off of Amazon today and going more towards Facebook, Apple, Google, biotech companies and all the ancillary service providers. That’s what’s been pushing the rental rate.”

Pushing the rental rate, and also attracting eager lenders and investors by the plane-load. 

“We’re very bullish on Seattle from a lending perspective and we have several loans on our books in the Seattle MSA,” Charlie Rose, a managing director of structured investments at Invesco Real Estate, said. “We like Bellevue, and we continue to like the [central business district] up to South Lake Union; it benefits from the best transit access in the market and truly is a live-work-play, walkable environment that is consistent with what tenants are seeking these days.”

Rose cited strong fundamentals across the majority of product types, total returns historically outperforming in the Seattle market, and the benefit of supply constraints resulting in continued strong year-over-year rent growth as being key draws for lenders.

Invesco recently lent $190 million to refinance two newly built multifamily properties in South Lake Union, a tech and biotech hub north of downtown and on the southern tip of Lake Union. Invesco has also invested in the Redmond market, a Seattle suburb historically dominated by Microsoft, the other gargantuan tech player in Seattle which has lent the city so much heft since it opened up shop in the late 1970s. 

“Microsoft has been growing and driving office, residential and hospitality demand in that market and we’ve also seen other tech tenants starting to move into that market to be proximate to the talent that is already there as a result of Microsoft’s presence,” Rose said. 

But it’s not only the tech behemoths that are driving Seattle’s success.

“Whenever I see the list of rapidly growing smaller companies or the number of new venture-backed companies in Seattle, I’m just absolutely blown away by the numbers and the breadth of the market,” Joseph Schocken, the founder and president of Seattle-based Broadmark Capital, said. “Yes, for sure it is recognized that there’s a major Amazon effect, but I think what is not generally recognized is the large number of second-tier technology companies aggressively building major bases here. Seattle does not get recognized for that next generation of companies in development.” 

Schocken sits on Mayor Jenny Durkan’s task force for trying to create middle-class housing in Seattle, a pressing task given that there’s been a roughly 26 percent increase in the number of jobs over the past five years and only a 13 percent increase in the number of housing units available.

“That describes a very challenging housing market,” he said. “In Seattle, like in all rapidly growing metropolitan areas, there is a very meaningful shortage of affordable housing. So, whether that is middle class, working families, or even people below the average median income, there’s just an enormous shortage of housing and people are being pushed further and further away from the center of Seattle. It’s a rapidly changing market and there’s meaningfully rising tension around the issue.”

According to a C&W Seattle CBD market report, the Puget Sound region continued to see high rates of investment, job activity and construction throughout the third quarter of 2019. Nearly 63,000 new jobs were added, the unemployment rate held steady at 3.7 percent and investment dollars topped a cool $1.1 billion. Each of the office projects delivered this year were pre-leased to tech tenants, the report notes: Arbor Blocks, to Facebook; Lakefront Blocks, to Google; and The Atrium, to multiple biotech firms.

Rent, accordingly, is on the rise, with Class A properties fetching in the mid-$60s per square foot. Further, almost a quarter of the leases signed in 2019 exceeded more than 25,000 square feet, per the C&W report. 

One of the things that’s particularly attractive about Seattle is that it provides “a hip, very high quality of living,” de Haan said. “It has a burgeoning art and food culture that has expanded significantly; it has the water, which is a great amenity; it’s got the mountains around it; and there’s no state taxes there. So, there are lots of very high-quality reasons for people to be in Seattle.” Further, the top employers view the Seattle employee base as being well educated and skewed towards a more millennial orientation.

“In order for them to access the employee base they’re seeking, they need to have a big presence in Seattle,” de Haan said.

“We’ve seen continued strength on the demand side, meaning more and more demand for tenant space from a more diversified tenant base,” de Haan continued. “However — and there is one however in here — as a percentage of the total space being consumed, it definitely is tech heavy. That’s driven by that by the strength of the technology market to a large degree, but it is also a risk.”

Natixis, another active lender in the Seattle MSA, has racked up more than $700 million in primarily office originations over the past few years, Michael Magner, the head of U.S. loan originations, said. The bank recently provided a $220 million CMBS refinance to New York-based RFR Holding and TriStar Capital for the Amazon Phase VII building at 400 Ninth Avenue North in the South Lake Union neighborhood. (Fun fact: Seattle boasting the lowest distress rate in CMBS among the top 15 most populous MSAs in the U.S.).

Active buyers in the market, RFR and TriStar also teamed up in 2017 to acquire Centre 425, a 16-story office property fully leased to Amazon, also in Bellevue. 

“With tech giants Amazon and Microsoft each occupying more than 10 million square feet in their Seattle-based corporate headquarters and Facebook and Google calling Seattle home for their HQ2 campuses, we will continue to expand our Seattle footprint,” David Edelstein, the president of TriStar Capital, said of the draw to the city at the time of the Centre 425 purchase.

Magner wasn’t at liberty to discuss the Amazon Phase VII property financing but said “I think the real hot spot has been South Lake Union. Bellevue has been the alternative and I think we’re seeing a lot of interest shift over to Bellevue, but there are still a lot of very interesting opportunities in South Lake.”

But with opportunity comes competition for deals, which has “definitely increased,” Magner said. “I think Seattle has become a much more well known, established market, whereas initially, maybe people weren’t quite identifying it as one of the major markets to be in. As it’s evolved, more and more investors are there, and they’re coming from all around the world. The notoriety of the market has increased and therefore the lending competition has also increased.”

Magner sees the reason the Seattle market is so hot as being twofold.

“It’s an interesting alternative to Silicon Valley, both from a cost perspective and a lifestyle perspective,” he said. That dynamic is luring in younger talent and also turning Seattle into a hub for engineering platforms; Mercedes Benz, for example, tapped a former Amazon software engineer to run its tech platform and J.P. Morgan Chase built a major technology engineering center in the city.

“You can see how the market is starting to establish itself as not just being a one-trick pony,” Magner said. 

And despite being heavily weighted toward the tech sector, the market is insulated via the diversification of the various tech platforms it houses, Magner said. 

“Facebook is different than Amazon, and Microsoft is different than both of them, too. They’ve all got a different twist on tech,” he noted. 

Another source, who preferred not to be named as speaking anecdotally, offered another silver lining if there is ever a big blip in Amazon’s meteoric rise: He noted that the firms’ employees are sitting on a large amount of stock options, which they could opt to cash out should Amazon’s stock stall or begin to fall. 

“If employees start selling their stock and that will bring probably opportunity for significant household spending to be generated from liquidation of equity in the company,” the source said. 

A period where employees are selling Amazon stock seems very far away, but all signs point to Seattle being an investment and lending hive of activity from here on in. 

“My view is that Seattle is a long-term, mega-trend city,” Schocken said. “This long cycle that we have been in may go through an interruption, but we view Seattle as an outstanding investment opportunity.”