An Examination of the Pacific Northwest Real Estate Climate: First Half of 2023

Pacific Northwest Real Estate Climate 2023

The commercial real estate sector of Puget Sound has demonstrated noteworthy dynamics across its Industrial, Multifamily, and Capital Markets during the initial half of 2023.


Industrial Sector: Confronting Inventory Scarcity Amid Investor Appetite

The Industrial market is active with investors and users alike, but inventory is scarce for land and buildings. Interest rate hikes strongly impacted the volume of investment, leaving Sellers wondering how far price adjustments will go before the market stabilizes.   Investments were very slow during the first two quarters as cap rates adjusted.  A few notable sales occurred, with cap rates above 4% for what would be considered trophy properties.  Vacancy Rates have increased to 5.1%, with a notable rise in sublease space, while rental rates are holding and in some areas still increasing. Absorption was negative this past quarter at -740,000 SF.

Developers are holding off on speculative projects, especially in the tertiary markets north and south of the Ports of Seattle and Tacoma.  Developers are still looking for quality land, showing their bullish outlook for this region.  Land prices have dropped, Sellers have not adjusted expectations.


Multifamily Sector: Sustaining Strength Amid Softening Fundamentals

The Multifamily market is still holding strong despite softening fundamentals.

New Unit Delivery has slowed from approximately 10,000 coming online annually to about 7,500 expected in 2023.  In 2024, we are expecting nearly 8,000 new units, still a drop from 10,000 units that came online annually over the past few years.  The current supply is only about 70% of the inventory we need to keep up with demand.

Looking ahead, rental demand is expected to be about 26,600 units between January 2023 and June 2025.  This equates to between 9,000 and 12,000 per year.  During this time, developers will supply only 18,078 units.  So, we are under-supplied.

Despite the vacancy rate floating up from 5.6% to 6.5% in the last 6 months, it is expected to peak by the end of 2023 and begin returning to a 5% equilibrium.  Once we hit 5%, this opens up the possibility for rent growth.


Capital Markets: Navigating Uncertainty Amid Workplace Evolution

Economic uncertainty and a rapidly evolving workplace have put Capital Markets in a state of flux. Investment sales volume has declined for six consecutive quarters, primarily due to interest rate increases and work-from-home policies. With most local companies back in the office, downtown is experiencing the most foot traffic since 2019 and investors continue to view Seattle as a desirable market long-term.

Seattle has the second most cranes in North America, behind only Toronto. 33 of the 51 cranes are for residential projects, but new construction starts have dropped precipitously. This indicates that supply-demand fundamentals could soon shift. Additionally, construction cost increases have moderated significantly, with some projects seeing budgets lower than six months ago.

Owners are making tough decisions on the future of their assets. The prevalence of distressed sales and underutilized buildings being converted to residential are two themes to track moving forward.


Final Thoughts
The Puget Sound real estate market in the first half of 2023 has been a fascinating blend of resilience, adjustment, and change, underscored by evolving economic factors and new trends in workplace dynamics. As we move forward, it is increasingly evident that adaptability and understanding of the nuanced interplay between the different market sectors will be key drivers of success for investors, developers and asset owners alike.



Jim Bowles, SIOR
Lee & Associates
(206) 773-2673