Tech Giant's Continued Growth Will Benefit All Property Types in Downtown Seattle
By: Joseph Sollazzo, Real Estate Economist with CoStar Group
The Amazon effect typically refers to the online retail giant’s global influence on retail and supply-chain dynamics. But more locally, it is also remaking the physical and demographic landscape of downtown Seattle.
Amazon has been at the center of the region’s tech boom and its growth has drawn migration to the urban core. From 2000 to 2012, the population of downtown Seattle grew by more than 26%(1), compared to 17% for all of Seattle and only 14% nationally.
Younger folks are driving much of this growth, as the downtown population aged 25-44 has grown four times faster (28%) than the metro average. With its estimated local workforce of 18,000 and potential to expand by an additional 22,000 over the next five years(2), the ramifications of Amazon’s expansion for the local CRE markets are acute.
A lot of attention has rightly been given to Amazon’s presence in Seattle’s office market. Its footprint now stands at 3.4 million square feet, accounting for nearly 75% of net CBD group absorption since 2011, and its growth shows no signs of slowing. Between projects underway, in planning, and leases yet to be finalized, Amazon’s downtown Seattle footprint could easily eclipse 8 million square feet by forecast’s end.
What's more, the hiring associated with this business expansion will have just as dramatic an impact on the apartment and retail markets.
In an apartment market awash in 4- and 5-Star units, Amazon’s expansion will provide some much-needed depth to the high-end renter pool.
Seattle is in the midst of an apartment boom unlike anything it has ever seen, with almost 23,000 units expected to be added to the Seattle submarket over the next five years, over 65% of metro wide deliveries.
Many of those new units will be too expensive for the metro’s average renter(3), but with average salaries that are 65% above downtown’s median(4), Amazon employees can hardly be considered average. And Amazon hires are more likely to rent downtown. They tend to disproportionately fall in the 24-35-year-old apartment-renting cohort, want access to urban amenities, and appreciate the mobility of renting.
A historical metro wide ratio of one unit of apartment absorption per five jobs added is more likely to fall around 1:3, meaning Amazon could single-handedly generate 7,600 units’ worth of demand for new units.
As shown in Exhibit 1 below, these new residents will increase the proportion of renters that can afford new apartment units by 15 percentage points in Lake Union, with similar increases in other downtown neighborhoods.
Seattle’s demographics are already quite favorable for retail-a growing population and above-average household incomes-but downtown is the epicenter of the metro’s growth. Currently, $3.3 billion of buying power resides downtown (1.4% of the metro’s total).(5)
Using a 3:1 new hire-to-apartment absorption ratio, Amazon’s expansion over the forecast could generate another $722 million of buying power, an increase of 21% across downtown, and as much as 30% in the CBD specifically (see Exhibit 2).
Given the existing ratio of buying power to retail stock, Amazon-driven earnings could support 1.7 million square feet of new construction, more than double what is projected over the forecast.(6)
The sizable gap between the square footage that could be supported and what’s likely to be built and the historical relationship between sales/square foot and rent indicate that retail landlords can expect Amazon’s growth to provide a nice boost to rent growth over the forecast.
There is no doubt that Amazon’s continued growth will benefit all property types in downtown Seattle, but is it sustainable?
Almost anything is possible as long as Jeff Bezos remains at the helm, but timetables for construction and hiring will most likely have to be lengthened, at least slightly.
But absent a corporate calamity or a significant negative macroeconomic event of some kind, Amazon will continue growing in Seattle, attracting young tech professionals to the area and changing the physical landscape. And commercial real estate investors are primed to be key beneficiaries.
(1) Lake Union, Belltown/Denny Regrade, Seattle CBD, and Pioneer Square/Waterfront submarkets.
(2) Amazon’s 2018 employment is calculated by applying a conservative 200 SF/employee usage factor to its potential office footprint (existing footprint + pending leases + new construction).
(3) Tech workers will be spending an average of 30% of their income to live downtown (traditionally considered an acceptable level), compared to average residents’ 55%. Anecdotally, Amazoners have been willing to spend upwards of 45% of income on housing.
(4) According to Dice.com’s annual Tech Salary Survey, Seattle technology professionals’ average salary is $95,048 ($87,811 nationally) compared to an average median salary of $56,756 in the census tracts that make up downtown.
(5) The population x median household income.
(6) That is, assuming the current ratios between buying power/SF and sales/SF and between sales/SF and rent/SF continue to hold, increasing buying power by 22% should increase retail sales and allow for a subsequent increase in rent.
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