Background and Description of SODO
Major freeway and transportation access projects, coupled with the recent completion of a convention center and two new sports stadiums, drive SODO's transition from primarily industrial uses to higher yielding evolving uses. SODO's growth pattern reflects a national trend. Similar development patterns apply to aging, centrally located, industrial areas in Cleveland, San Francisco, and Denver.
The SODO district, a roughly rectangular area directly south of downtown, encompasses 550 acres. Its northern edge lies against Seattle's downtown while its eastern edge borders Interstate 5. Puget Sound borders the west, while Spokane Street forms the southern border.
Seattle's first settlers in the last half of the 19th Century initially built up what is now downtown, Belltown, and First Hill. The area's abundant timber was cut and shipped to San Francisco to supply gold rush stimulated construction. In the 1890s industry started to spill over into what is now SODO, a one square mile area located between Puget Sound and the first range of coastal hills, immediately south of Seattle's present downtown area.
With the extensive rail lines that were built within the area, the draining of the Duwamish River delta, and the development of the immediately adjacent port facilities on the western edge of SODO, warehousing and wholesale trade, spurred by the Klondike, Alaska gold rush, grew alongside with manufacturing.
By the 1920s, much of Seattle's heavy industry was located in SODO. During World War II, SODO factories built airplanes, ships, components, and munitions. Between the end of the Korean War and 1990, warehousing and light industrial activities slowly replaced heavy industry. Since these early days, SODO has been a primarily manufacturing/warehousing area with little change until relatively recently.
In the early 1990's, businesses that primarily served the downtown core started to move into SODO to take advantage of the proximity to customers and the lower rents. These businesses included office supplies, distribution, furniture, building supplies, art supplies, high tech, banks and professional offices. In addition major retailers like Home Depot, Office Max, and Costco opened major sales outlets within SODO. By 1998, with the major renewal of the northern section of SODO due to the two newly constructed stadiums, downtown's central business district itself began moving into SODO and revitalizing SODO's importance as an urban hub.
New transportation infrastructure drives current growth. New freeway accesses and the light-rail, all under construction, mean that Puget Sound's regional transportation infrastructure ties together within SODO's one square mile. This will make SODO one of the most convenient locations in the Seattle metropolitan area.
Various governmental agencies own or utilize approximately 60% of SODO acreage. These uses include post office transfer facilities; waste recycling facilities, school district office space, social services, the Port of Seattle, mass transit stations and systems, two stadiums and a convention center. As a result, private uses account for a mere 220 acres out of the total 550 acres.
Family run businesses engaged in light industry, warehousing, office and retail activities own most of the privately held land. American Life Inc. controls either through ownership or leasehold approximately 18 acres of these 220 acres, or about 9% of the total. American Life Inc. focuses on purchasing contiguous properties allowing for future sales of combined parcels of sufficient size to interest institutional developers or real estate investment trusts.
Dynamics of the SODO Real Estate Market
The strong economy and rapid growth of the late 1980s and 1990s touched off a series of land-use conflicts that continue to reverberate throughout the region. The Washington State Growth Management Act (GMA), passed by the Legislature in 1990, mandated the adoption of comprehensive growth-plans to encourage future growth in existing urban areas while restricting low-density "sprawl" in the suburbs. As a result, suburban growth has been slowing while in-fill in established urban areas such as SODO has been increasing.
SODO's small available acreage close to the Port and downtown tends to create a demand for SODO space that generally exceeds the supply. Further, within the Seattle downtown area or near-by districts, the continuing demolition of competing properties for transportation infrastructure and for new office/retail projects creates additional demand because the overall supply of affordable close-in locations is reduced. The approximate 7% average annual rental increases that have occurred over the past twenty years reflect this trend. SODO's 1.5% vacancy rate (north of Spokane St) indicates a tight rental market. This is, by far, the lowest vacancy rate in the region.
SODO's proximity to downtown Seattle, the port, the freeway system, and rail facilities creates demand for space from users with a variety of special requirements for buildings and access. Tenants continue to pay a premium for convenient central locations. As a result, SODO warehouses commonly fetch 50 cents a foot per month as opposed to 35 cents a foot for newer facilities in outlying areas.
SODO's building stock, generally 30 years old or older, works for existing warehouse uses, but not for the new uses moving into the area. As a result, the largest recent non-infrastructure developments within SODO entailed the conversion and re-use of existing facilities, often involving transformation of single-user facilities into multi-tenant properties. The conversion of Sears' turn-of-the-last-century warehouse, distribution and retail facility into Starbucks Coffee's world headquarters, Office Max and other retail uses and the conversion of the U.S. Post Office transfer facility into administrative offices for the City of Seattle School District exemplify this trend.
Growth patterns and infrastructure development continue to increase land prices. In many cases, land values exceed the value of the building. As properties change hands at higher land prices, new owners cannot afford to rent to traditional warehousing and light industrial users. For the foreseeable future, the market dynamics should continue to force the conversion of existing warehouse stock to more intense uses.
Major Infrastructure Developments
A proposal to build a region-wide network of transportation improvements was approved by voters in November 1996. When completed, this system will include a 24-mile light-rail transit system between the University District, downtown Seattle, and Seattle-Tacoma International Airport; a 1.6 mile light-rail line in downtown Tacoma, 81 miles of commuter rail service linking Everett, Seattle, Tacoma, and Lakewood; and bus/carpool ramps serving 100+ miles of HOV (high-occupancy vehicle) lanes on the region's freeway network. The estimated completion date for the project is 2009.
Sea-Tac International Airport is being expanded to include a third runway, new and expanded terminals and parking facilities, improved access and circulation roads, a new hotel next to the main terminal, a people-mover system, and connections to the regional light rail network. There are several other transportation infrastructure projects in varying stages of construction and/or funding.
Much of this transportation infrastructure directly benefits SODO. These include:
- Automobile access improvements. Major improvements are now underway at both the north and south ends of SODO.
At the north end, construction proceeds on access to SODO from the Interstate 5 and Interstate 90 freeways. The new freeway extension serves both 1st and 4th Avenues South, the two major SODO north/south thoroughfares.
At the south end, upgrades to Highway 99 and the West Seattle Freeway along Spokane Street will provide significantly better access from a number of directions. (Note that the West Seattle Freeway connects with Interstate 5 allowing direct access for drivers coming from the south.) - Light-Rail. This 24-mile system, now under construction, will run through SODO, include two SODO stations and connect SODO to downtown and the airport. Estimated completion is in 2009.
In addition to transportation infrastructure, SODO benefits from:
- Safeco Field (new home of the Seattle Mariners), a new football stadium, and a new exhibition center.
- Effects of February 2001 Earthquake. The February 2001 Nisqually Earthquake forced some SODO property owners to upgrade their buildings. These repairs and replacements will upgrade SODO as a whole.
American Life Inc. Mgmt's Expectation of Future Rentals and Values
Management further notes that SODO's superior location should continue to drive land prices and rents without a zoning change. The existing zoning prohibits large scale office development (over 50,000 square feet of office in one structure), large box retail, and residential uses, but does not restrict construction of large facilities offering flex space suitable for light industrial, tech, and other modern manufacturing uses. Existing zoning also allows the construction of facilities where employees or owners live in the same structure as where they work. Ironically, Office Max, Home Depot and Costco opened stores in SODO before the advent of the current zoning restrictions. American Life Inc. sees that values will continue to increase as a result of steadily rising rents from demand in excess of the limited SODO supply.
Since any disposition of American Life Inc. properties will be some years from now, the level of future rentals is important to investor returns over an extended period. Over the past twenty years, SODO rents have increased at an average rate of some 7% a year. This compares to an average rental increase of 3% per annum for the South Seattle industrial area. Because the past twenty years were years of steadily increasing economic growth, American Life Inc. management believes that investors who wish to project future rental increases may conservatively assume annual rental increases of 3% to 5%.
Outlook
American Life Inc. management strongly believes that SODO will continue to evolve with the growth of Seattle's populated downtown area. This trend is based on a number of factors that are independent of the status of the region's economy. These factors include the following:
- SODO's land area provides readily available growth potential for businesses serving Seattle's downtown. No other areas of Seattle effectively serve this market.
- Freeway projects increasing vehicular access to SODO will improve the viability of SODO as a place to do business. Increased vehicular access to SODO should entice major retailers to place outlets in SODO as well as attract developers looking for sites for new retail, light industrial, and new uses.
- The lower level of rents in SODO relative to other Seattle areas adjacent to downtown will continue to attract a variety of tenants in addition to those from the service and retail sectors. These include tenants looking for office space, light industrial, flex space, and showroom space. No other areas of Seattle effectively service the downtown market.
- The light rail project will connect SODO to downtown and beyond without depending upon automobile transport. As a result, a variety of new users will want to take advantage of SODO's central location and proximity to downtown.
- Regional traffic congestion coupled with the fact that all of the regional transportation infrastructure comes together within a few SODO city blocks has created a premium on locating in a central area such as SODO.
To conclude, SODO offers a close-in location with the best transportation infrastructure in the Puget Sound region. Given the shortage of available land and the area's highly desirable location near the Port, downtown, and major transportation facilities, and the management of American Life Inc. believes that SODO will remain a high-growth real estate market.
