Is the West Coast Ready for its Second Half Comeback?

Rising interest rates, inflation, and the war in Ukraine did a number on the latter half of 2022. Meanwhile, five-digit layoffs from tech giants like Google, Meta, and Amazon hit the West Coast especially hard, adding to ongoing office woes and the pausing of institutional capital.

Rather than doom and gloom, however, Kidder Mathews CEO Bill Frame and president & COO Brian Hatcher look at 2023 through a sports analogy. “The game will be decided in the second half,” says Frame, who asserts that CRE performance should elevate after mid-year. Part of this is because, as Hatcher notes, those high-profile layoffs are likely temporary, and “we think they’re all going to bounce back in the second half.”

Frame and Hatcher reflect on what happened in 2022 and highlight which sectors will lead a comeback victory in 2023:

Irrepressible Industrial

Despite Amazon cutbacks, resilient rent volume should help the pace of industrial development rebound from the debt market-induced slowdown. Hatcher cited the 121,000-square-foot industrial lease by a window manufacturer in “really suburban” Arlington, WA, as proof of persistent demand.

“The interest rates haven’t helped, but those have kind of flattened out a little bit over the last couple months, which I think has encouraged some of those developments, especially industrial,” said Frame.

Office Ups & Downs

The general office sector will have a “rough road” for at least most of the year, but specialties such as medical office and life sciences, are looking at a different path.

“In the Northwest, especially Bellevue and Seattle, there’s a lot of [office] square footage either under construction or recently completed with tenancy by some of the large, household tech names that isn’t going to happen,” said Frame. “So there’s going to be a lot of square footage that will remain on the market and that’s going to take some time to work through.”

Kidder Mathews’ CEO reported that leasing is still robust in medical office and life sciences, as well as retail and industrial.

Multifamily Fundamentals vs. Financials

Debt market headwinds could have the slightest effect on the multifamily sector. The US housing shortage and demographic tendencies toward closer-in living have not gone away. Meanwhile, asset prices will adjust to find a new balance.

“I don’t think multifamily has been affected price-wise like office and retail,” said Hatcher. “I think apartment owners are pretty well insulated because for a while there they weren’t building a lot and what they did build was built quite quickly.”

Frame added, “There’s a supply and demand issue in single-family residential in the US with about four million units underserved. So, there’s a lot of pressure to create housing and that’s the quickest way to create it on a mass scale. The effect of rising rates on multifamily is going to be short-lived.”

Outlook

Industrial, which accounted for 47% of Kidder Mathews’ $12 billion transaction volume in 2022, will continue to be a strength, and multifamily, retail, and life sciences are gaining steam and market share. Patience is the name of the game though in 2023, as CRE players continue to assess macroeconomic trends, such as debt costs and inflation, while waiting for sellers’ expectations to catch up with buyers. Unlike some downtrodden sports fans, thankfully it’s not a “wait till next year” scenario.