SEATTLE—The Seattle retail market is stable with moderate positive absorption and new construction driven by a strong investment climate for stabilized centers and single tenant net leased properties. This according to a recent report from Kidder Mathews Valuation Advisory Services.

Washington posted a healthy 7.3% increase in retail sales for 2013 versus 2012. The Puget Sound region increase was better at 7.5%. The Puget Sound region accounts for 64.9% of the state's total sales volume, which is above its 58.7% share of the population. This is driven by higher income levels and lower unemployment, which in turn attracts a strong mix of retailers.

In the second quarter 2014, the vacancy rate declined by 7 basis points from 5.71% to 5.64%. Total available space (total vacant as well as occupied but available) decreased from 7.33% to 7.13%.

King and Snohomish counties are stable, while Pierce and Kitsap are the softest markets. King, Kitsap, and Pierce saw vacancy rate improvement. Snohomish and Thurston saw vacancy rates increase slightly.

Asking rents for direct vacancy were neutral quarter over quarter. Rents have been improving for stable trade areas and remain flat for those with higher vacancies. Retail rents in the Seattle CBD range between $30 and $75/s.f./year, NNN and rents in suburban grocery anchored centers range between $20 and $35/s.f./year, NNN, depending on property location and condition.

Retail development activity is moderate, the report says. Kemper Development has broken ground on the Lincoln Square expansion across the street from Bellevue Square. This 1.62 million s.f. project will include a three level retail podium of 172,000 s.f. Kemper Development is also proposing an expansion of Bellevue Square in the southeast corner of that property. Verus is underway on the 250,000 s.f. Village at Chambers Bay, anchored by Whole Foods. Costco at Lynwood Place also broke ground. A number of other projects are getting ready to break ground. Examples include a premium outlet mall in Lacey (Wig Properties and partners), a theater anchored center in Silverdale (Center Cal), and a 304,000 s.f. center that will include a 162,000 s.f. Costco in Bellingham (PMF Investments).

In 2013, absorption was a mild 382,000 s.f., which is only 17% of 2012 net absorption. In many trade areas, the best vacancies have been re-absorbed already and in weaker areas the tenants that are expanding are not looking for less functional space. As is the case with investors, tenants are also looking for the best quality, leaving market conditions weaker for B and C quality product on the leasing side.

The regional market is targeted by institutional investors for core product because of healthy economic conditions. A few large class A, multi-tenant retail investments have sold recently, but single tenant net leased assets are a dominant retail investment product for private capital. Class B and C retail product sales are slow and predicted to be a major challenge in the future, as tenants continue to reduce their footprints and/or seek location upgrades. The current demand is equity driven versus the debt driven demand ten years ago and capital has begun to move into secondary and tertiary markets in search of yield. With cheap debt available for the foreseeable future, cap rates are expected to remain low. Retail investment demand remains high as capital from multiple sources is still competing for the best product. Trade buyers have also driven demand, which has led to further compression in cap rates.