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Retail a Bright Spot in Cloudy Northwest

The Pacific Northwest economy has had more than a few bumps in the past year as a result of changes in both the domestic and international scenes, leaving economic forecasters using the words "downturn" and "slowdown" to describe the area. But retail industry players paint a better picture, pointing to active buying and selling of shopping centers as well as new and expand-ing retailers making moves throughout the region.

The first blow to the Pacific Northwest was a recovering California economy, making it less attractive for residents to leave the state, and more likely for those who had previously fled to return and start over. And since one of the more popular destinations for California expatriates has been the Pacific Northwest, Oregon and Washington suddenly found their steady stream of skilled professional workers - along with their fat paychecks and willing-ness to pay inflated housing prices - dwindling.

In addition, the U.S. economy has felt the effects of problems in Russia, Latin America and, particularly, the Far East. While upsets in the financial markets of Japan, Korea and Taiwan sent rumbles across the American stock market, they were more like thunderbolts to businesses in the Pacific Northwest. A significant segment of the Northwest economy depends on the exportation of forest products, agricultural products and transportation equipment, with the largest benefactor being the Asian market.

Washington The financial instability in Asia did strike a blow in Washington. With a number of cancellations and delivery delays from Asian customers, Boeing - the primary engine driving the Seattle area economy - had more layoffs than expected. This has led to lower personal income levels and a decreased demand for retail goods. In the Puget Sound area, for example, a 10.4% growth in retail taxable sales in 1997 was followed by a 7% growth in 1998, and a 1999 projection of only 4.2%, according to a November 1998 report from the Office of the Forecast Council, Olympia.

But the state's economy is still strong relative to the rest of the country. Mason Frank, president of Portland-based MBK Northwest, says that despite the wider economic picture of troubles in Asia and its effect on major employers such as Boeing, he does not predict any major impact on retail growth. "We don't see any changereally in talking to our retailers for 1999," Frank says. "There is so much continued growth up there from other sectors that the Boeing situation will not have much of an effect on the retailers."

Even investors, often the first to leave at the sign of trouble, seem to have confidence in the state's retail picture. Growth was solid in Washington throughout much of 1998, says Reynolds Haas, director of the financial services group for the Seattle office of Cushman & Wakefield, New York. Acquisitions of all types of retail properties, from neighborhood shopping centers to regional centers, were very active in 1998. Buyers included a combination of REITs and institutions or institutional advisers, followed closely by foreign buyers, primarily from Europe and Singapore.

"Last year was an excellent year for us, but we are not anticipating quite the activity in 1999 that we had in 1998," Haas says. Some REITs left the market in the third quarter of 1998 because of confusion in the secondary markets and some devaluations of their stock, but he expects they will return in the first or second quarter of 1999. "They just kind of took some time for a breather," he explains.

Retailers also had an active year in the state. "There has been an awful lot of interest from players coming into the market," Frank says. "Seattle is considered to be one of the top retail markets in the country."

Babies 'R' Us, Old Navy and Gart Sports opened stores in the city last year. "(Gart Sports) acquired Sportmart and took over the Sportmart stores, plus opened up some new ones of their own," Frank says. He explains that when national retailers first enter the Seattle market, they tend to focus on establishing themselves before considering a move farther south toward Portland or over the mountains into Spokane.

Looking to the future, Frank notes that Best Buy has been eyeing the region for some time and should appear on the scene fairly soon. "I don't think that there is any question - whether it is the year 1999 or 2000 - that they will penetrate the market and will want four or six stores, ultimately," he continues.

Susan Zimmerman, retail specialist with Kidder, Mathews & Segner, a Seattle-based commercial real estate firm, points to several retailers making the news statewide. In October 1997, Pacific Place shopping center opened in downtown Seattle, attracting some national tenants new to the Pacific Northwest, such as Tiffany & Co. and Cartier. Retailers that made a big impact last year in Washington include The Gap, Old Navy and Zany Brainy. "I think you will see other retailers follow soon," she predicts.

Zimmerman points to some changes in the retail scene, particularly in the computer category. Egghead Software closed its stores to become an online merchant, while Gateway Computers, which used to be exclusively a mail-order and online retailer, opened its first retail store in Tacoma.

One category of goods that has been well-received in the Northwest is the home improvement and home furnishing sector, adds Frank. "The Home Depot stores are just extraordinarily successful," he says. And the home furnishing sector is certainly expanding with Linens 'N Things, and Bed, Bath & Beyond. "Their sales here are typically much better than their national sales, and they just seem to fill a void in our marketplace."

Oregon Oregon's economy last year was the slowest since the 1990-91 recession, and little change is expected in 1999. Forecasters from the Oregon Office of Economic Analysis, based in the state capital of Salem, predict that both overall employment growth and personal income growth will fall below the national average, coming in at 1.3% and 4%, respectively, vs. projected national figures of 2% and 4.2%, respectively.

Add to these statistics the effects of the Asian financial crisis, which has had a greater impact in Oregon because the state exports a larger percentage of forest and farm products, and more segments of the economy are affected.

But the signs are not all bad. Employment in the retail sector grew by nearly 5% between the second quarter of 1997 and the second quarter of 1998 in the Portland-Vancouver area, according to a year-end report from locally based Norris, Beggs & Simpson.

Population in the state is projected by the U.S. Census Bureau to increase by nearly 12% between 1997 and 2005, with the fastest growth likely to occur in the 18-to-24 and 45-to-64 age groups. Those rosy statistics should have retailers smiling. Projections for 1999 and beyond assume that an Asian recovery combined with continued competitiveness in American industry will add to the optimism.

Influencing retail demand in Oregon in the coming years will be a change in the population dynamics of the region. Only a few years ago, there was a large in-migration of workers from Southern California, but that trend has begun to slow.

Regardless of what happens in the near future, Bob LeFeber, a broker with Portland-based Commercial Realty Advisors and chairman of the ICSC government relations committee for the state, says the Oregon market is fairly well-balanced with very little vacancy. "There is very little new development going forward," he says. "The new development that is happening is typically a pent-up project that could have happened a long time ago if the land were available. More activity is occurring in investment sales, with the REITs snatching up portfolios of property."

A potential area of concern for retailers looking for new or expanded space in malls and neighborhood centers is steadily rising rents, caused primarily by a lack of inexpensive new land for development. "Where shop rents used to be in the $17 to $20 per sq. ft. range, now they are increasing to $20 to $24 per sq. ft.," LeFeber says, noting changes just in the past year or two.

Rent increases, combined with the lack of new development, could mean smaller retailers will have a harder time finding suitable space, while larger space users may focus more on self-development of freestanding locations or select redevelopment opportunities.

LeFeber says his company is involved in a redevelopment project now that involves Office Depot and Pep Boys sharing a former grocery store space. "You have to be creative and look at these kinds of alternatives," he says. "There are a number of centers ripe for redevelopment, in places like Oregon City, for example."

Aside from a shortage of buildable space, new construction is hampered by the recent increase in development cost add-ons, says Bob Dunn, first vice president of retail in the Portland office of Los Angeles-based CB Richard Ellis. For example, he says, Multnomah County, which includes downtown Portland, charges developers $3.46 per sq. ft. in addition to land costs and construction costs. Washington County, west of the city, adds $5 per sq. ft., and Clackamas County, to the southeast, charges an additional $5.46 per sq. ft.

In a way, Dunn continues, the situation is getting to a point of diminishing returns. "For some of these regional retailers, and even some of the national retailers, their sales are not going to warrant the $20 to $24 per sq. ft. rents of these neighborhood developments, and we are going to have some further fallout."

Although he expects the state to have a good year, Dunn also sees a slowdown. "We have been keeping a pretty rapid pace, just like the stock market and everything else, and the pendulum can swing only so far before it starts coming back the other way," he says. "We have started to swing back already."

Indicative of this swing is a flattening of land values, Dunn says. Land costs will be a major stumbling block to any new development. Other hurdles include site development costs, which, he says, "have probably tripled in the past five years," and the state's Urban Growth Boundary statutes. These laws strictly limit the amount of raw land available for new construction, while encouraging in-fill development and mixed-use redevelopment.

Much of the activity that has occurred in the past year has been associated with the grocery segment, says LeFeber. All the major chains are either developing new stores or remodeling existing ones. "You see a lot of remodel activity going on at older Safeway and Fred Meyer (stores)," he says. Meanwhile, Albertson's has opened several large-format units that, in LeFeber's words, are "pioneering and probably a little ahead of their time."

Merger and acquisition activity has boomed in the past two years in the grocery segment. First, Portland-based Fred Meyer Inc., a one-stop grocery and housewares retailer, bought the Seattle-based QFC grocery chain and continued the QFC expansion into Oregon under the same nameplate. More recently, Kroger, which had no stores of its own in the region, bought out Fred Meyer, again without instituting a name change.

Other retailers making a mark in the state are Wal-Mart and Seattle-based Eagle Hardware. "Wal-Mart recently came to town, although it has taken the company a very long time to find locations," LeFeber says. "They have one store successfully operating at Eastport Plaza (in east Portland near the I-84 and I-205 interchange), and they have just opened their second store in Vancouver, Wash."

Eagle Hardware has opened two stores in Oregon, one in Tigard, just south of Portland, and the other is a purchase agreement on some land in east Multnomah County, he continues.

"This market was kind of the in-betweener between Northern California and Seattle for many years," explains Dunn. "But our population growth has been way above average for the past five to eight years, and we have reached enough of a critical mass to get the same attention that Seattle gets, even though Seattle is still twice as big as our market."

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