2023 NEPSQ Retail Environment Study

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Executive Summary

As one of Seattle’s oldest neighborhoods, Pioneer Square is rich in history. The area is home to a thriving arts and culture scene and offers a broad range of social services for communities in need of support. However, the area also faces public safety challenges, high commercial vacancy rates, and a large population experiencing houselessness.

The high concentration of government and office uses has shaped development patterns in Northeast Pioneer Square for years. Pre-pandemic, workers at the King County Civic Campus, the Columbia Tower, and other office buildings nearby generated much of the area’s retail demand. Following the shift toward work from home trends induced by the COVID-19 pandemic, the near single-use function of the area as an employment center has impacted the resiliency of the Northeast Pioneer Square District.

In July 2022, The Alliance for Pioneer Square contracted with ECONorthwest to develop a Retail Market Study for Northeast Pioneer Square to identify strategies to support postCOVID-19 recovery through economic development tools that bolster vibrancy across Pioneer Square.

This report is a subset of a larger, Pioneer Square-wide project to be completed in 2023 and provides background information and analysis on recent market trends and other conditions affecting Northeast Pioneer Square. This Executive Summary provides a synopsis of the report’s key findings and recommendations

Key Findings

ECONorthwest defined Primary and Secondary Market Areas for the Northeast Pioneer Square district. The Primary Market Area reflects the core area definition from the Northeast Pioneer Square Framework Plan and is the focus for understanding the current supply of retail and services for this study. The Northeast Pioneer Square Secondary Market Area is the focus for understanding demand for retail and services in the Primary Market Area.

Demographics

 As of mid-2022, the Northeast Pioneer Square Primary Market Area was estimated to have a population of 987 people and 547 housing units. Nearly a third of households in the Primary Market Area are very low-income, earning less than $15,000 per year and about 9 out of 10 households rent. About 75 percent of housing units in the area are subsidized units, demonstrating the need for more diverse housing types in the area.

 In 2021, the Secondary Market Area had a daytime employee population of 15,881. However, the most recent data indicate that only about 27 percent of those employees have returned to the office, which is substantially lower than the 40

percent of workers that have return to Seattle’s Downtown. About 50 percent of workers in the Secondary Market Area are employed by the government, with many working at the King County Civic Campus.

 The Primary Market Area’s limited population growth and high concentration of lower-income renter households underscores the need for a more balanced mix of employees, residents, and visitors, and a broader spectrum of housing choices to support a diversified retail environment.

Real Estate Trends

 Retail market trends. Between 2010 and 2022 Q2, the Primary Market Area saw the greatest rent growth of 77 percent or $9.64 per square feet, while the Secondary Market Area saw a growth of 40 percent or $6.56 per square feet.

 In the second quarter of 2022, the Secondary Market Area saw the largest amount of retail space vacated in a single year approximately 26,000 square feet. About 7,500 square feet of retail space has been vacated in the Primary Market Area In the past two years.

 Under current conditions, there is a surplus of retail supply in Northeast Pioneer Square. However, increasing the presence of in-person workers and attracting new residents to the area could generate demand for new retail space.

 Office market trends. Between 2010 and 2022 Q2, the Primary Market Area saw its largest rent growth of 44 percent or $10.87 per square feet. Both the Primary Market Area and Seattle saw similar increases of $9.69 and $9.88 per square feet, respectively.

 In 2022 Q2, the Primary Market Area had the highest vacancy rate of 25.4 percent, followed by the Secondary Market Area (18.6 percent), and Seattle (12.0 percent). Despite the Primary Market Area having the highest vacancy rate out of the two comparison market areas, rents have remained comparable to that of citywide averages in 2022 Q2, likely due to government and other institutional tenants.

 Since 2010, the Primary Market Area has not experienced any new office space construction. On the other hand, the Secondary Market Area had two large office developments in 2016 and 2018 totaling almost 700,000 square feet. In comparison, the Seattle office market has been building substantial office space to accommodate its growing tech industry. Since 2010, Seattle has built approximately 26.5 million square feet of office space.

 Multifamily market trends. The average per square foot rents for market rate units in the Primary Market Area have increased 29 percent ($0.53) from $1.81 in 2010 up to $2.34 in 2022 Q2. In Seattle, the average per square foot rents have increased 39 percent ($0.83) from $2.13 in 2010 up to $2.96 in 2022 Q2. Similarly,

the Secondary Market Area has seen modest rent growth of 34 percent ($0.74) from $2.17 in 2010 up to $2.91 in 2022 Q2.

 Housing is in great demand in Seattle and both Pioneer Square market areas. Vacancy rates in the Primary Market Area have fallen rapidly in the last decade and were at 4.9 percent in the summer of 2022, while vacancy in Seattle and Pioneer Square were 6.3 and 5.7 percent, respectively. Very low vacancy rates coupled with continued rent growth year-over-year indicates upward pressures on rents and future demand for new construction at all income levels.

Stakeholder Interviews Summary Themes

ECONorthwest staff hosted a workshop with a set of stakeholders, including property and business owners, brokers, and property managers. The following section summarizes common themes discussed by multiple stakeholders.

 Encouraging King County and the City of Seattle employees to return to the office or the area for recreational purposes will help support a thriving retail environment.

 The concentration of social service providers in the area provides challenges for ground floor retailers.

 Large retail spaces greater than 1,500 square feet in size are challenging to lease up in Northeast Pioneer Square due to businesses requiring smaller spaces.

 A substantial number of ground floor retail spaces in Northeast Pioneer Square are large, deep, and narrow with little to no opportunities for subdivision.

 Stakeholders have expressed interest in changing the use of ground floor retail spaces, but the costs and required seismic upgrades to the building that are triggered with this action are cost prohibitive.

 Public safety issues in the area have hindered return to the office. Some stakeholders expressed that the safety of their employees is a concern in returning to the area.

Recommendations

Based on the analysis in this report and conversations with stakeholders, ECONorthwest developed a set of strategies to help support ground floor retail in the Northeast Pioneer Square area.

 Diversify the Mix of Uses in and Around Northeast Pioneer Square. The Alliance should continue to work with City agency partners and district stakeholders to support a more balanced mix of uses in the district with an emphasis on creating more workforce and market rate housing in the area.

 Add Market-rate Housing to Support Neighborhood Resiliency. A more diverse mix of housing will support a more resilient neighborhood economy. The chief recommendation from a 2022 report produced for the Alliance by MIG 1 was that Pioneer Square lacked both workforce and market rate housing. Adding more housing at a range of affordability levels will attract more residents to the area and help to stabilize it in the wake of the pandemic and the remote work era. The addition of new household units will also help with replacing some of the worker demand for retail.

 Leverage the Area’s Rich Arts and Culture Scene with Complimentary Uses. Capitalizing on the area’s active arts and culture scene with public art installations, gallery showings, and other outdoor art events will not only support the arts community but will also help to draw in visitors and increase their dwell time. Recognizing Pioneer Square’s arts and cultural assets and the marketing of them is an important element of economic development that can help create resiliency across the Northeast Pioneer Square District. Arts and cultural exhibits alone cannot change the retail dynamics of an area. Marketing of these assets and continued programming of complimentary uses are needed to boost visitors and attraction to the area year-round.

 Support Ground Floor Activation in Large Redevelopment Projects. Our analysis indicates there are a few challenges for retail and service uses in the area, including public safety concerns and reductions in foot traffic from employees. Another major challenge is that many food service and personal services establishments have tended to be internal-facing within larger office buildings. A post-pandemic retail environment in the Northeast Pioneer Square area is likely to need more flexibility to attract patronage from more segments of demand and will need to be more externally facing to residents and visitors who come to, or pass through, the area. There is an opportunity for smaller format street facing retail to meet space needs for target business and to advance goals for a more vibrant public realm in the area.

 Activate Empty Storefronts. Long term retail vacancies often require organization and active marketing efforts to advertise spaces within an area. Activating these spaces often needs creative solutions like the resources that Seattle Restored offers. Other similar programs like PopUp Denver offer financial support and a package of resources for small businesses to set up shop. This program offers financial support to small businesses and entrepreneurs to set up shop in empty storefronts in an area of the city that is struggling to recover from the pandemic and provides interior design, streamlined permitting, setup and merchandising support. Given post COVID-19 market trends, property owners may

1 MIG. “Pioneer Square Housing Analysis.” March 2022.

need to lower their asking rents and shorten lease terms to fill their vacant spaces. In return, active storefronts will likely lead to a reduction in crime and more pedestrian activity.

 Support Employees Returning to In-Person Work. Some of the largest employers are public sector and the Alliance and stakeholders should continue to collaborate with City and County leadership to support programming and activities that can help incent and support workers returning to the area consistent with City and County policies.

 Reduce Barriers to Change of Occupancy. With relatively high existing retail vacancy rates, it will be critical to support tenanting these vacant spaces by removing barriers and creating financial support programs for small businesses. Financial assistance programs could improve technical assistance resources like design and permitting services, reduced change of use fees, or direct subsidy to support tenanting vacant space and economic development opportunities for business owners.

 Reduce Barriers and Support Funding to Create Smaller Retail Spaces. Many of the existing vacant retail spaces in the Northeast Pioneer Square area are larger floor-plate spaces that exceed the size demands of smaller businesses. Subdividing these larger spaces into smaller spaces that are better able to meet the needs of potential business owners and demand for those kinds of services can be extremely challenging from a design, engineering, and cost perspective.

1. Introduction

As one of Seattle’s oldest neighborhoods, Pioneer Square is rich in history. The area is home to a thriving arts and culture scene and offers a broad range of social services for communities in need of support. However, the area also faces public safety challenges, high commercial vacancy rates, and a large population experiencing houselessness.

The high concentration of government and office uses has shaped development patterns in Northeast Pioneer Square for years. Pre-pandemic, workers at the King County Civic Campus, the Columbia Tower, and other office buildings nearby generated much of the area’s retail demand. Following the shift toward work from home trends induced by the COVID-19 pandemic, the near single-use function of the area as an employment center has impacted the resiliency of the Northeast Pioneer Square District.

In July 2022, The Alliance for Pioneer Square contracted with ECONorthwest to develop a Retail Market Study for Northeast Pioneer Square to identify strategies to support post COVID-19 recovery through economic development tools that bolster vibrancy across Pioneer Square.

This report is Phase 1 of a larger project to be completed in 2023. Phase 2 will include a broader Pioneer Square market study that will be structured to provide an understanding of current market conditions and provide Alliance staff, BIA members, agency partners, and other community stakeholders with strategic actions that could support economic development and activation across the neighborhood.

This report focuses specifically on Northeast Pioneer Square, in service to the Northeast Pioneer Square Framework Plan. It provides background information and analysis on recent market trends and other conditions affecting Northeast Pioneer Square to provide a baseline understanding of market conditions for Pioneer Square stakeholders. The strategies presented in this report provide guidance on how to support existing small businesses, attract new businesses to the area, and provide tools for cross-collaboration between the Alliance for Pioneer Square, city agency partners, property owners, and businesses owners.

Organization of this Report

This report is organized into the following sections:

 Section 2. Market Areas. Describes the market areas from which most retailers in Northeast Pioneer Square draw their customer base.

 Section 3. Drivers of Retail Demand in Northeast Pioneer Square– Population, Employees, and Visitors. Describes the demographic and housing trends of the area including who works in Northeast Pioneer Square Residents, employees, and visitors are the prime drivers of retail demand.

 Section 4. Northeast Pioneer Square Market Conditions and Trends. Presents information about the local, commercial, and residential markets. It presents real estate market trends that will be used to understand the current market conditions and help develop actionable strategies.

 Section 5. Retail Leakage and Demand Analysis. Examines the retail demand and supply in Northeast Pioneer Square and evaluates the area’s potential to support new retailers.

 Section 6. Recommendations Describes the retail strategies to support ground floor retail uses in Northeast Pioneer Square.

Approach

This retail study is based on an assessment of the current retail environment and trends derived from the market analysis, a district-level analysis of demographics, a retail leakage and demand analysis, and conversations with Northeast Pioneer Square stakeholders. These stakeholders include property and business owners, commercial brokers, property managers, developers, and residents.

2. Market areas

ECONorthwest defined the Northeast Pioneer Square Market Area as the geographic area in which most of the retail sales within Northeast Pioneer Square occur and where most retailers are likely to draw their frequent customer base.

To conduct our analysis, we defined two market areas for Northeast Pioneer Square. These market areas are illustrated in the map in Exhibit 1 below. The Northeast Pioneer Square Primary Market Area reflects the core area definition from the Northeast Pioneer Square Framework Plan and is the focus for understanding the current supply of retail and services for this study.

The Northeast Pioneer Square Secondary Market Area is the focus for understanding demand for retail and services in the Primary Market Area. The Secondary Market Area can be considered the capture area for demand from employees, residents, and visitors for businesses in the Primary Market Area.

These market areas are used throughout this report to summarize and describe the demographic, housing, and employment trends for Northeast Pioneer Square, along with real estate trends and retail supply and demand.

LEGEND:

 NORTHEAST PIONEER SQUARE PRIMARY MARKET AREA

 NORTHEAST PIONEER SQUARE SECONDARY MARKET AREA

How market areas are defined is important to understand how segments of demand (residents, employees, and visitors) interact with current businesses and commercial real estate within the Primary Market Area. Northeast Pioneer Square is unique in that employment centers and commercial uses dominate the area, meaning the majority of demand in both the Primary and Secondary Market Areas is derived from nearby employees.

Due to the high concentration of office workers and commercial uses in Northeast Pioneer Square, the impacts of the COVID-19 pandemic have been amplified. The pandemic has led to uncertainty and foundational shifts in the demand for retail and services. Because most of the demand for retail and services in the Primary and Secondary Market Areas comes from nearby employees, remote work and hybrid work trends are significantly impacting current retail and service business. These trends will continue to have strong implications for demand for new services in the area in the near-term.

Because return to the office in downtown Seattle has not fully recovered, this report provides a few scenarios to estimate how many workers and residents would be needed to further support retail services in Northeast Pioneer Square.

Exhibit 1. Northeast Pioneer Square Market Areas Source: Google Earth

3. Drivers of Retail Demand in Northeast Pioneer Square – Population, Employees, and Visitors

Residents, employees, and visitors are the primary drivers of retail demand. With over 15,000 workers employed in the Secondary Market Area, Northeast Pioneer Square is dominated by employment uses and the retail market has developed in response to the demand of the area’s large employee concentration

However, after the pandemic, many of these employees shifted to remote work and have not returned to their places of work. The most recent data indicate employee presence in Northeast Pioneer Square is less than a third of what it was in January 2019 (see Exhibit 9). In addition, about 50 percent of these workers are employed by the government, with many working at the King County Civic Campus. The in-progress King County Civic Campus Master Plan process could result in major shifts in the King County civic campus, meaning that the large concentration of government employees in Northeast Pioneer Square could be moved to other areas of the city potentially losing a large number of employees. While the absence of these employees strains the existing retail environment, it also leaves opportunities for new uses such as mixed-use residential development to possibly replace the King County buildings and land. In this case, the new residential households would still demand a variety of retail services close to where they live.

In contrast to its large employee population, the resident population in Northeast Pioneer Square is quite small. According to the most recent data (see Exhibit 2), the Primary Market Area had a population of less than a 1,000 people, underscoring the importance of employee presence, visitation to the area, and investments in housing at all income levels, to support the local retail market. In addition, people who live in Northeast Pioneer Square tend to earn lower incomes than those who work there. Residents living in the Primary Market Area, on average, earned below the Seattle median household income ($110,781 in 2021).

Because the daytime employee population was the largest compared to visitors and residents employees were the primary drivers of retail demand in the Northeast Pioneer Square area. Visitors and residents of the area also generate retail demand, but to a smaller degree compared to employee demand. Unlike employee presence, the most recent data indicate that visitation 2 to the Northeast Pioneer Square area has largely recovered from the COVID-19 pandemic. The residential population, however, has experienced little growth in the last decade.

2 According to Placer.ai, “A visit is triggered when a panel cellphone scans for a Bluetooth or WiFi signal two consecutive times in a five- to fifteen-minute period. The period between scans depends on the user phone’s Operating System (OS). For example, an Android OS will scan for a WiFi signal every three to seven minutes.”

Population and Household Characteristics

In 2022, the Primary Market Area had an estimated population of 987 people and 474 households. According to the most recent data, all households in the Primary Market Area live in multifamily housing, and about 9 out of 10 households rent. 3 Residents live in both subsidized affordable and market rate housing. The Primary Market Area has a large share of subsidized affordable housing, which contributes to a disproportionately high share of very low-income households to the area (see Exhibit 6). There have been only marginal increases in population during the most recent post-2008 recession development cycle due to the limited amount of new residential development that has occurred in the area.

The Primary Market Area’s limited population growth and high concentration of lowerincome renter households underscores the need for a more balanced mix housing units, employees, and visitors to support a diversified retail environment.

Exhibit 2. Population, Northeast Pioneer Square Primary Market Area, 2010, 2020, and 2022

Source: ESRI Business Analyst

The Primary Market Area’s population increased 19.4 percent between 2010 and 2022. The district’s estimated population for 2022 is slightly higher than it was in 2020.

Exhibit 3. Housing Units, Northeast Pioneer Square Primary Market Area, 2010 and 2022

Source: ESRI Business Analyst

The number of housing units in the Primary Market Area increased 7.8 percent between 2010 and 2022 from 507 units to 547 units.

Exhibit 4. Total Housing Units by Housing Type, Northeast Pioneer Square area, 2022

Source: MIG

Housing in the Northeast Pioneer Square area is comprised of a mix of subsidized affordable housing, market rate apartments, and condos (owner occupied). The large number of subsidized affordable housing units has led to a high concentration of low-income households in the market area. About 75 percent of housing units in the area are subsidized units, demonstrating the need for more diverse housing types in the area.

Exhibit 5. Housing Tenure, Northeast Pioneer Square Primary Market Area, 2010 and 2022

Source: ESRI Business Analyst

The majority of households in the Primary Market Area rent. This percent as a share of occupied housing units declined somewhat from 2010 to 2022, falling from 93 percent of renteroccupied units in 2010 to 88 percent of renteroccupied units in 2022.

All households lived in multifamily housing.

Approximately 89 percent of households in the Northeast Pioneer Square Primary Market Area earn less than the median household income of Seattle which was $110,781 in 2021. Nearly a third of households in the Primary Market Area are very low-income, earning less than $15,000 per year.

Exhibit 6. Median Household Income by Income Bracket, Northeast Pioneer Square Primary Market Area, 2022

Source: ESRI Business Analyst

Employment Trends

Employees working in the Secondary Market Area work predominantly for the government, with slightly over half of employees working in this sector. Most of these workers are employed on the King County Civic Campus. The remainder of employees in the Secondary Market Area work mostly in the Services sector a broad category including occupations from engineers to food service workers. We estimate about half of service workers worked in more highly paid professional services occupations. In all, the Secondary Market Area has just over 15,800 employees with an estimated average annualized wage of $103,541 (using King County as a proxy; see Exhibit 8).

Exhibit 7. Number of Employees by Sector, Pioneer Square Secondary Market Area, 2021

Source: ECONorthwest analysis of PSRC’s 2021 Covered Employment Estimates

Exhibit 8. Annualized Income by Sector, King County, 2022 Q1

Source: BLS county-level Q1 2022 QCEW data

The market area’s current retail environment is dependent on employee presence, but since the onset of the COVID-19 pandemic, the return to office has been slower to materialize than some expected, and workers may never be in the office at the same rates as they were prepandemic. Employers are still figuring out the right balance of in-person to remote work. Approximately 27 percent of workers have returned to the Northeast Pioneer Square area, which is substantially lower than the 40 percent of workers that have return to Seattle’s Downtown.

Exhibit 9 below shows employee presence in the Secondary Market Area using cell phone data compared to January of 2019. Even as the COVID-19 pandemic has wound down, the return to office recovery has been slow. Since the beginning of 2022, employee foot traffic has hovered around 25 to 30 percent of pre-pandemic levels in 2019. This means that a crucial population for driving daytime retail demand is largely absent. Restaurants are no longer able to rely on lunch rushes of office workers. This means that there are less employees in the area to purchase haircuts and other goods and services. Overall, a reduced employee presence leads to a reduction in retail demand and sales to the area. Public safety concerns in the area have also hindered return to the office. All this suggest that addressing public safety and incentivizing return to the office will be key to supporting the retail market.

Exhibit 9. Share of January 2019 Employee Foot Traffic, Pioneer Square Secondary Market Area, 2019-2022

Source: Place.ai

Visitation and Tourism

Visitors and tourists are also important drivers of retail demand. Using cell phone data from Placer.ai, ECONorthwest was able to understand trends across time in visitors and employees in the Northeast Pioneer Square Secondary Market Area (see Exhibit 10). Two and a half years after the COVID-19 pandemic hit, tourism has returned to somewhat of a “normal” state in the Northeast Pioneer Square area, where total visitors have exceeded January 2019 numbers. Approximately 568,000 people visited Northeast Pioneer Square in June 2022, which was the first month where visitor count surpassed January 2019 visitor counts. Leveraging visitation and tourism to Northeast Pioneer Square will be crucial, particularly in light of reduced employee presence in the area. Capitalizing on the area’s active arts and culture scene with public art installations, gallery showings, and other outdoor art events will not only support the arts community but will also help to draw in visitors and increase the time they spend visiting Pioneer Square.

In addition, large events at Lumen Field (such as Seattle Seahawks games) and Mariner’s games at T-Mobile Park draw large crowds of visitors to the Northeast Pioneer Square area. During conversations with stakeholders, interviewees indicated that attendees of these large events often park in or near the Pioneer Square area and walk to the event location. Capitalizing on these visitors with temporary pop-ups and programming in public spaces may help boost retail sales and draw additional visitors to the Northeast Pioneer Square area in the future.

Exhibit 10. Percent of January 2019 Visitor Foot Traffic, Northeast Pioneer Square Secondary Market Area, 2019-2022

Source: Place.ai

4. Northeast Pioneer Square Market Conditions and Trends Retail Trends

Generally, Seattle’s retail rents have seen steady year-over-year growth and have grown 47 percent or $8.87 per square foot since 2010. Both Northeast Pioneer Square’s Primary and Secondary Market Areas have seen similar rent growth to Seattle’s; however, rents have fluctuated more intermittently in the past decade. This is likely due to the volatility of the retail submarket where new stores and restaurants failed in the long-term.

Between 2010 and 2022 Q2, the Primary Market Area saw the greatest rent growth of 77 percent or $9.64 per square feet, while the Secondary Market Area saw a growth of 40 percent or $6.56 per square feet. It is likely that we will see decreases in observed rents in the nearterm as rents are adjusted downward in response to escalating vacancy rates occurring in the post-pandemic commercial real estate environment.

Despite high retail vacancies in the area, the City of Seattle and the Alliance for Pioneer Square have responded well with activating vacant store fronts with pop-up art galleries and exhibits that draw in visitors and pedestrians to the area. These type of art and cultural activities that are well represented in Northeast Pioneer Square can become a pivotal focus

point that can draw crowds form within and around the community to support existing and new retail businesses.

Exhibit 11. Average Retail Direct Annual Rent per Square Foot, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

Retail Vacancy Trends

Since 2010, retail vacancy rates have decreased steadily in Seattle and the Northeast Pioneer Square Primary and Secondary Market Areas. However, both market areas saw spikes in vacancies after the COVID-19 pandemic that were not observed in Seattle as a whole, which indicates the pandemic impacted (and continues to impact) the Northeast Pioneer Square area more severely. The absence of mixed-income residential likely contributes to the region’s lack of economic resilience

Data on retail vacancy rates also likely undercount actual retail vacancy rates across the Northeast Pioneer Square area due to business closures that might still have active leases, increases in sub-lease activity, and smaller property owners that lease up their own properties without traditional broker engagement. The most important aspect of this retail vacancy data is the direction and the velocity of changes, which indicates less demand for retail in a post-pandemic environment.

Exhibit 12. Average Retail Vacancy Rate, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

Retail Absorption Trends

Net absorption in both the Primary and Secondary Market Areas has tracked a cyclical pattern of positive net absorption followed by negative net absorption. Trends in net absorption indicate that most leasing activity is for smaller retail spaces (2,000 square feet in size or smaller). In 2021 and 2022, both market areas saw negative net absorption indicating that more commercial space was vacated than was leased by retail tenants.

In the second quarter of 2022, the Secondary Market Area saw the largest amount of retail space vacated in a single year approximately 26,000 square feet. About 7,500 square feet of retail space has been vacated in the Primary Market Area In the past two years.

Exhibit 13. Retail Net Absorption, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

Office Trends

Historically, office rents across the Primary Market Area, the Secondary Market Area, and Seattle saw remarkable rent growth between 2010 and 2018. For a short period, average office rents in both market areas were above citywide averages. In 2019, office rents began to decline across the city and both market areas. Between 2019 and 2022 Q2, the Primary Market Area had the greatest decline in rents of 8 percent or $2.72 per square feet, followed by Seattle and the Secondary Market Area at 6 percent and 3 percent, respectively.

Between 2010 and 2022 Q2, the Primary Market Area saw its largest rent growth of 44 percent or $10.87 per square feet. Both the Primary Market Area and Seattle saw similar increases of $9.69 and $9.88 per square feet, respectively.

The Primary Market Area has office rents of $33.52 per square feet in 2022 Q2 which is just below citywide average office rents. High observed office rents in the Primary Market Area reflect the fact that office users in the district are predominantly government agencies who often support higher rents along with longer term tenant stability due to longer leases. It is also important to acknowledge that office vacancy rates have increased sharply since 2020 and are likely to put downward pressure on achievable rents over the near-term.

Exhibit 14. Average Office Direct Annual Rent per Square Foot, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

Office Vacancy Trends

The pandemic had a dramatic effect on the Pioneer Square area’s office market and the area saw sharper pandemic impacts than Seattle as a whole. In addition, it is likely that we will not know the full impact to office demand from shifting business and employee preferences until 2025 when all the pre-pandemic leases have ended. Office vacancy rates may increase through 2025. Although, Northeast Pioneer Square’s office users are somewhat different from the rest of Downtown Seattle which could lessen the impact of future vacancies, there are some repositioning strategies that Northeast Pioneer Square could take advantage of which will be covered in detail in the Phase 2 report.

Historically, the Primary Market Area office market has seen relatively high rates; however, its prime location next to the central business district, proximity to a robust transportation network, and institutional office tenants have allowed the area to maintain competitive rents.

Between 2010 and 2018, the Primary Market Area and Seattle observed sharp decreases in vacancy rates. Over this same period, the Primary Market Area saw sharp increases in occupancy, but the pandemic impacts to the office market have hit the area hard. In 2022 Q2, the Primary Market Area had a high vacancy rate of 25.4 percent, followed by the Secondary Market Area (18.6 percent), and Seattle (12.0 percent). Despite the Primary Market Area having the highest vacancy rate out of the two comparison market areas, rents have

remained comparable to that of citywide averages in 2022 Q2, likely due to government and other institutional tenants.

It is also likely that we have not yet seen the bottom of the pandemic impact to office vacancy rates in Seattle or the Northeast Pioneer Square area.

Exhibit 15. Average Office Vacancy Rate, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

Office Absorption Trends

Office absorption in the Northeast Pioneer Square area is reflective of Seattle’s office demand dynamics. In recent years, net absorption has been negative, which means that more office space was vacated than was leased. A negative net absorption and rising vacancy rates are indicative that office rents are likely to decline soon.

Since 2010, the Primary Market Area has not experienced any new office space construction. On the other hand, the Secondary Market Area had two large office developments in 2016 and 2018 totaling almost 700,000 square feet. In comparison, the Seattle office market has been building substantial office space to accommodate its growing tech industry. Since 2010, Seattle has built approximately 26.5 million square feet of office space.

Return-to-office has remained slow to materialize and employers are still figuring out the right balance between remote and in-person work. Until there is more certainty, short-term

office leases will remain the preference of tenants as they figure out their right office needs for their employees post COVID-19. In the meantime, long-term office leases will likely be less desirable by tenants and property manages and property owners alike will need to adjust to the leasing preferences of the majority of tenants.

Exhibit 16. Office Net Absorption, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

Multifamily Rent Trends

Historically, market rate multifamily rents in Seattle and both Northeast Pioneer Square market areas have increased at a steady rate. Since 2010, rents in the Primary Market Area have increased $246 per month, or about 29 percent, compared to $559 per month in Seattle or 38 percent. Since the onset of COVID-19 in 2020, rents have increased even further, increasing by 17 percent in the Primary Market Area and 16 percent in Seattle.

Exhibit 17. Average Multifamily Rent Per Unit, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

The average per square foot rents for market rate units in the Primary Market Area have increased 29 percent ($0.53) from $1.81 in 2010 up to $2.34 in 2022 Q2.

In Seattle, the average per square foot rents have increased 39 percent ($0.83) from $2.13 in 2010 up to $2.96 in 2022 Q2. Similarly, the Secondary Market Area has seen modest rent growth of 34 percent ($0.74) from $2.17 in 2010 up to $2.91 in 2022 Q2.

On a per square foot basis, rents in the Secondary Market Area have closely mirrored Seattle’s rents; however, Seattle’s apartments tend to be smaller in size than apartments in the Secondary Market Area.

Source: CoStar

Housing is in great demand in Seattle and both Pioneer Square market areas. Vacancy rates in the Primary Market Area have fallen rapidly in the last decade and were at 4.9 percent in the summer of 2022, while vacancy in Seattle and Pioneer Square were 6.3 and 5.7 percent, respectively. Overall, residential demand exists in both Pioneer Square market areas. Very low vacancy rates coupled with continued rent growth year-over-year indicates upward pressures on rents and future demand for new construction at all income levels.

Exhibit 18. Average Multifamily Direct Annual Rent Per Square Feet, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2.

Exhibit 19. Multifamily Vacancy Rate, Northeast Pioneer Square Primary and Secondary Market Areas and Seattle, 2010 to 2022 Q2

Source: CoStar

5. Retail Leakage and Demand Analysis

This analysis summarizes information on retail demand within the Northeast Pioneer Square area by examining consumer expenditures, overall retail supply, and retail sales which are key metrics that provide insights into the existing and future retail performance by retail store category. ECONorthwest also complied covered employment data from PSRC to estimate worker demand for retail.

Understanding that remote work will continue to influence how many employees are back in the office, ECONorthwest developed a retail demand model that considers resident spending and worker spending. Different return to work scenarios were modeled to show the retail demand of workers based on the assumptions that not all employees will return to the office. These scenarios assume that 30, 50, and 70 percent of all workers in the market area will return to the office. Nearby employees represent the largest segment of demand for retail and services in the Northeast Pioneer Square area and the near-term future of retail opportunities in the area will be influenced by employees returning to in-person work.

Exhibit 20 below shows that the vast majority of potential retail demand comes from employees and that food and beverage retailers and restaurants are in the highest demand in the Northeast Pioneer Square area. If 70 percent of employees returned to the area, as much as $57 million in food and beverage products could be demanded in the Northeast Pioneer Square area. Under existing return to office trends, less than $30 million in food and beverage products is likely demanded.

Exhibit 20. Total Worker and Resident Demand, Northeast Pioneer Square, 2022

Source: ECONorthwest Analysis of Claritas, PSRC, and ESRI Business Analyst data

However, encouraging workers to return to the office is not the only way to increase retail demand in Northeast Pioneer Square. Investing in housing in the area will both increase retail demand and build community resiliency.

Exhibit 21 below shows the potential new resident demand that could arise from adding 964 new household units in the Secondary Market Area if the proposed 4th and Columbia mixeduse tower is built 4. These new households could contribute to a 122 percent increase in residential retail demand in Northeast Pioneer Square, assuming their spending habits are the same as current residents.

Exhibit 21. Current and Potential Resident Demand, Northeast Pioneer Square, 2022

Source: ECONorthwest Analysis of Claritas, PSRC, and ESRI Business Analyst data

Retail Leakage and Demand

Demand for retail in the Northeast Pioneer Square area is measured through consumer expenditures Typically, workers spend around 5 to 10 percent of their disposable income near their places of work (lower-income workers spend a higher proportion of this income). Examining consumer expenditures can provide insights into the demand for retail store types.

Exhibit 22 below shows that, under current conditions (Low (30%) scenario), there is a surplus of retail supply across all categories, meaning additional retail services are not demanded in the area. However, this surplus decreases in scenarios with higher shares of workers returning to in-person work. This analysis indicates that retail demand and retail market potential in the Northeast Pioneer Square area is extremely sensitive to what future employment looks like because employees represent such a large segment of overall demand.

Only in the high return to work scenario (70 percent of pre-pandemic employees returning to work) is there additional demand for more food and beverage services to help support streetlevel activation.

4 https://www.crescentheights.com/portfolio/4th-columbia

Beyond a return to in-person work, adding housing and attracting new residents to the area is another way to generate additional retail demand. Under a hypothetical housing scenario where 50 percent of workers return to in-person work and 964 new households are generated in the area, retail gaps emerge across nearly all spending categories. The greatest gap is projected to be in clothing and clothing accessories stores with over $15.9 million in potential unmet demand.

Conversely, if current remote work and hybrid work trends continue at current observed rates with around 30 percent of employees back in-person and no new housing is developed, it is likely that existing businesses in the Northeast Pioneer Square area will continue to face headwinds related to a lack of nearby employees and residents to support existing businesses.

Exhibit 22. Retail Gap/Surplus Analysis, Northeast Pioneer Square, 2022

Source: ECONorthwest Analysis of Claritas and PSRC data

Retail Market Potential

The retail leakage analysis indicates what could be demanded for additional retail store categories in the Northeast Pioneer Square area if the number of in-person employees in the

area increased and new residents were attracted to the area. For workers, retail demand is predominantly for food and beverage services while new potential residents are more likely to demand clothing, accessories, and home goods as well as nearby eating and drinking restaurants.

We have also heard consistently through conversations with stakeholders that much of the existing and vacant retail space available in the Northeast Pioneer Square area is not suited to demand from target users without expensive tenant improvements. The primary demand for businesses in the Northeast Pioneer Square area is smaller format food service and personal service businesses that are looking for less than 2,000 square feet and oftentimes less than 1,000 square feet.

Where demand does exist for missing business types in the Northeast Pioneer Square area, there is not readily leasable space for those businesses. The existing retail inventory in the area tends to be larger format that requires substantial investments to partition into smaller spaces, which also often triggers additional building improvements. Additionally, many existing vacant retail spaces would require a change of use or substantial building system improvements that are major cost and process barriers for small businesses to undertake as tenant improvements. If more retail supply was available in the Northeast Pioneer Square area, either through improvements to existing retail space or through new inventory, that was better suited for the needs of small businesses, it is likely that the neighborhood would see more businesses that meet the needs of residents and workers in the area.

Much of the food and personal services that have historically located in and around the Northeast Pioneer Square area are internally focused within larger office buildings and take the form of food court type quick service restaurants, employee-serving delis, or personal services not easily accessible to non-office workers. Given post-pandemic trends, it is timely to think about how retail and services can be more externally facing to serve both workers and residents from other parts of the area, especially as workers in office buildings continue to work from home.

Stakeholder Perspectives on Pioneer Square

To gain perspective on ground floor retail trends and the effect that remote work caused by the COVID-19 pandemic has had on businesses in the Northeast Pioneer Square area, ECONorthwest staff hosted a workshop with a set of stakeholders, including property and business owners, brokers, and property managers. The following section summarizes common themes discussed by multiple stakeholders.

Stakeholder Interviews Summary Themes

 Encouraging King County and the City of Seattle employees to return to the office or the area for recreational purposes will help support a thriving retail environment. King County and City of Seattle are major employers in the area and

its employees help support the local businesses in the area by shopping for lunch and other goods and services.

 The concentration of social service providers in the area provides challenges for ground floor retailers.

 Large retail spaces greater than 1,500 square feet in size are challenging to lease up in Northeast Pioneer Square due to businesses requiring smaller spaces.

 A substantial number of ground floor retail spaces in Northeast Pioneer Square are large, deep, and narrow with little to no opportunities for subdividing these spaces.

 Stakeholders have expressed interest in changing the use of ground floor retail spaces, but the costs and required seismic upgrades to the building that are triggered with this action are cost prohibitive.

 Public safety issues in the area have hindered return to the office. Some stakeholders expressed that the safety of their employees is a concern in returning to the area.

6. Recommendations

Based on the analysis in this report and conversations with stakeholders, ECONorthwest developed a set of strategies to help support ground floor retail in the Northeast Pioneer Square area.

 Diversify the Mix of Uses in and Around Northeast Pioneer Square. The near single-use function of the area as an employment center has resulted in impacts to district resiliency in response to the pandemic. The Alliance should continue to work with City agency partners and district stakeholders to support a more balanced mix of uses in the district with an emphasis on creating more workforce and market rate housing in the area.

 Add Market-rate Housing to Support Neighborhood Resiliency. A more diverse mix of housing will support a more resilient neighborhood economy. The chief recommendation from a 2022 report produced for the Alliance by MIG 5 was that Pioneer Square lacked both workforce and market rate housing. Adding more housing at a range of affordability levels will attract more residents to the area and help to stabilize it in the wake of the pandemic and the remote work era. The addition of new household units will also help with replacing some of the worker demand for retail. 5

MIG. “Pioneer Square Housing Analysis.” March 2022.

 Leverage the Area’s Rich Arts and Culture Scene with Complimentary Uses. Capitalizing on the area’s active arts and culture scene with public art installations, gallery showings, and other outdoor art events will not only support the arts community but will also help to draw in visitors and increase their dwell time. Recognizing Pioneer Square’s arts and cultural assets and the marketing of them is an important element of economic development that can help create resiliency across the Northeast Pioneer Square District. Arts and cultural exhibits alone cannot change the retail dynamics of an area. Marketing of these assets and continued programming of complimentary uses are needed to boost visitors and attraction to the area year-round.

 Support Ground Floor Activation in Large Redevelopment Projects. Our analysis indicates there are a few challenges for retail and service uses in the area, including public safety concerns and reductions in foot traffic from employees. Another major challenge is that many food service and personal services establishments have tended to be internal-facing within larger office buildings. A post-pandemic retail environment in the Northeast Pioneer Square area is likely to need more flexibility to attract patronage from more segments of demand and will need to be more externally facing to residents and visitors who come to, or pass through, the area. There is an opportunity for smaller format street facing retail to meet space needs for target business and to advance goals for a more vibrant public realm in the area.

 Activate Empty Storefronts. Long term retail vacancies often require organization and active marketing efforts to advertise spaces within an area. Activating these spaces often needs creative solutions like the resources that Seattle Restored offers. Other similar programs like PopUp Denver offer financial support and a package of resources for small businesses to set up shop. This program offers financial support to small businesses and entrepreneurs to set up shop in empty storefronts in an area of the city that is struggling to recover from the pandemic and provides interior design, streamlined permitting, setup and merchandising support. Given post COVID-19 market trends, property owners may need to lower their asking rents and shorten lease terms to fill their vacant spaces. In return, active storefronts will likely lead to a reduction in crime and more pedestrian activity.

 Support Employees Returning to In-Person Work. The current reduction of inperson employees in response to post-pandemic remote work and hybrid work trends has removed a large segment of demand for business. Some of the largest employers in the area are government employees and the Alliance and stakeholders should continue to collaborate with City and County leadership to support programming and activities that can help incent and support workers returning to the area consistent with City and County policies.

 Reduce Barriers to Change of Occupancy. One of the major barriers identified in conversations with building owners, building managers, brokers, and business owners is the uncertainty and costs associated with change of occupancy for commercial uses and tenant improvements. Many entrepreneurs and new business owners are often unaware of the timing, process, and cost implications associated with commercial change of use within existing commercial spaces. With relatively high existing retail vacancy rates, it will be critical to support tenanting of these vacant spaces by removing barriers and creating financial support programs for small businesses. Financial assistance programs could improve technical assistance resources like design and permitting services, reduced change of use fees, or direct subsidy to support tenanting vacant space and economic development opportunities for business owners.

 Reduce Barriers and Support Funding to Create Smaller Retail Spaces. Many of the existing vacant retail spaces in the Northeast Pioneer Square area are larger floor-plate spaces that exceed the size demands of smaller businesses. Subdividing these larger spaces into smaller spaces that are better able to meet the needs of potential business owners and demand for those kinds of services can be extremely challenging from a design, engineering, and cost perspective. This is especially true for larger retail spaces in historic buildings that would require major structural improvements to support subdividing into smaller spaces. Much of the conversation around commercial building repositioning has been focused on converting office space to residential uses. The Alliance and stakeholders could work with City partners and professional organizations like AIA and NAIOP to advocate for reduced regulatory barriers and financial incentive programs to facilitate more smaller retail spaces as active ground floor uses.