By: Matthew Kwatinetz

What’s the big deal about real estate? Everybody’s suddenly talking about it in the context of Arts & Entertainment (A&E). Meanwhile, Ben Bernanke, Chairman of the Federal Reserve, has once more lowered interest rates and can be heard in sound bites on NPR discussing the “real estate crisis”. So, if real estate is truly in the hole, why are rents continuing to rise and A&E based businesses still losing spaces in every neighborhood in the City?

Well, as with many factors that measure livability or quality of life, Seattle is once more on top of the heap. It’s a mixed blessing in this case. While the rest of the nation experiences real estate crisis, Seattle only is affected by the fear of eventual crisis, thus slowing down the housing market and making lenders and banks nervous. Our actual fundamentals here continue to be strong—with solid employment growth, population increases and decreasing unemployment figures. The Urban Land Institute (ULI) has named Seattle the number two commercial real estate market in the nation, second only to Manhattan. What this means in practice is that as the housing economy around the country is crumbling, Seattle continues to experience strong growth in the commercial market. But that is just half of the picture. There is an exponential effect to our strong position. There are investors, banks, Real Estate Investment Trusts (REITs) and pension funds that have a certain amount of money allocated to invest in real estate. As they are looking around the nation for good money placements, their eyes are invariably turning to the Pacific Northwest.

What does that have to do with Arts & Entertainment? Though it is impossible to predict if the trend will last (or even change directions), some of us worry that this confluence of factors could accelerate the gentrification cycle. As it specifically affects A&E, gentrification begins when arts organizations, entertainment businesses and/or artists seek space to create, perform, do business, and live. Usually these seekers are resource poor (non-profits, start-ups, individual artists) or they have a need to be in outlying areas to avoid negative neighborhood impact (late night activities, loud music, shop/construction noise). For one or both of these reasons, A&E normally will move to outlying, blighted or otherwise undesirable neighborhoods to set up shop. Certain areas attract clusters of such uses, and begin to attain a reputation for the (tragically, it turns out) hip.

As this continues, the A&E uses form a concentrated pull that draws traffic—ie, people—to the area. People begin streaming in to see shows, throw parties, buy unique items, etc. All of this activity and traffic leads to neighborhood revitalization—bars, cafes, restaurants and retail soon follow in the footsteps of the aggregated A&E uses. The area then begins to look more desirable to developers and retailers, so land prices start to rise. The increase in land prices drives up rent, as property owners have to cover larger tax amounts, and developers begin making offers to those property owners to sell.

Once land prices rise sufficiently, it becomes more economical to knock down existing buildings and build new ones than to reuse existing buildings. This is because each given lot of land has a certain maximum amount of building (ie, Floor Area) that can be built on the land—and obviously, the more floor area, the more rent coming in, which means a higher value for the building. So when land prices become high enough, it makes financial sense to rebuild any buildings that are not in their “highest and best” use.

And so, the troubles begin. Residential development of apartments and condos as well as the replacement of current retail and office buildings with higher end stock accelerates the increase in rents and land prices. It is a feedback loop that escalates quickly. Buildings are sold out from beneath tenants at prices that would be unimaginable months prior. The influx of new business and residential tenants soon creates an emigrating population that is greater than the “pioneers”. Those new tenants often contain some individuals or businesses that begin to complain about impacts from the very activities that originally brought A&E uses out to this (no longer) outlying neighborhood. The municipality normally feels a need to respond, and the regulatory environment becomes increasingly hostile to the A&E uses in an attempt to appease the new neighborhood users. Often, this increase in regulation, even if motivated by benign intent, will quickly drive out the A&E uses to begin the cycle again.

There are many ways to address this predicament and to our credit in this region, the reigning municipalities (especially City of Seattle and King County) are moving as quickly as they can to understand and combat the issues at hand. On Capitol Hill, we have had a series of meetings that have accelerated since the Oddfellows’ Hall debacle, and on April 2 at 5p we will be taking our concerns to City Hall. I encourage you all to join us. Next time, I’ll talk more about some of the innovative solutions that have been proposed here in the PNW and elsewhere across the country.