Real Estate Strategic Plan Presentation

Real Estate Strategic Plan Briefing        Item No:   - _supp------------------
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Meeting Date: October 27, 2020








1

Overview
Market Update
Real Estate Principles
Port Property Profiles and Recommendations
Acquisitions and Partnership Opportunities
Mar     April      May       June       July      August    September    October   November   December    January
Port
Commission    x
Port RE
Team               x                     x              x
External
Advisory                         x                          x                                      x
Committee
Port Property                                Acquisitions &
Research and                               Partnership
Recommendations                           Research
2

Market Context
Region Unemployment: Initial Claims with Continued Claims, Jan - Sep 2020
Number Of Claims                                                                                                                Number Of Claims
160,000                                                                                                                               160,000
140,000                                                                                                                               140,000
120,000                                                                                                                               120,000
100,000                                                                                                                               100,000
80,000                                                                                                                                 80,000
60,000                                                                                                                                 60,000
40,000                                                                                                                                 40,000
20,000                                                                                                                                 20,000
0                                                                                                                      0
January-20    February-20    March-20      April-20       May-20       June-20       July-20      August-20   September-20
Snohomish Initial Claims              Pierce Initial Claims                   King Initial Claims
Snohomish Continued Claims        Pierce Continued Claims             King Continued Claims
3

Market Context
OFFICE                                   INDUSTRIAL
Rent Collections:               96.4%                                Rent Collections:               99.4%
CMBS Mortgage            2.3%                           CMBS Mortgage            1.2%
Delinquencies:                                                      Delinquencies:
US VACANCY              10.7%                         US VACANCY              5.7%
Current:                                                             Current:
Forecasted Peak:              12.7%                              Forecasted Peak:              6.9%
in 2023                                                             in 2021
BIG QUESTIONS                                BIG QUESTIONS
WFH impact on vacancies?                           Who are the winners in the
Rise or fall of coworking?                                 supply chain disruption?
Will telemedicine reduce                               Will manufacturing
demand for medical office?                           meaningfully increase space
demand?

10/20/2020            Sources: NAREIT, Trepp, Costar, STR, Zillow, US Census Bureau                                                                        4
Note: Mortgage delinquencies represent CMBS delinquencies. Data as of Aug 2020 where not specified.

Market Context
RETAIL                               HOSPITALITY/LODGING
Rent Collections:                                                       CMBS Mortgage
Free standing:               90.5%                                                              23.0%
Delinquencies:
Shopping Center:            80.1%
Hotel Occupancy:
CMBS Mortgage                                                                     47.0%
14.8%                     Jul:
Delinquencies:                                                       Aug:                         50.2%
US VACANCY              10.2%                         Recovery to 20-year historical average
Current:                                                             expected in 2023.
Forecasted Peak:              14.6%
in 2021
BIG QUESTIONS
BIG QUESTIONS
Will $50 billion in delinquent
Which retail categories will
CMBS debt trigger a
survive?
broader financial crises?
Which retail typologies will
How many independent
be successfully redeveloped                           hotels will not make it
in the near term?
through the downturn?
10/20/2020            Sources: NAREIT, Trepp, Costar, STR, Zillow, US Census Bureau, Moody's Analytics                                                       5
Note: Mortgage delinquencies represent CMBS delinquencies. Data as of May 2020 where not specified.

Market Context  Regional Industrial
Total Inventory and Deliveries, 2016-2020 YTD                   Puget Sound Industrial Vacancy, 2016-2020 YTD
Total Inventory                                                                                       8.0%
(in Millions of SF)                                                                   Total Deliveries
(in Millions of SF)          7.0%
335m                                                         4m        6.0%
5.0%
330m                                                         3m
4.0%
3m       3.0%
325m
2.0%
2m
1.0%
320m
2m       0.0%
2016        2017        2018        2019        2020
315m
1m
Seattle Metro            King County
310m                                                                                      Pierce County        Snohomish County
1m
305m                                                         m                 Avg. Rent*    Vacancy                  Avg. Rent*    Vacancy
2016        2017        2018        2019      2020 YTD                 Metro      $11.69        5.4%          Magnolia      $13.83        2.6%
King County        $13.06          4.9%               Ballard        $16.89          5.5%
Pierce County         $8.20          7.8%          Duwamish N        $13.16          6.1%
King Co Deliveries                 Pierce Co Deliveries
Snohomish County       $10.14         3.4%          Duwamish S       $12.75         1.3%
Snohomish Co Deliveries          Total Inventory
*Avg. Annual NNN rate per square foot
6

Market Context  Regional Office
Total Inventory and Deliveries, 2016-2020 YTD                   Puget Sound Office Vacancy, 2016-2020 YTD
Total Inventory                                                                  Total Deliveries
(in Millions of SF)                                                                                                8.5%
(in Millions of SF)
8.0%
216m                                                        5m
7.5%
214m                                                        5m
7.0%
212m                                                        4m
6.5%
210m                                                        4m         6.0%
208m                                                        3m         5.5%
206m                                                        3m         5.0%
204m                                                       2m         4.5%
2016         2017         2018         2019       2020 YTD
202m                                                        2m
200m                                                        1m                      Seattle Metro              King County
Pierce County                   Snohomish County
198m                                                        1m
196m                                                        m
2016        2017        2018        2019      2020 YTD                  Market  Avg. Rent*    Vacancy             Submarket  Avg. Rent*    Vacancy
King County       $36.57         6.8%   Belltown/Denny Regrade       $41.76         4.7%
King Co Deliveries             Pierce Co Deliveries                                  Pierce County       $26.23         5.8%     Pioneer Sq/Waterfront       $40.60         8.7%
Snohomish Co Deliveries      Total Inventory                                Snohomish County      $25.42        6.4%     Queen Anne/Magnolia      $37.47       12.2%
*Avg. Annual Full Service rate per square foot
7

Real Estate Principles

8

Port Real Estate Principle Framework
"The Port of Seattle will use its real estate, capital
Framework                                                assets and financial capabilities to accomplish the
Century Agenda. These are tools to thoughtfully
steward, rather than areas well-suited for specific
Strategic Principles                                                  25-year goals."
Existing Properties
Manage for the Mission                                     Strategies for
Operational                    Existing                                   Strategic Principles
Opportunity
Properties
Cashflow                                                                    Use to Continually
Evaluate Real
Leverage Expertise                                                                             Property
Performance and
Acquisitions                                                        Alignment with
Operational                   Acquisition
Principles
Opportunity                   Strategies
Partner to Amplify                    Cashflow

9

Port Real Estate Principles
Illustrative Examples:
Manage for the Mission
Fishermen's Terminal:
Set clear objectives for each           Opportunity to significantly advance the port's agenda
property and the portfolio               related to maritime industries
Frequently evaluate each             High cost of development
Unlikely to produce market returns (low ROI per
property's contribution to the
traditional financial measures)
mission
Consider selling
underperforming properties to       Harbor Marina Corporate Center:
redeploy capital and amplify           A challenged property that doesn't make a strong
impact                              contribution to the Port's mission
Value can be re-allocated to amplify the Port's mission
and agenda


10

Port Real Estate Principles
Illustrative Examples:
Leverage Expertise           Achieving Multiple Missions (Lower Duwamish Industrial
Identify opportunities to              Area)
advance multiple Port policy            Engage in development that works towards multiple Port
objectives with each                     mission objectives: environmental policy advancement,
investment                            social justice, supporting neighboring industrial lands, job
creation
Adopt processes that allow for
efficient value-add input               Internal Coordination (RFP Pre-Launch review to Streamline)
from multiple departments            Establish an internal RFP pre-launch process to streamline
review, evaluation and implementation
Increase effectiveness in execution and decrease risk and
uncertainty


11

Port Real Estate Principles
Illustrative Examples:
Partner to Amplify Impact
Ground Leasing and Private Partnerships (Des Moines Creek
PUBLIC AGENCIES                 West)
Where real properties and shared
Partnering or leasing to private entities to maximize the
policy objectives align
efficient use and development of the Port's lands
INDUSTRY STAKEHOLDERS          Operational Partners (Harbor Marina Corporate Center)
Where joint investments can improve        Initiate a working group with other public agencies to
sector performance                          identify opportunities where publicly owned properties can
be optimized
PRIVATE INVESTOR/DEVELOPERS     Financial Partners (EDA)
Where private capital can more             Partnering with other public agencies, such as the Economic
efficiently redevelop Port properties
consistent with Port objectives                  Development Agency (EDA), could provide access to funds
that the port could leverage to meet larger goals

12

Port Real Estate Principles
Property Classifications:
OPERATIONAL PROPERTIES
Formalize property classifications and     Primary purpose of the property is to
apply to each property within the          support Port operations.
portfolio.                                     Capital investments are made to optimize
functions by the Port and industry
partners/tenants.                                    OPPORTUNITIES
Property classifications can change
Property is
over time.
CASHFLOW PROPERTIES                primarily an
unrealized
opportunity.
More than one classification can apply          Primary purpose of the property is
to hybrid properties.                             to generate net cash flow.
Manage to market based metrics.
Reinvest to enhance net cash flow.
Apply appropriate evaluative metrics
to each property classification.

13

Contents  Properties Being Evaluated
FOCUS PROPERTIES
Focus Properties:
The 2020 Real Estate Strategic Plan will
focus on this group of eight properties in
the Port of Seattle's real estate portfolio.

2016 PROPERTIES  REVIEW
Review Properties:
The 2016 Real Estate Strategic Plan
evaluated these properties. These
properties are not the focus of the 2020
Strategic Plan Update.

*Properties now under the purview of the Sustainable
Airport Master Plan (SAMP).

14

Property Profiles

15

Fishermen's Terminal
Property Type:         Operational          Cashflow       Opportunity
Key Observations
HQ of Seattle's commercial fishing fleet
Strong occupancy (94% occupied)
Retail square footage is a key driver of overall revenue
for the uplands portion of the property
Deferred maintenance (Downie and Nordby for
example) is a key issue for the uplands facilities
Near term need for capital improvements and/or
redevelopment
Occupancy                         Largest Occupants
94.2% | 21k SF Available         Fishing Vessel Owners Marine Ways (51% RSF)
Chinooks (3% of RSF, Largest Gross Income)
Annual Rental Income                 Use Summary
$ 2,355,251             Office, Retail, Restaurant,
Warehouse, Dock, Yard
Weighted Avg. Lease Term
33 months
Leases Expiring In 2020/2021
29% of RSF | 104k SF                                      16

Fishermen's Terminal
Property Type:         Operational          Cashflow       Opportunity
Staff/Stakeholder Input
Large CIP outlay required to attend to deferred maintenance,
necessary but will not generate a positive NPV
Capital investment in existing facilities needs to be invested
strategically
FT is expensive to develop due to the quality and nature of
the site fill
Could provide an opportunity to explore EDA funds

Strategies
Keep operationally critical organizations in place to support maritime
industry
Identify and implement new developments to support both the existing
maritime industries and incubate new maritime industries to sustain the
industry over the long term
Revaluate needed capital investments at existing facilities as part of
broader site improvements and investments
Improve visitor experience thru wayfinding signage and interpretive
displays (1% for art project)
17

Salmon Bay Marina
Property Type:         Operational          Cashflow       Opportunity
Key Observations
Originally purchased based on adjacency to FT, protection of
industrial land, and uplands development potential
Currently serves as a recreational marina adjacent to FT
Underutilized areas permitted for development under seller's
MUP
Seller's MUP at uplands still active from acquisition (mini-
storage and commercial)

Occupancy                         Largest Occupants
100%             Special Needs Group INC, 62%
Cascade Adventure Vans
Annual Rental Income                 Use Summary
$49,715 | $12.31/OSF        Office, Retail
Storage Warehouse
Weighted Avg. Lease Term
17 months
Leases Expiring In 2020/2021
62% | 2.5k SF
18

Salmon Bay Marina
Property Type:         Operational          Cashflow       Opportunity
Staff/Stakeholder Input
Focus on the development of the uplands at Salmon Bay
Permits for in water and uplands are separate
Interest in defining how this property can potentially
serve/benefit FT and fulfill its economic potential
Need to address in water uses and relationship to uplands

Strategies
Evaluate the opportunity to utilize/modify the MUP at the uplands prior to
its expiration
Explore the opportunity to develop uplands to support uses at Fishermen's
Terminal
Use uplands development to support reinvestment in docks and waterside
facilities


19

Terminal 91  Uplands
Property Type:         Operational          Cashflow       Opportunity
Key Observations
Facilities largely occupied
Critical cruise ship and maritime facilities on P90
&91
Industrial land capacity on Uplands
Expensive for the Port to self-develop but will
provide benefits to the Port's core mission over the
long-term
Occupancy*                        Largest Occupants
100%             City Ice (26% of RSF)
Lineage (34% of RSF)
Annual Rental Income*                Use Summary
$3,212,034             Warehouse, Yard,
Storage
WALT (Months)
108              *Note: Inclusive of land/yard leases
Leases Expiring In 2020/2021*
9.8% | 97k of RSF *
20

Terminal 91  Uplands
Property Type:         Operational          Cashflow       Opportunity
Staff/Stakeholder Input
Issues around Magnolia Bridge replacement
Maritime and Cruise both highly seasonal; the conflict of how to
support both industries slows development progress
Need to relocate Maritime Ops facilities
Opportunity to locate maritime industry tenants from other
locations in City (Lower Duwamish for example)
Magnolia and Queen Anne communities sensitive to Port
operations and development
Strategies
Keep planned growth in motion. Continue to move Phase 1 development
of light industrial buildings through design and permitting
Make utility and infrastructure investments needed to support Phase II
development of Uplands
Target maritime industries for occupancy in Phase 1 and Phase II; Provides
an alternative space option to maritime industry suppliers to locate next
to their key customers
Explore how to improve freight mobility and access for employees
(especially as new development unfolds)
21

Harbor Marina Corporate Center
Property Type:         Operational          Cashflow       Opportunity
Key Observations
West Seattle Bridge Fall zone creates uncertainty
Future light rail alignment needs will likely impact site
Low occupancy  lost two large tenants in 2019 (72%
currently occupied)
Relatively short lease terms and significant expirations
in 2020/21
Difficult leasing environment overall
Occupancy                         Largest Occupants
72.0% | 38k SF Available         The Mountaineers INC (12.5%)
Tideworks (8.5%)
Annual Rental Income                 Use Summary
$1,253,000 | $12.85 Avg Lease Rate     Office
WALT (Months)
19
Leases Expiring In 2020/2021
26% of RSF | 36k SF
22

Harbor Marina Corporate Center
Property Type:         Operational          Cashflow       Opportunity
Staff/Stakeholder Input
The West Seattle Bridge closure is affecting this site in multiple
ways including location withing the fall zone, and site access
limitations
Tenants have been made fully aware of fall zone dangers by
SDOT
In addition to the issues with the West Seattle Bridge, ST3 will
also likely impact HMCC.
Strategies
Pursue partnership opportunities with potential partners (KC, SDOT, ST) to
support required infrastructure improvements associated with planned
bridge repairs and light rail alignment
Consider putting property on market for sale
Complete a feasibility study to determine highest and best use for
property (including marina)
Evaluate relocation of commercial in water uses to other Port properties

Explore a strategy to allow leases to expire and/or only extend on the
short term to allow for maximum flexibility in the near term
23

World Trade Center West
Property Type:Property Type:         OperationalCashflow           Cashflow       Opportunity
Key Observations
Achieving below market rents
Significant vacancy (75% currently occupied)
WTC Club a Port Operation (7,000 sf) and revenue
producer for Port
Home to Port's event operator, Columbia
Hospitality
Mix of office tenants
Occupancy                         Largest Occupants
75.2% occupied | 17k available     Opus Solutions (27%)
Columbia Hospitality (18%)
Annual Gross Income                  Use Summary
$797,000 | $17.94 Avg NNN Lease
Office, Retail, Event Center (WTC)
Rate
WALT (Months)
31
Leases Expiring In 2020/2021
15% of RSF | 10,293 SF
24

World Trade Center West
Property Type:Property Type:         OperationalCashflow           Cashflow       Opportunity
Staff/Stakeholder Input
WTCW was a significant property for the Port's vision in
establishing an international business hub along the
Seattle waterfront at the turn of the century.
Original focus was on building non-profits focused
around trade and international development
Waterfront revitalization disruptions have impacted
office markets prior to COVID
Strategies
Evaluate the Property in terms of its fit and alignment with
Port's mission and objectives

Evaluate the implications of a sale of the WTCW property

Maintain mission supportive uses in the Building such as
the World Trade Center Club through a long-term lease of
the space or consider relocation of such uses

25

Pier 69
Property Type:         Operational          Cashflow       Opportunity
Key Observations
Has served as the Port headquarters (145,420 SF)
since 1993
Represents a major investment by the Port in the
City's waterfront revitalization
Includes a mix of water dependent tenants
Water dependent uses required on site
(approximately 25%)

Occupancy                         Largest Occupants
100%             Port of Seattle (77% of building)
Clipper Navigation
Annual Gross Income                  Use Summary
$658,904             Office, Dock, Storage/warehouse
Retail
WALT (Months)
53
Leases Expiring In 2020/2021
0%
26

Pier 69
Property Type:         Operational          Cashflow       Opportunity
Staff/Stakeholder Input
Pier 69 is a Port legacy project and important property
for the long term
Focus should be on leasing strategies in the near and
long term
Consider leasing strategies that reflect changes in the
Port's office space needs
Strategies
Consider future leasing efforts tied to the in-water dependent uses
and releasing (key lease expiration in 2022)

Re-evaluate Port's office needs post COVID to determine space
requirements at P69

Evaluate how to reuse Clipper Caf space

Evaluate P69 leasing options based on forecast of Port office space
needs

27

Portfolio Management
Capital (equity) within a real estate portfolio is a
resource.                                                New Capital
Market fluctuations, policy priorities and                   Competes with other investment
property level opportunities/ challenges impact              opportunities.
the quantity, performance and risk profile of
invested capital.
Recycled Capital
Active portfolio management requires a
constant review and balancing of policy                     Harvested from existing
performance (mission), cash flow and equity                properties and redeployed to
growth.                                                better achieve portfolio goals.
ILLUSTRATIVE EXAMPLE
1.  Sell WTCW (lease back or relocate WTC)
2.  Fund
Pre-Con for Phase 1 @ T91
Design and permitting @ FT
Acquire DMCW WSDOT Prop & RFP for development

28

Evaluate Acquisition and Partnership Opportunities
Manage for the Mission     Leverage Expertise          Partner to Amplify Impact
What types of properties are         What secondary policy              What other organizations have an
being considered?                    objectives can be achieved            interest in the success of this
within the scope of the                investment?
primary business plan?
What is the business and
performance plan?                                                     How can others be brought into an
Are there alternative                  investment to amplify impact?
structures/approaches that
What is the Port's mission
would produce outsized
objective?
benefits compared to other          When should the Port partner?
initiatives?
How will success be measured
in the near, mid and long term?


29

Next Steps
Evaluate acquisition and partnership
opportunities
Evaluate funding options and strategies
Develop methodology to rank/prioritize
acquisitions/partnerships
Incorporate key findings/recommendation
into Maritime/EDD CIP
Implement key real estate development
recommendations within strategic plan



30

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