There's no doubt the Puget Sound region's commercial real estate market is strong and growing. A report by the Urban Land Institute and PricewaterhouseCoopers recently ranked the region second only to New York City in overall prospects for commercial and multifamily investment and development. And the region placed first in industrial, office, rental apartment and for-sale home development, and second in retail and hotel development.

"Seattle is developing into an exciting 24-hour city smack-dab on key Asian shipping routes, and its brainpower economy diversifies," according to the report.

Meanwhile, GVA Kidder Mathews says the region's office market "was robust in the third quarter, as the regional vacancy rate dropped to 8.8 percent" and "this is a result of an economy that has continued to expand long after the national stumble."

But there are long-term concerns: "While the bulk of the activity has been in the Bellevue and Seattle (central business districts), the outlying markets have seen increased interest as some tenants are not able to find appropriate space or have been priced out of the city centers."

The problem is exacerbated when the outlying markets, sprawling in nature and lacking the traditional infrastructure and amenities that make up city centers and attract commercial developers, fail to absorb the population density, or critical mass, necessary to make mixed-use retail, office and residential development viable.

On the positive side, Washington state deploys a growth law that encourages density and mixing buildings to encourage people to walk and to take public transit. Additionally, many suburban cities are aggressively trying to invest in their downtowns and to make them magnets for mixed-use developments.

The long-term problem, however, is at least two-fold. First, Wall Street doesn't particularly like - or better yet get - Main Street. I recall talking to a friend of mine in the business press who said he's been told by investors that the cash stream from a single-use development (think strip mall) was much easier to repackage and sell to other investors than a mixed-use development. So, on some level investment firms dictate whether or not the outlying, and perhaps less proven, markets are able to attract mixed-use developments.

The second problem is traffic congestion. After glowingly reporting on this region's commercial real estate prospects, the Urban Land Institute delivers a sobering reminder that the region also has a big problem: "abysmal traffic congestion strangles commuters." And the abysmal traffic congestion is exacerbated as Seattle and Bellevue gobble up commercial development and draw more and more bedroom commuters from the outlying markets. It's the bedroom communities that need city centers, remote work spaces and additional retail, office and industrial development to help people avoid long commutes to work and to enable them to efficiently accomplish daily tasks like grocery shopping. (an efficient regional public transportation and highway system would help, too, but that's for another blog)

Some experts say it's only a matter of time - perhaps a long time - before the outlying markets become increasingly attractive to investors and developers who have already built up the traditionally proven markets. The city of Renton rejuvenated its downtown core by heavily investing in public amenities and drawing a skilled developer to build up residential living as part of the mix. Independent retailers moved in. But Alex Pietsch, administrator of the city's economic development efforts, says retail has been the toughest component to put together. (for a national look at this issue, check out this story by The New York Times)Why? Because critical mass is still building and the big investors are still mulling the city over. "It takes a lot of traffic to make a coffee shop successful," Pietsch says. "You're relying on the residential population to support those businesses, and until you reach a tipping point they struggle

"It's really difficult to get any of the big national guys to go anywhere outside a mall or a lifestyle center. We're really focused on local independent shops."

But Pietsch is confident the tipping point will come. "That will come as more and more people live downtown."