Across Lake Washington from downtown Seattle, in the city's Eastside submarket, sits a monument to the region's deflated economy — the unfinished Lincoln Square project in downtown Bellevue. Construction was halted last summer on the $360 million project, which was to include a 300-room hotel, 148 luxury condominiums, 330,000 sq. ft. of retail space and 530,000 sq. ft. of offices.
Nearby, another major project sits abandoned. The only trace of the planned 20-story Technology Tower is the parking garage, the only component completed before the developer went bankrupt.
The economic outlook in the region isn't a cheery one. Seattle's unemployment rate registered 6.5% in January compared with 5.7% nationally. There's a $2.6 billion state budget shortfall, and the state is notorious for its business-unfriendly regulatory approach. In March, state economists warned that Seattle won't see any sign of recovery before late 2004.
But some developers are looking beyond the current miasma. Or, as some locals would say, they are possessed by irrational optimism and are planning major new projects that they hope will open to a brighter scene in two years.
One of the more grandiose plans is a $500 million, five-acre, multi-use complex near Bellevue's Meydenbauer Convention Center, planned by developer Schnitzer Northwest LLC. Envisioned are three 23-story towers with 1.2 million sq. ft. of Class-A office space atop a retail/restaurant/entertainment complex, and 625 hotel rooms. Schnitzer hopes to break ground late this year or early in 2004. The development is scheduled to open in 2006.
According to industry sources, there is even interest in reviving the halted Lincoln Square project. City of Bellevue records show Opus Northwest LLC has taken an option to purchase the development from majority owner Lend Lease Real Estate Investments.
Unhealthy Office Sector
For now, the region's office market remains weak, but owners andsay they are optimistic that the worst may be over. The vacancy rate rose to 16.2% in the first quarter from 14.6% in the fourth quarter of 2002, but Seattle's Class-A rents actually rose a bit from $29.30 per sq. ft. at year's end to $29.49 in the first quarter. That's still a huge drop from the peak of $41.35 per sq. ft. in the third quarter of 2000, but Seattle brokers are happy to see any sign that the market may have hit bottom.
“I think the majority of the big give-backs have now taken place,” says Jeff Jochums, vice president at Colliers International. That's particularly true in Bellevue, where vacancies have remained flat at around 25% the past two quarters. However, rents in the Bellevue CBD continued to decline, falling from $26.74 in the fourth quarter to $24.18 in the first quarter of 2003.
One effect of falling rents is that more tenants are coming back into the urban core, rather than renting in outlying office parks. For instance, Jochums points out, insurer Safeco Corp. recently decamped from 158,000 sq. ft. of offices in Redmond and moved to a new 130,000 sq. ft. space in Seattle's University district.
On the other hand, this only exacerbates the vacancy problems in the burbs. And soaring vacancy rates may press some landlords to sell. In March, tenants of the 20-story Millennium Tower in downtown Seattle said Boston's Beacon Capital Partners — majority owner of the office portion of the building — was in sale talks with Metzler North America Corp., the Seattle arm of a German investment bank.
The 200,000 sq. ft. office portion of the tower, erected in 2000, is more than 40% vacant. While the building cost hasn't been disclosed, Beacon recently refinanced the commercial portion of the Tower with a $46 million loan. The Millennium Toweris being closely watched, as its sale would set a new price benchmark.
One positive trend in the office sector is the continued demand by biotechnology companies for specialized space. Microsoft billionaire Paul Allen's real estate development company, Vulcan Inc., is planning a six-or seven-building campus in Seattle's South Lake Union area, in concert with the nearby University of Washington. Some 10 million sq. ft. of office and lab space is planned over the next five years for the $60 million project.
Vacant space does get filled, but often at a steep price discount. For example, Bentall Capital, owners of the two-building, 315,000 sq. ft. Summit development in downtown Bellevue, dramatically slashed rent rates from the target price of about $24 per sq. ft. to as low as $15 to fill the halls. Bentall Capital also wound up making one building eight stories shorter than originally planned. The development is 95% leased six months after opening.
Microsoft was the big buyer in office space last year, most recently purchasing four buildings it formerly leased — the 430,000 sq. ft. Cedar Court complex on the Eastside — for nearly $100 million in October. Builder Hines Development got a premium $232.50 per sq. ft. for the fully occupied complex, which Microsoft spent heavily to improve. According to Jochums, if Microsoft had elected to move out, Cedar Court would have gone for much less, much like the empty I-90 Corporate Center in Bellevue. The I-90 Corporate Center sold at auction in February for just $60 per sq. ft.
An Appetite for Apartments
While the transactions involving major office properties have dropped dramatically in Seattle's King County — from $964.2 million in 1999 to $430 million in 2002 — deal volume is still strong in multifamily, a sector in which investors see a safe haven for their funds. Sales totaled roughly $700 million last year, not a record but still a strong sign of investors' continued interest in the sector.
Four large multifamily complexes changed hands in Seattle's King County in 2002. The biggest deal was the $38.6 million paid by Drever Multifamily Opportunity Portfolio Fund LLC for the Overlook at Lakemont. The seller of the 400-unit Bellevue complex, which needs renovation, was Trammel Crow Residential.
Such intense demand for apartments has caused cap rates to plunge from 8.75% at the end of 2001 to 7.15% in December 2002. The soaring prices don't seem to faze buyers, partly because low interest rates make the properties affordable and investors are still looking for good alternatives to equities, says Patty Dupre, a principal at Dupre+Scott Apartment Advisors.
“Apartments are still selling because people want to get their money out of the stock market,” she says. It's not uncommon for realtors to knock on landlords' doors, begging them to sell because buyers want into the market so badly, Dupre says.
However, low interest rates can have a negative impact on occupancy because they encourage tenants to buy their own homes. The multifamily vacancy rate in King County was 7.4% in September 2002, up from 5.4% in September 2001, according to Dupre+Scott. The combination of a robust single-family home market and tenant move-outs due to job losses has created a stressful situation for apartment landlords. Dupre notes that the percentage of landlords offering move-in incentives — usually a month's free rent — to entice new tenants in King County soared from 28.4% in September 2001 to an all-time high of 64% in September 2002.
Retail — A Mixed Bag
Seattle's retail market has fared better than other commercial real estate sectors. In Bellevue, the retail vacancy rate actually has dropped from 3.6% at the end of 2001 to 2.31% at the end of 2002. In downtown Seattle, however, the vacancy rate rose from 2.71% to 5.23% during the same period. One positive indicator: Rents in both submarkets have increased during the past year — up about $3 per sq. ft. to $33.36 in Seattle, and up $1.40 on the Eastside, to $26.10.
The fundamentals, however, are soft. Taxable retail sales slipped 2.4% in 2002, and state economists don't expect sales to rebound substantially until 2005. That dim outlook has led many shopping mall owners to seek greener pastures, says Greg Wendelken, regional manager for Marcus & Millichap in Bellevue. Several mall owners in the region are discreetly looking for new owners, Wendelken says. “If you're thinking about selling your [mall] real estate in the next two or three years, there's no reason to wait because we don't see any upside to values in the next couple years, but we do see the possibility of downside,” he says.
One of the biggest mall sales took place last spring in SeaTac, south of downtown Seattle. In April 2002, Westfield America Trust purchased the popular, 1.5 million sq. ft. Southcenter Mall from The Richard E. Jacobs Group, in a $756 million package deal that included eight other malls around the country.
The last major mall to change hands in the region was the troubled 1.7 million sq. ft. Lakewood Mall Shops, not far from Southcenter, which sold in July 2001 for a bargain $16.27 per sq. ft. New owners MBK Northwest redeveloped the center. Smaller centers have sold in recent years for $132 to $142 per sq. ft.
And this February, the nearby SeaTac Mall changed hands. Steadfast Commercial Properties purchased the 60-acre mall from Newman Properties for an undisclosed sum. The new owners of SeaTac Mall are planning the first major redevelopment of the 28-year-old structure.
More Rooms At the Inn
The hotel industry in Seattle has limped along since Sept. 11, and tourists have yet to flock back to town. Occupancy rates have plunged from 78% at the height of the dot-com boom to 69% last year in Seattle, and 61% on the Eastside. But the region keeps on adding new hotels, and plans for more than 1,800 additional rooms are on the drawing boards.
The big winner in Seattle's hotel game is considered to be local developer Richard Hedreen, who in early 2001 managed to sign up Hyatt Hotel Corp. as a joint venture partner for the $140 million Grand Hyatt Seattle. The deal for the 425-room hotel, a luxury project with high-tech amenities for which the price has not been disclosed, gave Hedreen a deep-pocketed financial backer just before tourism in the region went into a slump.
The first of many new planned hotels, the 358-room Marriott Waterfront Hotel opened in April in downtown Seattle near the Bell Harbor International Conference Center and Pike Place Market. Aspen Murray LLC plans to begin construction on a 24-story Inter-Continental hotel nearby, at First Avenue and Madison Street. It's slated to open in 2005.
There may soon be many more hotels, both in Seattle and Bellevue. On the Eastside, developer Kemper Freeman recently proposed adding a 16-story, 279-room tower to the Bellevue Hyatt Regency, while Marriott plans a 265-room Courtyard by Marriott in downtown Bellevue. Silver Cloud Inn plans three new hotels in Bellevue and Seattle, as well as a 110-room addition to its hotel in downtown Bellevue.
But Eastside hospitality consultant Wolfgang Rood says he doubts all the planned projects will be built right away, because most are still in the early planning stages. Also, financing may not be easy to obtain in the current economic climate.
“If you added up all the proposed projects and assumed they'd all be coming on line at a similar time, that would have a very negative impact,” he says. “But that rarely happens.”
Industrial Weakness Mounts
With the city offering few incentives to lure out-of-state companies to fill its empty industrial parks, Seattle's only hope is for existing companies to expand, says Gregg Riva, senior vice president of Colliers International.
Vacancy rates have been steadily climbing, with close-in Seattle industrial vacancies rising to 4.14% at the end of 2002, up from 3.45% over the same period in 2001. On the Eastside, home to the bulk of Seattle's industrial space, vacancies skyrocketed to a record 17.55% at year's end, up from 12.05% a year earlier.
Plenty of deals are being signed, but mainly because landlords are luring tenants to cheaper digs. “They're mostly tenants taking advantage of current market conditions, who are changing spaces for a better financial package,” Riva says.
Buildings near downtown Seattle are generally less than state-of-the-art, but their convenient location has kept vacancy rates lower than rates on the Eastside. Historically, the newer, Class-A space on the Eastside has commanded higher rents, but at the end of 2002, rents in the two areas were nearly identical: 54 cents per sq. ft. in Seattle, and 55 cents per sq. ft. in Bellevue/Eastside. The gap in rents has narrowed because the Eastside's soaring vacancy rates had landlords competing hard for tenants.
Despite an industrial vacancy rate of nearly 18% in the Eastside submarket at year-end 2002, one developer is planning a new industrial complex near Bellevue. Opus Northwest says it will open three buildings on Interstate 90 east of town at the end of this year, which will bring 164,500 sq. ft. of new product onto the market. Opus is moving forward on the project despite having just one, 20,000 sq. ft. tenant signed up.
Brokers fear that industrial vacancy rates in the region could continue to soar, as a large block of space is expected to come onto the market soon.
In nearby Snohomish County, The Boeing Co., which has been in a severe downturn ever since Sept. 11, 2001, plans to market some 2 million sq. ft. of industrial space in the near future. Colliers International researcher Hugh Winskill says that the Boeing properties could cause the vacancy rate in Snohomish County to reach an astonishing 35%.
But Riva of Colliers believes the worst is over for the industrial sector in King County, which includes Seattle and Bellevue.
“We're kind of skipping along the bottom,” he says. “We're not seeing many new chunks of industrial space coming on to the market here as was the case for the past two years.”
Carol Tice is a Seattle-based writer.
SEATTLE-BY THE NUMBERS
Metro area: 3.3 million
Source: City of Seattle
UNEMPLOYMENT RATE: 6.5%
- University of Washington
- Microsoft Corp.
METRO AREA STATS:
16.2% vacancy, 1Q 2003
14.7% vacancy, 1Q 2002
Rent per sq. ft.: $29.49 1Q 2003
Source: Cushman & Wakefield
Multifamily (King County):
7.5% vacancy, Spring 2003
5.4% vacancy, Fall 2001
Rent per unit: $918 Spring 2003
Source: Dupre+Scott Apartment Advisors
5.9% vacancy, 3Q 2002
4.6% vacancy, 3Q 2001
Rent per sq. ft: $18.80 3Q 2002
Source: Marcus & Millichap
Industrial: (Close-in Seattle)
4.14% vacancy, 4Q 2002
3.45% vacancy, 4Q 2001
Rent per sq. ft.: $0.54 4Q 2002
Source: Colliers International
69.1% occupancy, 4Q 2002
68.5% occupancy, 4Q 2001
Source: PKF Consulting
MAJOR PROJECTS UNDER CONSTRUCTION:
Meydenbauer Convention Center complex, mixed-use complex that includes 1.2 million sq. ft. of office space and 625 hotel rooms
Cost: $500 million
Developer: Schnitzer Northwest LLC
South Lake Union biotech campus, a six to seven-building campus near the University of Washington that includes 10 million sq. ft. of office and lab space
Cost: $60 million
Developer: Vulcan Inc.
Marriott Waterfront Hotel, a 358-room luxury hotel with high-tech amenities
Developer: Marriott International Inc.
Completion: April 2003
Inter-Continental Hotel, a 24-story hotel at First Avenue and Madison Street
Developer: Aspen Murray LLC
Bellevue industrial complex, Three buildings, totaling 164,500 sq. ft.
Developer: Opus Northwest
Completion: year-end 2003