September 16, 2014

Seattle's real estate boom has finally spread beyond apartments

For quite awhile, Seattle's real estate boom was driven almost entirely by the apartment sector but that is changing as developers, investors and lenders get more confident about other kinds of projects here.

Last week a panel of developers at a Commercial Real Estate Women Seattle and Sound event said hotel rooms are getting harder to find, and the time is right for new hotels. They also said the office tenant base today is broader than just Amazon.com.

Schnitzer West has been one of the more active office developers in Seattle and Bellevue over the last decade. Big companies, primarily Amazon and Microsoft, have taken most of the space in Schnitzer West's recent projects.

Schnitzer West is working on two new office projects that are a little smaller than some of the company's other buildings: Urban Union, a 12-story, 285,000-square-foot building at 501 Fairview Ave. N.; and Centre 425, 16-story, 360,000-square-foot building at 415 106th Ave. N.E. in Bellevue. They are designed to house several tenants.

Pam Hirsch, senior investment director at Schnitzer West, said larger tenants took most new space in the last development cycle and in recent years, but now smaller tenants are ready to move. She said she doesn't expect Amazon or Microsoft to swoop in and lease these buildings.

Schnitzer West is demolishing a building at Fifth and Madison to build Madison Centre: a 37-story, 754,000-square-foot office tower. Right now, Schnitzer West doesn't have a tenant.

“Tenants don't like to make a commitment two to three years ahead of delivery, so securing a prelease tenant while you are just showing plans on the table and marketing the project is really tough,” Hirsch said. “They want to see shovels in the ground. So we have found in our history that once you have broken ground and are under construction and you've dug your hole, that's when they will show up and sign a deal.”

Schnitzer West's office tower is one of three planned by developers in the south downtown area. A number of other towers are planned in South Lake Union.

One type of project Seattle hasn't seen much of over the last five years is hotels. Demand for rooms today is high and several developers, including Touchstone Corp., are betting on the hotel market. The Seattle-based firm is building two in the downtown area: an 11-story hotel at First and Stewart; and Hill7, a 14-story hotel and 11-story office building at Boren Avenue and Stewart Street.

For several years after the recession, lenders and investors were not interested in Seattle hotel projects, said A-P Hurd of Touchstone, who was on the panel. Most of the money went to “distressed” properties that fell on tough times during the recession.

Hurd said for several years hotel investors visiting Seattle would say there was no money to build new hotels in this market while at the same time complaining that they had to call five hotels just to find a room.

Those investors have changed their tune, and Seattle has quickly become a top investment market. Hurd said the hotel sector is recovering nationally and that frees up money for new projects.

But the biggest driver in Seattle real estate is still apartments. More than 10,000 apartments are expected to open in the region this year, and thousands more are coming in the next two years.

Vulcan Real Estate Investment Strategy Director Lori Mason Curran recalled the moment several years ago when she was astounded by the number of apartments planned and under construction downtown. Many of those buildings — a few of which are Vulcan's — have opened and leased quickly.

Mason Curran said the apartment boom here has been deeper than she and other developers expected, and it's not slowing down yet. “It's not going to go on forever, but I still think there is much more demand than I ever would have imagined a couple years ago.”

When the market slows down, apartments won't take a huge hit as long as people still want to be here. Vacancies will go up, but adjustments can be made.

“That's the great thing about apartments,” Mason Curran said. “You adjust the rents, and you fill them up. Rents might go down, but that can be a good thing too. It makes them more affordable.”