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BY JON SAVELLE
Journal staff reporter
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Changes in the real estate market are driving structural changes at CB Commercial.
Gary Carpenter, executive managing officer, said the institutional owners of real estate increasingly are demanding more services and greater sophistication from brokerage houses. Accordingly CB Commercial is shifting away from a simple brokerage format to offering strategic advice to clients.
"We have to hire and maintain people and professionals with a variety of skills," Carpenter said. Overall, the shift has been to the investment side, with the focus on service.
"Pure brokerage used to be the foundation," he said. "Now it's 'I want you to strategize for me, tell me how to position my property in real estate trends, compare me to other users and owners like me -- and maybe after you do all that there may be a transaction involved.' "
To attract corporate and institutional customers, CB has added property appraisal and financial services to its offerings.
One result of the shift, however, has been a decline in the percentage of the firm's income that comes from commissions on transactions. Carpenter said that has dropped to between 60 and 70 percent, down from 90 percent in past years.
"We are not shifting away from commissions," he said. "We will provide the information (for the client) to make a smart decision, and get a commission from that.
"We see it as having growth potential. Wall Street firms saw this a long time ago; Salomon Brothers and Goldman Sachs have been doing business like this for many years, and are still making money from transactions."
On the subject of the Puget Sound real estate market, Carpenter noted that the trend has been for the advantage to shift toward the landlord side of the slate. There aren't as many office lease transactions, he said, as the market is full and fairly stable. But that likely will change in a couple of years as leases expire and tenants think about moving.
Robert Aigner, Colliers vice president in the Seattle office, said the company enjoyed record revenue growth in 1995. Across the board -- apartments, property management, office leasing and industrial -- Colliers saw its business grow.
"We've done a very nice job attacking various market segments and capturing market share," Aigner said.
This has been achieved by hiring "superior people," by investing in technology and by capitalizing on the worldwide network of Colliers International.
Colliers is taking the "user's perspective," according to Aigner, by looking in directions that are most promising for growth. For many companies that direction is toward international commerce.
"They need to hook up with real estate providers," Aigner said. And those real estate brokers who cannot provide international links eventually will be at a disadvantage.
In the Northwest market, Aigner sees office properties making a comeback as an investment or development option, although it may take a few years to bear fruit.
The industrial Kent Valley will continue to grow to the south as users get frustrated trying to find spaces large enough to satisfy their needs. Aigner said this will cause expansion along the I-5 corridor to Portland.
"The companies that are really on top of it will look up and down the I-5 corridor," he said. "In Chehalis, Centralia, Northwest Landing. That's especially true given so few developable sites over 20 acres. They've been pretty well picked over."
At the Seattle real estate appraisal and consulting firm Wronsky Gibbons & Riely, principal Christopher Wronsky seems to be watching the real estate market from all angles at once.
In a short conversation he noted that industrial space is tightening in Kent but that Sumner probably will become a good alternative; that rents are rising in downtown Seattle, which may push out tenants who would otherwise never think of looking for space in, say, Tukwila; that nobody is considering how much retail space is about to be added to downtown Seattle, and that a lot more people will have to buy things there in order for it to pencil out; that 20 to 30 new movie screens are planned for downtown, but the demand isn't proven; that the Denny Regrade seems to be achieving a critical mass of residents and retail; that such public projects as the new symphony hall and ACT theater will add to the entertainment draw downtown, indicating either that more people will come or the buildings will be underutilized; that the convention center could just as easily expand upward as north or east; that with the new baseball stadium, the Kingdome becomes a "yawning hole"; and that in order to bring in the people the city needs a cruise ship dock, a third runway at Sea-Tac and new hotels.
"The danger is we may not get enough warm bodies downtown to take advantage of all the entertainment -- and we're going to need them," Wronsky said.
One thing the city does not need more of is appraisers. According to Wronsky, lots of people entered the field in response to increased federal reporting requirements, but they weren't supported by market demand. The result is a contraction in the business, with a number of firms going out of business.
In response to that, Wronsky Gibbons & Riely has diversified into consulting as well as appraisals and now does about 40 percent of its business in consulting. Much of the firm's work is with local improvement districts and communities, with improving business in transactions and leases.
Although some real estate brokers have said that lenders seem to be almost overcautious in the current market upswing, Hal Greene, executive vice president of Seafirst Bank, doesn't share that opinion.
"I actually am surprised to see . . .some of the aggressiveness that we saw in the late 1980s back in the market so soon," he said.
"Retail is going on all over the place, so somebody's financing it. There's plenty of condo and single-family being built. The only category that's not being built is office, and most of that is because you can't get the rents to justify the cost."
Greene said Seafirst did just over $1 billion in volume in commercial real estate in 1995, which was similar to the bank's activity in 1994. Much of that business was in tract financing, condominiums, retirement communities, mobile homes, owner-occupied residences, some retail and just a little office.
"We look very carefully at retail," Greene said. "Big boxes and category killers are overdone."
On the other hand, some big box projects are attractive. Greene said a QFC store in a neighborhood, for example, would have more appeal to the bank than one in a mall. And he is "very bullish" on downtown Seattle, which Greene believes is putting enough pieces together -- in retail, housing, the arts and entertainment -- that it will become a magnet for the region.
If Nordstrom is making the biggest bet, Greene said, "You have to assume they know something."
According to Greene, Seafirst has had a very consistent real estate lending business for the last five years. It is based on good market share and good customers.
"We went back into the market sooner than a lot of people," Greene said. "A developer of real estate wants to know what he can rely on; we tried to stay consistent and not do anything that would cause us to become inconsistent."
Greene believes the Northwest is economically healthy, and much more so than a lot of other areas. He noted that it's an attractive area for people to live in, and businesses continue to come here.
Steven Wasson, executive vice president of U.S. Bank, agreed that lenders are not unusually cautious.
"We're not leery of the market any more than we always are," he said. "We ask, does the project meet the needs of the community? If we think the market demands are there, then we're willing to jump in with both feet. But we don't want to build a project that's unproven or unneeded.
"If you are in a weak market, and you add more product, the law of supply and demand clearly says it will drive prices down."
Wasson said the bank spends a lot of time studying markets and submarkets, and is "extremely pleased" when it finds a good developer with a good project.
At the same time, each small market segment has its own peculiar quirks, so a lender must understand what they are. Wasson said he considers the office market in Seattle to be "soft," so he's being very careful about financing new development in that segment.
U.S. Bank last expanded its staff in 1994 and has no plans to add more people soon. However the bank is in the process of merging with West One Bank, which will add real estate staff and lending capacity.
Overall, Wasson sees a good year ahead for the bank. He said its investment portfolio is improving, loan volumes are going up and "you can't ask for much better than that."
Like many others in the commercial real estate industry, developer Jon Runstad, chairman and CEO of Wright Runstad, sees the market shifting into a much better balance between supply and demand than it has been in for several years.
Runstad said his company will continue to focus first on those properties in which it already has an ownership interest. Beyond that Wright Runstad will be looking very selectively at new acquisitions, particularly in Seattle and other West Coast areas; and finally the company is considering potential new developments.
There are three main prospects.
The most immediate one is further construction at the company's Sunset Corporate Campus, in the I-90 corridor, where one of five planned buildings has been built. Runstad said the second will be started this year, with discussions with users underway for at least two of the remaining three buildings.
Runstad also has a project in the works in the Port of Seattle's Central Waterfront development. The company is currently engaged in design and permitting tasks for a new world trade center, which would be in excess of 200,000 square feet.
A third prospect is in downtown Portland. An office development with ground-level retail and on-site parking, the 300,000-square-foot building would probably get underway in 1997.
As to the market overall, Runstad said he has been a little startled to look back at 1995 and see 900,000 square feet of absorption coming from biotech, communications and software companies.
"It's a little bit of a surprise to see the degree to which they are locating in downtown office buildings when they had sought campus environments," he said. "Many are saying they would prefer to be in a more urban setting, with amenities and public transportation."
While noting that the high-tech market segment seems to be very dynamic, Runstad said it also appears to be continuing to grow steadily.
At the Norman Company, which is engaged in property management, tenant improvements, sales, acquisitions, construction management and financing, strategies for the future rely on a flexible and adaptable organizational structure.
President Jim Norman said the company has about 85 employees. But it is organized much like an architectural office in which members with different skills can be assembled into teams to handle projects or problems in tandem.
One of their biggest challenges at the moment is adding value to properties on the tenant's side. Norman said his company's response has been to develop a construction management service that tenants -- corporations, for example -- can hire to direct the construction of improvements in leased space.
"This to me is real added value for them," he said.
By the same token, Norman said his company also is offering the services of skilled project managers. He said the company currently is providing this service to a securities firm that is occupying new space: the firm wants to move in while the improvements are in progress. That requirement mandates a high degree of coordination for the movement and installation of communications, wiring, furniture and carpets in addition to the construction itself.
Apart from those new services, the Norman Company's bread-and-butter business comes from property management, sales and acquisition. The company manages the Columbia Seafirst Center, the Bank of California Building, Park Place and the Marsh & McLennan Building in Seattle. The firm also manages Colby Square in Everett plus smaller properties there and on the Eastside.
Norman said there seems to be optimism everywhere. He had just completed a Portland-to-Bellingham tour of the Interstate 5 corridor and found no one with a bearish outlook.
But he did note how dramatically the Northwest market has changed in recent years, with the rise of high-tech, biotechnology and communications industries. Norman feels having a flexible organization will be a key to making the most of the opportunities that such change affords.
"One of the things we're pleased about today is, our organizational structure allows us to work in a team environment where we can pull skills together on behalf of clients without regard to how we got the deal," he said. "We as a company can work for them. That's been very satisfying."
John Magnuson, an independent institutional real estate consultant, pretty much does everything at Magnuson Management, Inc.
"My company is essentially myself," he said.
Magnuson's specialty is apartments. He said the market is stable, with no disturbing fluctuations or shocks -- even considering the recent Boeing layoffs.
"The Boeing cutback has stabilized in the apartment market," he said. "I don't anticipate a huge dropoff of demand as a result of Boeing considerations, because a lot of the people affected by that were homeowners who took early retirement. They weren't really into the apartment market."
One surprising trend Magnuson has noted in the Puget Sound region is that Pierce County is shaping up to be the next growth market for apartments. He said the growth is related to Northwest Landing (Weyerhaeuser's planned community at DuPont), State Farm's new claims center near Ft. Lewis, and new plants for Intel, Matsushita and NEC.
Magnuson said the military's housing demands are also stable, with relatively short personnel deployments abroad creating a reason for their families and dependents to stay in the area.
"Where any softness is, is related more to the condition of the property rather than the economy," Magnuson said. To compete, owners must offer attractive, functional units at affordable prices.
According to Chris Pallis, principal broker with Pallis Realty Advisors, his company is the only one in the state that never represents landlords.
"In theory there is potential for conflict of interest," he said. "We eliminate that possibility by focusing on tenants or purchasers."
Pallis Realty Advisors does 90 percent of its work in leasing and in arranging build-to-suit projects. Pallis said, however, that new construction requires a high proportion of pre-leased space. That's because lenders, with the overdone 80s still fresh in their memories, aren't eager to finance speculative projects.
"You'll see a lot of small projects in the next few years, 50,000 to 250,000 square feet," he said. "You won't see new high-rise before the year 2000, with the caveat of requiring a tenant who can take 200,000 to 300,000 square feet."
At the moment, the issue for many tenants is not rents but finding suitable space. Pallis said it does exist, but tenants are becoming a bit frustrated by the lack of choices.
At Pallis Realty Advisors, business has been good. Pallis said the firm will add a new hire to the three people now with the company, and he added that tenants appreciate their no-landlords orientation.
Steve Dennis, president of Quadrant Corporation, is looking forward to another strong year but nothing like the go-go days of the 80s.
"Which is good," he said. "It will be a year of moderate but solid growth."
Dennis is encouraged by such indicators as a solid housing sector "now that Boeing is in a hiring rather than a firing mode," lower interest rates and declining vacancies in the office market. He said every area from Olympia to Arlington is active, but not too active.
"It's nice because it's not out of control," he said.
But Dennis is concerned about the decreasing availability of developable land, the muddle of impact fees and land-use constraints under the Growth Management Act, and the confusion resulting from different jurisdictions trying to sort it out.
That has slowed everything down.
"We are aggressively trying to identify sites that have development potential and get them into the approval process as soon as we can," Dennis said.
One new Quadrant project now underway is the Willows Corporate Center on Willows Road in Redmond. Dennis said the 400,000-square-foot office complex has attracted a lot of interest from users seeking space on the Eastside.
For future projects, Dennis said Quadrant is looking for land in Redmond and west of there to I-405.
At First Western Development, a retail development and property-management company, partner Mike Hess said new retail is still coming despite the involuntary exits of numerous players.
"It's the usual churning of tenants and a settling-out of who are going to be the survivors," he said. "There's still a lot undecided."
One of the busiest segments of the market is grocery chains, who are actively looking for sites where their stores can stand alone.
Hess said the traditional, double-anchored shopping center has gone by the wayside, to be replaced by superstores that incorporate many of the businesses that used to crop up next door. That includes videos, banking, florists and coffee shops.
"That's why the grocery store is getting bigger and bigger," Hess said.
First Western Development has been busy lately with a 200,000-square-foot complex of category-killer stores in Federal Way, which includes such names as Blockbuster Video, Home Express and Petco, to name a few.
It is typical of the kinds of projects the company is pursuing in suburban areas around the Northwest; others are in Coeur d'Alene, Yakima, Marysville and Oak Harbor.
The market overall has a different character these days compared to recent years, according to Hess. He said it is now tenant-driven, with few developers tying up sites.
David Victor, partner in Seneca Real Estate Group, said his real estate services company was formed in 1992 by several principals from Wright Runstad when the development industry was headed into the tank.
"If you were looking for an opportune time to start a real estate services business that wasn't it," Victor said. "Three years later our timing looks auspicious."
The market has recovered and Seneca Real Estate Group is busy offering services ranging from real estate consulting to construction management. Service is "as comprehensive or selective as clients desire," Victor said.
Recent projects include working with Craig Kinzer on acquiring AT&T Gateway for the city of Seattle. Seneca and Kinzer advised the city on the cost of a variety of solutions to its space problems and when the decision was made to buy Gateway, the group did the due diligence, financial analysis and negotiated the purchase. Seneca also is working with the Port of Seattle on the Des Moines Creek technology campus and manages property in Bellevue for the James Campbell Estate.
Victor said the firm's timing was good because big developers are preoccupied with their own problems and national brokerages have moved into property management. There are few firms that offer the broad type of development and real estate services Seneca Group does, he said.
"I believe there will be an increasing level of development activity. The majority will be build-to-suit for public or private sector entities," Victor said. "There won't be speculative activity for a number of years. The market is tight but rates won't support new development."
Clients have changed a lot since the 1980s. Victor said there is much more sensitivity to cost. Projects are less ostentatious, "less works of art than functional facilities that respond to the requirements of the firms that occupy them."
More capital is coming into real estate than it was five years ago but not for spec space, Victor said. Money is available for build-to-suit projects based on the credit strength of the tenant. Bricks and mortar are no longer adequate security, he said, adding, "That's a healthy attitude, compared to the excesses of the 1980s."
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