Puget Sound Real Estate Stages a Comeback

BY GARY CARPENTER
CB Commercial

The Puget Sound commercial real estate market is experiencing a remarkable resurgence, posting the lowest vacancy rate among comparable cities across the nation.

With a 7.59 percent vacancy rate, downtown Seattle has a tighter office market than Minneapolis, Portland or San Francisco. All these cities are considered tight markets with vacancy rates below 10 percent. Other cities such as Los Angeles, Phoenix, Denver, and Atlanta are seeing 10 to 20 percent vacancies while San Diego and Houston are more than 20 percent vacant in their downtown business districts.

Like cities throughout the country, in the early 1990s, Seattle experienced the combined effects of the national recession and empty office space due to overbuilding during the 1980s. At one point, more than 750,000 square feet of Class A space was on the market as sublease space due to businesses downsizing and consolidation in the banking industry.

But during 1995, the market experienced more absorption than the combined absorption for the previous three years. Downtown Seattle posted 891,557 square feet of absorption for the year, exceeding annual absorption every year since 1991.

Vacancy in the region dropped to the lowest rate since before the building boom in the 1980s with Seattle's Central Business District vacancy at 7.59 percent, a record low.

Major contributors to this strength were moves and expansions involving Walker Richer & Quinn, Phamis Corp., R.W. Beck, AT&T, Starbucks Coffee and the City of Seattle.

The outlook for downtown Seattle is for continued tightening in the market, increasing the value of existing buildings. The most recently traded properties were constructed at $200 to $260 per square foot. For downtown high-rise construction to make sense, rental rates will have to climb from the current rates, in the high teens and low $20s, to $28 to $31 per square foot.

In 1996, Alper Northwest's 1000 Dexter Building will be the only significant new construction, a 95,000-square-foot, build-to-suit for Walker Richer & Quinn. Of the several projects on the drawing boards, only Metropolitan Park III, Quadrant's Lake Union project and Union Station are in serious planning stages but have no start dates. These projects are all on the periphery of the Central Business District.

Growth downtown reflects a strong business community that is encouraging a return to downtown livability.

Retailers are attracted to Seattle because local sales figures jumped 36 percent over the last decade while the national average has remained flat. We have become known throughout the world as a city with a business district that is complemented by shopping, dining and entertainment opportunities on par with any city in the world.

Travel to Seattle continues to grow for business and pleasure. Expansion of the convention center and the addition of more than 1,000 rooms to the current 7,000 in downtown hotels reflects the economic impact of Seattle's role on the world stage.

The City of Seattle estimates that more than 38,000 jobs are attributed to serving business and tourist needs of visitors in this city while our guests generate more than $15 million annually for the local economy. The port ranks 20th in the world.

Nearly 23 million passengers flowed through Sea-Tac Airport during 1995, up 8.7 percent from 1994 and running counter to the national trend of flat travel numbers.

In 1995 we saw the highly successful opening of the FAO Schwarz store, Ross stores and Abodio's return to downtown. This year we'll see the opening of Warner Brothers and Rock Bottom Brewery on Fifth Avenue, and on Sixth Avenue, Niketown, Planet Hollywood and Virgin Music.

The former Systems Block, better known as the Frederick's garage, will become a 325,000-square-foot specialty retail center that will include entertainment and food-and-beverage opportunities unlike any others in Seattle. The developers, Pine Street Associates, will have a busy year as construction starts on both renovating the Frederick & Nelson building and the Systems Block.

Those two retail centers will connect with a skybridge above Sixth Avenue, while below grade on the Systems Block will be downtown's largest retail parking facility offering 1,200 stalls.

Downtown Seattle will add close to one million square feet of new retail space during the next three years. As a result, no other region is more in demand than the Puget Sound, especially downtown Seattle.

We are seeing new life in all activities downtown. Cultural investments by the community such as the new ACT Theater in the renovated Eagles Hall, the new symphony hall to be known as Benaroya Hall, and new multiplex theaters all contribute to a downtown that is growing into a 24-hour city.

This strength permeates the business community, stimulating growth in the close-in industrial market. High-tech and bio-tech firms continue to find Seattle attractive for growth. With the local population's educational attainment above the national average and a tradition of creative development, several industrial firms have grown and gained national recognition while working close to Seattle's downtown.

Sale of the original home of Fred Hutchinson Cancer Research Center on First Hill will see that facility become a center for growing bio-tech firms. With an industrial vacancy rate at 4.55 percent, opportunities will be pursued in a competitive and tight market.

Strong growth in office, retail and industrial real estate naturally leads to strong investment opportunities in multi-family and condo development. Reflecting higher interest rates in the first half of 1995, multi-family sales in the region totaled $383,729,598 for 9,844 units. The non-leveraged rates of return are in the 8 to 8.5 percent range in Seattle and the Eastside, where location is key.

Class A apartment properties are finding that low vacancy rates help owners cut back or eliminate concessions and raise rents. Downtown, Harbor Steps Phase 2 is well underway, adding 305 units to the already successful Phase 1. The condo market is also very strong as demonstrated when Intracorp's new waterfront development sold all 80 units within a month. Condo conversions are also becoming common and are further tightening the rental market by taking units out off the market.

Few cities can boast of the strength in this market, for business in general and for real estate. Seattle is poised to make great strides in the home stretch for the millennium.

Gary Carpenter is senior vice president and executive managing officer at CB Commercial Real Estate Group's Seattle office.

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