New Office Space? It's Already Here

BY JAMES KEATING
Grubb & Ellis Company

Downtown office space opportunities have been altered dramatically by global, national and local events over the past six years. While the majority of the country still copes with vacancy rates in the teens, the Greater Seattle area has mid-single digits.

Seattle Central Business District (CBD) finished 1995 with vacancy at 6.3 percent for Class A and B combined, after an absorption (the net taking of space from the market) for the year of 825,707 square feet. With absorption approaching the pre-1990s level of one million square feet per year and with only 1.1 million square feet now available, the popular perception is that we have run out of space.

Future supply will come from rehabs; little new construction.

So where will the supply, to fill the anticipated demand, come from and what shape will the buildings take?

Several prominent downtown sites, teetering on the edge of development in the late 1980s, ultimately sat idle. This had nothing to do with the CAP initiative (Citizens Alternative Proposal) that was passed in Seattle to limit large office building development. Instead it was the hangover of worldwide speculation, loose money, the S&L debacle and a wasteful business climate predicated on unending expansion and market stability.

All of this led to massive overbuilding of office space nationally. Slashed rents, concessions to tenants and bail-out -- both friendly and not-so-friendly -- plagued many if not most of the properties developed or bought in the 1980s.

As a result, the Marathon Block (between Third and Second Avenues and Union and University Streets) has been purchased to become the new Seattle Symphony Hall. A full block at 1415 Third Avenue that was assembled by Prescott for the ACT Theater has been disassembled with various ownership signs on the doors.

The crash in office properties made buildings in general, and CBD high-rises in particular, the pariahs of institutional real estate. Anti-office sentiment was so strong that a couple of perfectly good (although not very efficient) older buildings were sold to buyers who saw more value in them as hotels than offices.

One example, 1101 Fourth Avenue, was surplus US West office space. Its new owners plan to add eight floors of condominiums to the existing eight stories that will be converted to hotel rooms. Cavanaugh Inns bought the former US Bank Building after the bank moved across the street to US Bank Centre. The sale demonstrates the allure that office buildings recently enjoyed. Although not in the CBD, Parkway Plaza Center, a five-story building in Southcenter was demolished last summer to develop a big box retail site.

Several developers, and one group in particular, have seen the value in acquiring sites with existing buildings for near term cash flow and future development potential. Principals at Martin Smith, Inc. have been amassing a cache of upside opportunities. Sites that were considered marginal five years ago have become the future office sites of Seattle.

Some examples are: Third & Madison, acquired from LaSalle; Pioneer Title and Seattle Trust buildings at Second and Columbia, and the City Light Building at Third Avenue between Madison and Spring. Developers will have interesting choices of remodeling or demolishing, building on site, or assembling a larger parcel.

These sites will serve to fill demand as tenants who were lured to new high-rises by artificially low rates in the late 1980s and early 1990s are confronted with sticker-shock renewal terms causing them to look for alternatives. Even at 6.7 percent vacancy in the CBD, the Class B buildings are incrementally discounted and, if they have updated systems, will appeal to those tenants who became used to Class A services but can't or won't pay the freight in Class A buildings.

An example of a new use of an older facility is the former Fred Hutchinson Cancer Research Center. After sitting on the market for two years, a biotechnology anchor tenant has signed a lease for 60,000 of the 285,000 square feet of space at the complex, thus enabling a sale.

Of course there are some sites that will ultimately be developed, and some that never should have been considered in the first place. A site that will see construction is Metropolitan Park III recently acquired from Martin Selig by the Benaroya family. Another may be Selig's parcel adjacent to 100 West Harrison. The Union Station site which will accommodate in excess of one million square feet, is in design development by Nitze-Stagen, a local development company. All are anticipating that rising rates will drive development.

Other office spaces will also come from existing inventory as large users, such as Nordstrom and federal, county and city governments, consolidate their spaces freeing up large blocks in older buildings throughout the city.

As users and developers of space look for solutions, positive economic realities are doing for existing buildings what the tax incentives of the early 1980s couldn't. That is to provide for the reuse or change of use in a structure that will return a profit, not create a tax write-off loss.

So where will new space come from? It is, for the most part, already here. We just couldn't recognize it until our perceptions changed.

James Keating is a senior associate with Grubb & Ellis in the Seattle office.

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