Downtown Real Estate Boom Not Likely To Bust

BY GARY CARPENTER
CB Commercial

Seattle commercial real estate is booming! Now come the questions about what will happen next. Will this be a boom and bust cycle like the '80s? Will we again see an overbuilt market that will take a decade to correct? Do we have any guarantees that downtown retail will flourish or are we likely to see another round of major store closures with the city center teetering on the brink of disintegration?

To answer these questions we need to look at what is happening now.

Both the retail and office markets in Seattle and the surrounding area are very strong. In the last two years nationally known retailers like FAO Schwarz and NikeTown as well as the new REI flagship store have opened in Seattle.

In 1997 and 1998 major retail and entertainment venues will open including the new Nordstrom flagship store, the Harbor Steps retail component, and Pacific Place. These and others on the horizon both increase the attraction to downtown and broaden its customer base.

Downtown is becoming an entertainment hub with the new ACT Theatre, the Symphony Hall, movie complexes, restaurants like Planet Hollywood and Wolfgang Puck's newest, ObaChine. The tourism market and convention business are growing at a steady rate, and with the proposed expansion of the convention center it can only keep growing.

More than 600 hotel rooms are forecast to come on line in 1997 and 1998. Multi-family housing, both apartments and condominiums, are under construction or planned to come on line over the next two to three years. All of this activity brings more and more people to the city at all hours of the day and night making it truly a 24-hour city.

Another key to the health of the city is that it is truly a working city. The vacancy rate in downtown Class A office space is less than 6 percent and it will be four to five years before we see a major new high-rise built.

In the meantime, we are continuing to experience healthy absorption which will be accommodated in new projects by developers like Wright Runstad & Company, Nitze-Stagen & Co., The Benaroya Company, Martin Smith Real Estate Services, and the more than 40 properties owned by Samis Land Co. that are in the process of being rehabilitated.

So how does this differ from the '80s? And what will keep the market from being overbuilt again?

In the '80s there was an abundance of capital, and permitting and zoning changes were forcing developers to build without firm commitments and preleasing in order to preserve their rights. Between 1980 and 1986 more than 8 million square feet of space was built and absorption slowed due to a slowing economy, corporate downsizing and numerous bank mergers.

The result was vacancy rates that ranged from 15 percent in 1987 to as high as 17.8 percent in 1992. Competition for tenants drove real rents well below proforma rates, and of course loans were underwritten on proforma. Examples of this were numerous and well publicized.

The situation is markedly different now for a variety of reasons. First, there has been no significant office construction since 1992, and the economy and office absorption have been rebounding, resulting in a 6.3 percent vacancy rate today.

Also today, zoning is in place so there is no government intervention influencing development decisions. Market demand is one of the major motivations to develop, and development will be selective with tenants in place before construction begins. Due to lenders' good memories, build-to-suit and substantially preleased projects will be prevalent in the '90s and beyond.

There is plenty of capital available in the market today, but it will be used far more conservatively than it was in the '80s. A major source of capital not seen in the '80s is Wall Street which has entered directly into real estate through securitization vehicles.

Another factor that will influence development is the scarcity of land downtown. There are still a number of major retailers eyeing Seattle, but they will be cautious, waiting for the right deal at the right time. Once Nordstrom moves, there will be some prime space available and although it is not yet spoken for, I am confident that it will not be vacant for long. Office development will be more selective and only institution-backed developers will be able to look at major projects. Some building will go to the outlying areas because of costs and timing issues.

There are so many factors that influence the strength of the Seattle area. It is truly one of the most desirable cities in which to live and work. The overall economy is strong and continuously diversifying to insulate it against the vagaries of specific industry market cycles. And the citizens and government seem committed to working to support the health of the city.

In addition, we will avoid overbuilding or a bust cycle because institutional investment and ownership is more conservative than the entrepreneurial or speculative development of the past. Yields in real estate are still on par or less than yields in alternative investments such as the stock market and securities which will discourage a race into the real estate market.

Gary Carpenter is executive managing officer of CB Commercial Real Estate Group.