Office Market Moves South

BY CRAIG HILL
Grubb & Ellis

We have seen more Eastside and Seattle brokers in the Southend marketplace in the last month and a half than we have seen in the last six years.

The Southend currently is the last place to find large contiguous blocks of office space. Last year marked the first year since 1992 that vacancy in the Southend fell below 20 percent. The vacancy rate in the Southend today is 16.4 percent, a bit misleading since the approximately 1.1 million square feet available will be quickly absorbed this year.

Grubb & Ellis forecasts 500,000 square feet of absorption for the year. We fully anticipate the Southend vacancy rate will reach 10 percent by mid-year, and may go substantially lower than that by year end.

There are some interesting projects that have come to light over the last year. They include:

• The purchase of the City Bank holdings of Black River by the Martin Smith organization, who subsequently leased 72,000 square feet of space to King County, moving from the I-90 Corridor.

• Multiple Zones, computer catalog company, moved from the I-90 Corridor to Renton III complex, taking 32,000 square feet.

• Approximately three months prior to that, Boeing had retenanted Renton II having also moved from the I-90 Corridor.

• Wizards of the Coast grew within the market from 40,000 square feet to 170,000 square feet.

The real story is that the Southend office tenant mix is becoming more diverse rather than being entirely dependent upon Boeing as it has been in past years.

Recently, Lowe Enterprises purchased Southcenter Corporate Square, after a failed retail strategy to convert the project to retail by Trust Company of the West. Southcenter Corporate Square and Lowe Enterprises will turn the complex back to office use. Southcenter Corporate Square is approximately 230,000 square feet in multiple buildings. Lowe Enterprises plans to make substantial capital improvements in the form of building upgrades and landscaping.

The largest contiguous block of available office space in the Southend is SeaTac Office Center. SeaTac Office Center is the only Class A suburban office complex in the Southend with approximately 300,000 square feet available; 210,000 of which is in Tower II.

Kilroy Realty Corporation (KRC), a newly formed real estate investment trust (REIT), now owns SeaTac Office Center. It is one of the most successful REITs to come to market in the last six months. The REIT will provide substantial capital to SeaTac Office Center for capital improvements, as well as tenant allowance packages to attract new tenants.

The Southend has gone through substantial change over the last year. With the Eastside and Seattle Central Business District at capacity, tenants have to look south to meet their objectives.

Rental rates for the Southend were in the $12-$13 range at the first of 1996, and have risen to the $15 range at the beginning of 1997. Tenant improvement allowances are beginning to decline.

Southcenter Corporate Square is currently quoting a $15.50 rate and $10-$12 per square foot in allowances. Tenant allowances approached $30 early last year, a material decline in concessions. Attractive concession packages still exist, but tenants must act quickly. By the end of the year, at current activity levels, the Southend occupancy level will be 92 to 95 percent.

Craig E. Hill is vice president with Grubb & Ellis Company.