The 1997 Djc Real Estate Industry Survey

Kauri Investments

"We won't purchase anywhere near as much in 1997," Potter said. "I'm kind of tired."

In about a year his company tripled in size to 80 people. Property management has grown from nothing five years ago to 1,200 units today. Potter has spent the past two years buying existing apartment buildings, upgrading them and converting about half to condos. He'll spend a lot of this year getting systems in place to manage the properties he now owns.

Potter has started looking at new construction but said that still is risky. He has done only one new project lately, a condo on the south slope of Queen Anne, but is working on other projects because rents have risen to the point that new buildings are starting to make sense.

"You can feel it before you see the numbers to back it up," Potter said.

Potter sees the multi-family housing market poised for some big changes in the next few years and has been positioning his company to be ready to take advantage. In 1995 Potter bought six buildings and in 1996 he bought four, including the 384-unit Crossroads complex which he has renamed Central Park East.

"By buying existing buildings and seeing the rent increases we would know when new construction made sense," Potter said. So he's been targeting older buildings in need of a face lift. Rent increases have been 10 percent and more in his properties and Potter says more are on the way because of job growth and the pent-up demand from years of slow construction. Single-family home price increases and growth management planning are also going to push people into multi-family projects.

"We need a tremendous increase in rents to support new construction," Potter said. "We're just at the early stages of that . . . Job growth defines our business. Prices have got to go up."

While he is continuing to focus on the starter market, Potter said he has branched out geographically, buying a project in the tight South Everett area and doing a condo conversion in Mountlake Terrace with units priced between $65,000 and $85,000.

He likes the Seattle market and will continue to operate in it but said the Eastside's higher incomes and larger projects are awfully attractive. Even in Seattle Potter is looking for larger projects, such as the 130-unit apartments near Northgate he bought for $6.3 million in December. He plans to keep the property as apartments and add some additional units if the city will allow some flexibility in parking requirements.

"The city says it wants more housing," Potter said. "We'll see."

So far it doesn't look good to him. The city needs 3,000 new units a year to meet its comprehensive planning goals and has been building only 1,500 a year.

"In the 1980s we did 3,000 and people freaked," Potter said.

Potter has reorganized his company, moving out of the presidency to chairman and moving three people into what is now called the office of the president. Peter Vierthaler is head of the development division; Nancy Dardarian is head of property management and David Lightfoot is the CFO.

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Equitable Real Estate

REITs are a huge source of equity capital and commercial mortgage-backed securities (CMBS) are supplying debt. Lower said that in the Seattle market pension funds (including foreign pension funds) are active, as are European investors.

Underwriting remains pretty disciplined, Lower said, unlike the way it was in the late 1980s, with banks still requiring preleasing and significant equity.

Warehouse, industrial and office properties -- both suburban and CBD -- are the most favored. Retail has the fewest takers. Lower said some people may start getting interested in retail as they perceive that market bottoming out.

Lower expects some good-sized properties will change hands in the Seattle area this year because of investor interest and sellers who perceive this to be a good time to make deals.

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Shorett Kidder Mathews

The contract Shorett Kidder Mathews & Segner Appraisal Services won on the Pacific Place project is a good example of the change. Shorett will provide a combination of appraisal and asset monitoring services for the pension fund which is an equity partner in the deal. In addition to doing the initial appraisal for the partner, Shorett will provide valuation updates on a quarterly basis to the out-of-town client.

"They want a real local, independent, third-party consultant," Shorett said. "It's pretty exciting because it's going to last several years."

Providing strictly appraisal services has become very competitive, Shorett said. "It's an arena that isn't worth playing in. You want to be in the larger corporate consulting arena." For appraisers there has been a gradual shift away from depending on banks for their survival.

Affiliating several years ago with Kidder Mathews opened a lot of doors locally and nationally, Shorett said, through Kidder's relationship with Oncor International. He said there are not a lot of appraisal companies able to offer a full menu of services such as brokerage and property management.

Shorett sees the real estate market entering a controlled growth phase. Government regulation and investor diligence will keep the market from reaching the excesses of the late 1980s. Nationally, the Seattle office market is one of the most attractive investments, Shorett said. Retail is the weakest and he doesn't see that changing much.

"This is going to be an exciting next five years," Shorett said.

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TRF Management

The property management business has been through some hard times as brokerages, developers and owners entered the business at the same time new construction halted. More people fought for shares of a pie which wasn't growing. Like many firms, TRF Management diversified, adding leasing, sales and refinancing services to its traditional property management businesses, a move which has worked out well, Muhlebach said.

Even though developers and brokers are busier now, he does not expect the competition for management contracts to lessen.

"Once you create another profit center its hard to get rid of it," Muhlebach said.

Fees for management are now below what they were five or six years ago but Muhlebach thinks they will increase slightly this year.

"Now that returns on real estate are better for the current generation of owners they are not as aggressive about hammering service providers," he added.

For Muhlebach the biggest change he sees on the horizon is the activity of insurance companies who are starting to sell a lot of the property they acquired in the 1980s. Their investment strategy is changing and the transactions create a lot of business for everyone in the real estate industry.

Muhlebach does not foresee another boom for Seattle but he does see a strong landlord's market in office and industrial and a hybrid market for retail, with good locations commanding high rents and weak locations suffering. The battle of the big boxes will mean stagnant rents for many of those properties as well as continuing tough times for local merchants.

"There will be steady improvement, not boom times, and that's really what you want," he said. "Seattle will remain one of the best commercial real estate markets in the nation through the rest of this decade."

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Colliers

Rob Aigner, vice president of the Seattle office of Colliers International, recently put into words the condition of commercial real estate in the Puget Sound region.

"Things are literally on fire, seriously," he said. "Apartments is unbelievable -- as hot as I've seen it in a long, long time. Cap rates are generally sub-8 percent; there's such demand from buyers from all over the world, it's amazing."

Aigner noted that investors are betting office rental rates will continue to rise, and "everyone wants in on the rent spike." He believes the spike will go high enough -- to $28 to $32 per square foot -- to justify new office construction.

New industrial space created what Aigner termed a bubble of vacancy in the last six months, but he believes it is not significant in the long term. "It's a passing storm at worst," Aigner said.

Retail is the least hot of all the markets, chiefly because of recent shakeouts like the closure of the Ernst chain. That, however, has provided a toehold into the market for the Alamo Group (related to the Alamo car rental organization), which bought Ernst spaces in bulk. Aigner said they can now tie up the property with low rents and master leases, engaging in rental arbitrage with a good upside.

Colliers has been busy, recently closing deals on a 300-unit apartment property and a $15 million deal for an institutional investor. Aigner said the firm's multifamily and leasing divisions are doing well, but the challenge is finding space for tenants.

The solution: work on renewing leases where they are, and on controlling the space around them for expansion. Then look for reasonable build-to-suit opportunities. Land is still available in the North Creek, Canyon Park and DuPont areas, Aigner noted, and Quadrant has I-90 property to develop.

"It's a rosy picture for commercial real estate, it really is," Aigner said. "The view looks good from here."

The picture is sufficiently promising that Colliers is looking for more brokers. Aigner said his firm could use five more specialists in the Seattle office, with another three in the Bellevue office.

"We're shaking the trees looking," he said. "And we're not averse to training individuals either."

In the Bellevue office, vice president and branch manager Scott Coombs said he has hired experienced agents with successful track records in the local market, as opposed to new, untried ones. The reason is competition. Coombs said skill and experience are the things clients are looking for, and without them the firm would be less competitive.

Having said that, however, Coombs said he is looking for a couple of new agents this year to support the work of the senior brokers.

Those senior brokers find themselves in a landscape much changed from just a few years ago. Coombs said they no longer just have a specialty and a territory; the market is demanding expertise over broader geographic areas and property types. That's because the lines between high-tech, manufacturing, warehouse and office users have blurred.

Coombs cited a recent example.

"A technology company, a medical device company, needs 20,000 square feet," he said. "They can be housed in either a technology or office building, and can be either in the Seattle/Lake Union area or in the Canyon Park/Eastside technology (corridor) through Redmond, Woodinville and Bothell. With a phone call we put together people with expertise in each geographic area and each product type. That's the kind of resource clients need today. They need to know everything right now."

The way to handle that is to focus more on offering services. That means help with processes, systems and solutions, Coombs said, rather than keying only to geography and product types.

"We're fortunate," he said. "We had a great year in 1996, and a lot of our business will be completed in 1997. It should be a very good year for our firm."

So, what should a would-be investor buy? Coombs said he'd buy an office or technology building on the Eastside. "It won't be a steal of a deal today," he said. "But if you buy today let time go to work for you."

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CB Commercial

"Not everyone wants you to sell or lease space for them," he said. CB now provides services, like strategic planning for corporate, institutional and individual clients, that do not necessarily involve a transaction.

Carpenter said this new direction began at CB two years ago and has been working well.

"It doesn't mean that those single transactions don't have to be there," he said. "It just means we're going to build larger market share. We have been effective with it. It generates additional business from existing clients."

The Seattle office of CB also has a specialty group that focuses on HUD opportunities nationwide. Although Carpenter said there is little of that work in this region, there is enough elsewhere to keep a staff of eight busy working with a third of the 85 CB offices around the country. The staff works chiefly in refinancing, sales and consulting.

"We're trying to get the word 'broker' out of our name, in people's minds," said Carpenter.

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Craig Kinzer & Company

"I'm getting a lot of pressure to expand, but I'm trying to resist it," Kinzer said. "That's my personal philosophy. If I were trying to grow a 20-person firm and create a legacy it would be different. I'm trying to make a well-respected boutique firm with AAA clients."

The four members of the firm don't do it all. Kinzer subcontracts for other services as needed, such as brokerage, financial analysis, due diligence and disposition of assets.

"Many times I'll contract out to those whom you'd think of as competitors, rather than staff up internally," Kinzer said. "I pick the best."

Kinzer himself isn't exactly a slouch. In 1996, he said, he personally handled $205 million worth of deals.

Those deals occurred in a downtown office market that has continued to tighten, with smaller vacancies and higher rents. But Kinzer is not among those who foresee rents rising to the point where new construction starts to pencil. Instead he expects rents to hit a plateau, as tenants who once had good deals start to look elsewhere.

All rent increases are based on the perception of downtown as a vibrant, desirable place to be. Kinzer said this impression is bolstered by the addition of new hotels, retail and waterfront development.

"I don't believe the hotels are going to find themselves overbuilt," he said. "I do think the retail is ultimately going to have a problem. If you fill up the retail, one could say it's a wonderful critical mass. But I would say there are not enough shoppers downtown to make them all survive."

The question is what happens in the second or third year after the new stores open. Will they attract people year in, year out, the way Bellevue Square does? Kinzer said Seattle's new symphony hall will help a lot, as will a new downtown library. The RTA's light rail service will be good when it comes, but it is a decade away.

"I see retail being sunk way before that comes," Kinzer said. Outside of retail, however, the local market is the best in the country. "I think we're kicking butt. Nobody I'm aware of in the country is picking up steam at the level we're at. Our low point was nothing compared to the Northeast and Southern California; there you had a true depression.

"We're well poised to come off of it from what was a healthy correction as opposed to a true depression. I couldn't be more bullish."

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Nitze-Stagen

Nitze-Stagen hopes to start construction this summer on a mixed-use project at Union Station.

"The company is here," he said. "It's much easier for all of our people if we can drive to our projects within five minutes. We're in a service business and you have to respond to your customers in a timely fashion. Being close has a certain efficiency built into it."

Among Nitze-Stagen's holdings are Merrill Place, a landmark office block in Pioneer Square, and the old Union Station northeast of the Kingdome. Stagen said his company is working on entitlements for Union Station and hopes by late summer to start construction of a mammoth mixed-use development south of the historic station. Discussions are underway with a number of possible anchor tenants, but Stagen had nothing further to say about that until a deal is struck.

What he did want to talk about is his vision of what the city could be, and what it needs to do to get there. Stagen believes Seattle is poised to become one of the world's great cities, in a league with Singapore, Frankfurt, Hong Kong and other similarly important centers of culture and commerce.

"The city has to take on an international identity," he said. "We do not compete with Portland and Vancouver."

To foster that international identity, Stagen thinks the city should do more to welcome visitors from different parts of the world as well as develop a good transportation system, an exciting downtown and the amenities that make visitors feel comfortable.

The city also needs an attitude that welcomes business, and a can-do philosophy as opposed to a "can't-do-it-because" approach, Stagen said.

"I think we have every opportunity in the world now, for the first time, to see that this happens," he said.

For his part, Stagen intends that his Union Station project will promote the creation of the kind of city he advocates. The project will include office and retail uses with bus and rail stops and a public plaza. But it is also designed to form a bridge, literally and figuratively, between the International District and Pioneer Square.

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Wronsky Gibbons & Riely

"Most is complex advice rather than steady appraisals," he said. "Banks have figured out they don't need it (appraisals) for their business."

This is just fine with Wronsky. He said he doesn't miss having to maintain books of data that were "huge, expensive and nobody read." Focusing instead on specialized advice is a lot more fun.

That specialty, however, does not lend itself to expansion of the firm through new hires.

"What people need when they add advisory skills are people with experience, people who have been around the block, who can give quick or thorough analysis to a problem," Wronsky said. "That's extremely difficult to train. The grunt work is increasingly unnecessary in terms of what you can get inexperienced people to do to make your life easier."

As befits someone who is in the real estate advice business, Wronsky is an astute and witty observer of the Seattle market. Many of his bon mots unfortunately are not for publication, but he did offer some thought-provoking comments on the local scene.

One is that, as the world of business and government becomes more complex, we are likely to see more public/private deals of the sort Jon Runstad engineered with King County. That arrangement allows King County, the primary tenant of a new Wright Runstad office development, to take an ownership interest in the real estate over a period of time.

"It's complicated," Wronsky said. "It's complicated because the times are complicated. But at the same time, it's smart."

Similarly innovative deals are going to be more necessary as time goes on. One example is new construction for high-tech users. Wronsky said such companies often have money for expansion but little time, and may need additional space that they don't want to commit to immediately.

"They will need a shorter lease, or flexibility in the space," Wronsky said. "It argues for a big wad of space, more than you think you need or can justify, so you can grow and shrink at a harmonic rate. Within that, it suggests that people are going to want the ability to move and retain their identity."

One intriguing idea is hoteling, or sharing space and trading it back and forth with a co-user. But regardless of the arrangement, everyone has to figure rent increases into the equation, particularly those in class A space where rents are rising most rapidly. Wronsky said many small businesses in such space wouldn't be there today had there not been a lull in the market early in the decade. And in order for them to stay they will have to find ways for more workers to use the space.

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Kidder Mathews

Joe Preston, president of the firm, said that while Kidder Mathews & Segner traditionally has been a brokerage company with a focus on transactions, customers now demand more services like facilities or lease management.

"Today you have to be long-range process oriented," he said. Everything is more complex, from entitlements to city bureaucracies, and a broker has to be able to manage the process. That leads to non-transactional services.

What's driving this change is a national trend among corporations to outsource services after in-house real estate departments were eliminated to cut costs. However, in sending the work outside, the corporations still usually prefer to go to just one service provider.

"It usually gets down to a strong relationship with one person," Preston said. "It's still key having quality, experienced people (who have) the financial skills and are process oriented."

A broker's world is much different today from the way it was 10 years ago. Then, according to Preston, it was enough to know your market and your inventory. You just had to put them together to make a good living.

Now Kidder Mathews & Segner has 65 agents in offices in Bellevue, Seattle, Tukwila and Tacoma. The firm is associated with 45 others nationwide to provide multimarket and international services, and recently joined with Peter Shorett to provide appraisals.

"Our strategy has been to cover King, Pierce and Snohomish counties," Preston said. "But there's a lot of blurring of specialties. Today it's hard to tell whether (a property is) office, retail, warehouse, manufacturing or technology, so you get a lot of crossovers in different specializations."

The result is that teams have become an essential tool. Each deal requires a unique set of skills to be applied, requiring the collaborative efforts of several people at once.

"It could be an appraiser or property manager as needed," Preston said. "What used to be a maverick, cowboy-type business is now team oriented."

Philosophically and structurally, Kidder Mathews & Segner is built around the idea of partnership within the company. Preston said the firm has been successful at attracting and keeping good people, of whom most previously worked for competitors, because it caters to their needs as well as those of clients.

"We recognize that brokers and key people are our customers," Preston said. "They work for me but I also work for them. There is no majority owner of the company. The producers are independent contractors and strong individuals; you have to give them a piece of the action and let them share the profits as well."

Although this structure has adapted to the changing market by adding salaried staff to provide non-transactional services, Preston said it is important to be alert to a possible reversal of this trend.

"I could see it changing very fast," he said.

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Outcalt & Johnson

"There are some empty boxes that do not warm the cockles of the hearts of the real estate community," Johnson said. Outcalt added that there is going to be more space languishing on the market before the situation gets any better.

"It looks to us like another buyers' market, where they can negotiate rather favorably if they want to take over the excess," he said.

In the last few years retail space was added rapidly as malls expanded, warehouses were converted and new box stores were built. The result was overbuilding -- at the same time that the public's fickle tastes in shopping changed again.

The trend du jour is an urban, pedestrian shopping experience of the sort found in downtown Seattle, University Village, Bellevue Square and soon Redmond Town Center.

"When you have traditional shopping centers trying to replicate the urban experience, that creates a lot of choices for the retail tenant," Johnson said. Of paramount importance is for the retailer to decide what customer to cater to, and provide the kind of experience that person is looking for.

"We believe many want to focus on the aging baby boomer, because as they get their kids out of the house they will once again spend on themselves," Johnson said. "They will be very attracted to an urbane shopping experience, seeking entertainment dining, traditional entertainment and entertainment shopping."

Outcalt said shoppers at first found the big boxes exciting, but now it's a case of been there, done that. They are no longer a fun destination. Now the customers mainly are families with children, and the parents have limited time to cruise the cavernous aisles of merchandise. They want certain items and that's it.

"If you don't find it, you'll think twice next time," Outcalt said.

That phenomenon is part of an ongoing fragmentation of retail markets, in which the one-size-fits-all structure has been replaced by at least 25 "particle markets," or specialized segments.

"Retail is a mirror of society," Johnson said. "We have a populace that is experiencing rapid change, that has a lot of choices available to it. The challenge for retailers is to find the profitable customers for them and grow with them. Retailers have to shop around for customers."

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UW Center for Real Estate

One is an applied-research project to determine exactly how office space is used downtown, and to use that data as the basis for market projections. His other concern is how to accommodate growth without losing those qualities that make the Northwest a special place.

Assembling the database of downtown office users is a far simpler matter than managing growth. But that doesn't make it easy. Filley said the approach is to document every single user of space, including the number of square feet and number of employees, aggregate the numbers and then issue a sector-by-sector forecast.

This contrasts with the current approach, which is to add up all the square feet that have been leased in a given period and call it absorption, or demand.

"Which is true," Filley said. "But it has a limited ability to predict what happens next year."

The new approach attempts to get a handle on employment trends, and from them extrapolate space needs.

"It may be unsuccessful, but we'll probably end up with nothing worse than what we have," Filley said.

On a similar theme, but on a larger scale, Filley is also looking at the availability of industrial land within the urban growth boundaries set up under the Growth Management Act. The goal there is also to develop projections of space needs based upon employment trends in core industries.

A key question in the study is: Are the goals of the GMA in sync with the realities of the marketplace? Is there enough land within the urban growth area to accommodate expected industrial space needs?

"If there is not enough land, growth will spurt out someplace else," Filley said.

This study is being conducted with the help of the Port of Seattle, the National Association of Industrial and Office Properties, and possibly King County. A final report is due in June.

"What both (studies) say is, the University of Washington has a healthy interest in the functioning of commercial real estate markets, and wants to be a player in the health and functioning of those markets," Filley said.

Filley's efforts are under the auspices of his small program at the UW. But he said the university is considering expanding it, making it an interdisciplinary collaboration with the departments of Geography and Architecture and Urban Planning. The result would be a more serious academic program related to commercial real estate and urban planning which would give construction managers, architects and planners a practical working knowledge of how real estate markets work.

A few other universities have such programs, notably MIT, USC, Wisconsin and Cornell.

Here, there is renewed interest in the relationship between real estate markets and land use, especially as the market swings into another up cycle.

"There are serious questions of how we accommodate our growth and the physical forms it will take," Filley said. "Those are all issues that are on the minds of planners and architects and construction managers and real estate (professionals)."

Those concerns are not unique to the Northwest. But Filley believes the depth of concern here, and the degree of involvement by the public, point to a heightened sense of the Northwest quality of life and the potential damage to it from misdirected development.

"Geography and temperament have resulted in something more thoughtful and more painful," Filley said. "We try to proceed with more care. This is not an area that welcomes careless development or slipshod development. It's everyone's back yard. We have avoided some of the problems that have occurred in flatter areas, because people care more. But it needs to be marshalled into constructive debate.

"Our mission is to avoid grinding all enthusiasm into the fine powder of public process. I believe this is a special place and people collectively can handle this stewardship well. And the University has a growing interest in being a part of it. That's why I'm here."

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Sabey Corp.

While that still has not softened lenders' resistance to speculative construction, Sabey nonetheless considers the current conditions to be the best he has seen in his 30 years in the business.

The reason is job growth, what Sabey termed "the foundation of all real estate." Between October of 1995 and that month in 1996, Seattle's overall job growth was 5 percent, according to Sabey. And the manufacturing and computer services sectors were up about 12 percent apiece.

That translates into strong demand for real estate for at least three to five years. To Sabey that is as good an investment opportunity as one is ever likely to see --a fact that is not lost on local and institutional investors who are filling the capital vacuum left by skittish lenders.

There are signs that lenders may be warming up. Sabey said real estate is no longer considered a pariah, although it was in recent years. And now discussions of where the smart money is going are beginning to mention real estate.

Sabey Corporation has not had to wait for lenders. The company, which provides its clients architectural, construction, leasing and management services, has been busy completing a new U.S. Postal Service plant in Tukwila and a new 150,000-square-foot facility for Boeing supplier Contour Aerospace in Everett.

"We think the Everett area is pretty exciting," Sabey said in a recent interview. "Boeing is pushing a lot of activity; their suppliers are doing well."

Rising rents and scarce land on the Eastside also are creating interest in Everett. And the state's Growth Management Act is having its desired effect, which is to force development into areas where infrastructure already exists. That's ideal for Sabey Corporation, which specializes in redeveloping properties for new uses.

Sabey takes a certain amount of satisfaction in watching the current direction of the market.

"I've been forecasting this change for about three years," he said. "We've got big bets placed, so obviously we're biased. But it's nice to see rent increases that are confirmation of these trends."

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The Retail Group

Seattle is a world-favorite tourist destination and has earned a reputation for service through Nordstrom's success. It is known as a city that is quite sophisticated and able to demand and handle retail of the caliber that's coming into the city, Owens said.

Retailers such as NikeTown herald the change. Nike is a huge corporation whose stores aren't just intended to move merchandise but rather to build image and brand identification, she said. Such stores will bring millions of tax dollars into the city, not only in shoe sales but also in hotel rooms, restaurant tabs and trinkets bought by people for whom NikeTown is one stop on a Seattle itinerary.

"You'd need 150 mom and pops to do for our city what one NikeTown can do," Owens said. "It's like going to a museum and that's great for our city."

New stores such as NikeTown that are coming into Seattle can be "construed as retail," Owens said. But not in the old form. Retail's new form is selling entertainment, interaction and fun along with the merchandise.

"The prospect of buying and selling goods has been eclipsed by making sure people have a good time," she said.

NikeTown and the other new retailers coming here will bring retail sales but more importantly they will attract tourists. They are "making the bait hot," according to Owens.

Of course today's entertainment retail fad will pass but Owens thinks the risk is minimal. There will still be cycles and tenants will come and go but Seattle is getting a lot of new development that will endure through cycles of retail.

"Sixth Avenue has been resuscitated," she said. "It's been a godsend."

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Spieker Partners

Spieker's portfolio has doubled in size since the REIT was formed in 1993, ending 1996 with 22.5 million square feet.

Spieker was ranked the 12th largest REIT in the country by Dean Whitter at the end of last year but a recent offering of 10 million shares now puts Spieker into the top 10 in terms of total market capitalization. Spieker's portfolio value, including equity and debt, is approximately $2.5 billion.

The focus for the future will be squarely on suburban office and industrial multi-tenanted, low and mid-rise properties in markets where the company has local expertise. There are no plans to add new geographic areas or get into new product types. Whether the portfolio grows by acquisition or new development depends on individual market conditions.

Spieker is selling off its 1.9 million-square-foot retail portfolio -- mostly neighborhood shopping centers -- a process which started in December of 1996. About 500,000 square feet have been sold to date, according to a spokesperson in the San Francisco office.

Spieker's most active markets have been in the Southern California and Orange County areas. Spieker caught that market as it was rising and will continue to ride the wave of increasing values and higher rents. There is also good activity in the San Francisco area, particularly San Jose. In terms of both rental increases and acquisition, Sacramento has been the slowest. Portland has good development opportunities and Spieker has done both industrial and office projects there which have hit the market well and been quickly leased.

Rent increases for 1995 averaged 13.9 percent across the board and for the first three quarters of 1996 (the last period for which figures were available) averaged 13.2 percent.

Consolidation of the industry is occurring and Spieker expects to grow larger through both acquisition of other portfolios as well as new investment dollars coming into REITs.

Richard Leider, vice president for Spieker in the Seattle area, said the REIT has been very active locally in acquiring and developing property and he expects that will continue in 1997 as vacancies fall, rents rise and employment remains high.

"It all bodes well for existing property owners," he said. "We're looking to aggressively grow the company, and markets here will allow us to do that."

Over the last few years Spieker has grown more by acquisition than development and had few competing buyers. That changed about 18 months ago as real estate started to become an attractive product. Today 15 to 20 groups are bidding against each other for the hottest deals, Leider said, with a minimum of five or six bidders showing up for lesser deals. The number of interested buyers has accelerated quickly as Seattle's reputation grows.

The buyers locally are primarily institutional. Insurance companies have become less aggressive but pension funds, REITs and individuals such as Larry Benaroya are busy.

Leider said the velocity of deals has also increased because owners see an opportunity to sell properties they've been holding onto.

"For the first time in many years, sellers can sell," he said.

Development of new industrial product will continue and Spieker will continue to do infill projects in proven locations. Suburban office markets are improving but rents will not yet support new construction. If rents continue to rise and construction costs remain fairly steady Leider said he thinks new suburban office development will start to pop up in about two years.

Leider does not expect to see another development boom like the 1980s because of the greater discipline of financial markets and tax law changes.

"That is not to say you may not outpace demand for a while, particularly with the long lead time (on new projects)," he said. Leider added that other factors working against a development boom are the area's severe geographic and political constraints on new construction.

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Quadrant

Quadrant is starting to seriously consider building office and research and development projects without much preleasing, most likely in Bothell and Redmond where it is close to completing designs and permitting for two-story flex space projects.

"We're seeing pretty good interest in those kinds of buildings because the vacancy rates are getting very low," Dennis said.

Adobe Systems' new campus in Fremont will be a catalyst for new development in that area. Quadrant will build about 300,000 square feet in the first phase of the north Lake Union development.

"Fremont hasn't had a lot of activity in recent years," Dennis said. "People have been waiting for something to happen. Adobe will validate Fremont as a good location."

Quadrant has waited a long time to build in Fremont, having gotten caught in the office market downturn which meant waiting years while tenants enjoyed downtown office space for $11 a square foot.

Quadrant can build a total of 700,000 square feet on its Lake Union property.

Dennis said the company is also positioning itself to take advantage of the surge in housing demand in the region. Quadrant built 200 housing units in 1996 and plans to build 250 in 1997. The constraint is land, not customers, and Quadrant is moving north to Snohomish County and south to Puyallup/South Hill in search of lots that will pencil out.

It is also developing narrow-lot-line and townhouse products which try to bring a single family feel to attached units. Half of Quadrant's home building business is now townhouses and other attached properties.

"We're constantly trying to explore ways to play on the new field of growth management and higher density," Dennis said.

Another big change Dennis sees is optimism. Vacancies are small, lenders are amenable and the economy is good.

"Cosmic forces are coming together and saying its time to build," he said. "It's almost scary there's so much optimism out there. I hope they won't do anything foolish.

"Real estate goes in cycles and its quite likely that in the rush to meet demand there will be a bit of overbuilding. But I think there is enough restraint that we shouldn't overshoot."

Dennis' optimism about restraint in this real estate cycle comes from the equity requirements of lenders and the quality of the competition.

"It's a pretty sophisticated and mature group of people," he said.

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CarrAmerica Realty Corp.

CarrAmerica focuses on "value office properties" in suburban areas and currently owns 173 office properties with a total of 15 million square feet of space. Three properties totaling 423,000 square feet are under construction, including a 95,000-square-foot, two-building project at Redmond East Business Park.

CarrAmerica bought the 400,000-square-foot Redmond East property last year from Michael Mastro and the deal included an adjacent five-acre parcel. Casper plans to start building as soon as he can get permits. With zero vacancy in his existing space and suburban office vacancies below 5 percent, Casper says the market is ready for spec office projects.

As a publicly traded REIT, CarrAmerica can't talk about other projects it may be working on until they are publicly disclosed in a prospectus. Casper said he's focused on the Redmond project now but said CarrAmerica is very interested in expanding its portfolio of Puget Sound properties.

Being a REIT allows CarrAmerica to move more quickly than traditional developers. Casper said REITs' decisions are based on different parameters from those of other developers and that can give their tenants more flexibility in product type, lease terms and tenant improvements.

"We might be able to come up with a special package of tenant improvement dollars," Casper said. "We might take more risks than traditional developers. We think that our approach of being landlords not subject to lenders' requirements will benefit users."

REITs are a fundamental shift in the way real estate is capitalized and Casper said he expects them to have a significant presence in acquisition and development of property in the area.

CarrAmerica buys property in markets across the country and Casper said Seattle is one of the markets the REIT has chosen to focus on. From a national perspective Seattle stands out for its diversified and strong economy and the quick recovery its real estate market has enjoyed, Casper said.

"Seattle real estate has been an incredible story in the last three years," Casper said, noting that three or four years ago the market was on its ear and Boeing was in a downturn.

"What a turnaround we've had. To be discussing new development and building office buildings is really quite a turnaround. All cylinders are firing."

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