Developers have big plans for Seattle CBD

By CHRISTOPHER WRONSKY
Wronsky Gibbons & Riely

Everyone is talking about how great the office market is -- for landlords. The current market conditions are a result of the absorption over the past several years without any additions to the inventory. This will not last forever. Potential sources of Seattle CBD office supply for the period 1998 to 2003 include a little over five million square feet.

The upcoming projects are divided into two categories. The first category covers proposed new construction or renovation. The second source of new supply includes space that is likely to open up as larger users either consolidate outside of the CBD or plan to move into new owner/user space.

Almost four million square feet of new space has been proposed for downtown Bellevue but there is not enought demand to fill half of it. Photo by Sky-Pix

Obviously it is impossible to know for certain at this point which projects will be built and which ones will not. This is particularly true when looking out beyond 2000.

For larger tenants looking for contiguous space in the Seattle CBD over the next two to three years, options will be scarce, but not nonexistent. We identified just over five million square feet of proposed new construction and almost three million square feet of space that could open up as larger users either consolidate outside of CBD or move into new owner/user space.

While 1997 was a year of development announcements, and any of at least six development companies is in a position to provide build-to-suit accommodations, due to the time lags involved with new construction, very little will actually be built before 2000.

Of the approximately one million square feet indicated as coming on-line during the 1998 and 1999 time period, the majority (Wright Runstad's King Street Center and World Trade Center East) is already spoken for. This leaves roughly 100,000 square feet in Expediters' 200,000-square-foot project (Expediters will occupy half the building), limited space in the Port's portion of the World Trade Center, the smaller Roffe and Polson building renovations and the possibility that Nitze Stagen could fast track a phase one at Union Station.

Near-term options just outside of the CBD core (primarily in the South Lake Union neighborhood) include Alper NW's second phase on Dexter Avenue (110,000 square feet are presently under construction), the Seattle Times' renovation of the Furniture Mart (presently leasing), Lowe's 1551 Eastlake redevelopment project and perhaps a moderate (future) renovation of Paul Allen's Quinton Instruments building.

The year 2000 is believed to be the earliest possible date for large-scale additions to the inventory. This includes phased development of Union Station, the possibility of a third Metropolitan Park tower, the first of three Martin Smith projects (most likely Millennium Tower), Trammell Crow's One Convention Place and Koehler McFadyen's R&D-oriented project along Elliot Avenue. Finally, Martin Selig has announced that he is back in the development business with a proposed project on lower Queen Anne.

Looking past the year 2000, the most significant projects on the horizon are the Nordstrom/Clise joint venture (preliminary plans have increased this project to 500,000 square feet) and Martin Smith's proposal for an 891,000-square-foot, 36-story office tower on the block surrounding the downtown YMCA.

More than likely there will be additional projects proposed, particularly given the aggressiveness shown lately by REITs and institutional money looking for deals.

All the best deals on existing product in Seattle have been done (at significant discounts to replacement cost), so a natural evolution is for some money to chase the higher yields promised by new construction. A future expected player is Bentall, who has picked up local expertise in Gary Carpenter and may wish to add to their recent acquisition through development, but we will also likely see new talent attracted to this strong market.

A second option for new tenants entering the market or existing tenants looking to expand will be to backfill as other tenants vacate space. Companies which have announced plans to leave the CBD include Adobe, Aetna, and GNA.

Adobe will leave Merrill Place and 83 King Street for a new headquarters in Fremont in 1998. Aetna's move will result in 110,000 square feet of space becoming available in Century Square. GNA Insurance was a candidate for a build-to-suit project, but with a national reorganization this is no longer an option, and they now plan to let their 156,000 square feet in Two Union Square roll over.

As an indicator of market strength, it is noted that the majority of this space is already spoken for. Terra Systems will take a chunk of Adobe's former space and Northern Life has signed a lease to take over for Aetna; although, in the latter case (as Northern Life is already located downtown), the move will merely open up 100,000 square feet in the Northern Life building.

Backfill opportunities will also be created as existing tenants move into new downtown buildings. Most notable is the chain of events that will be set in motion as Nordstrom completes both its renovation of the Frederick and Nelson building and a planned new office tower. The first impact will occur if portions of the existing Nordstrom store and the Seaboard building turn up as "new" Class B product in 1999 as the final phase of the Pine Street/Nordstrom/Frederick & Nelson redevelopment.

More significant blocks of space will turn over in 2001/2002 in conjunction with the completion of Nordstrom's office tower. Other blocks of space that could open up with new owner/user construction include space in Metropolitan Park as Fred Hutch considers future expansion at South Lake Union and two buildings along the central waterfront presently occupied by Immunex.

Immunex continues to move forward with plans for a new headquarters at Pier 92. King County, with their recent deal for a new office building (plus proposed expansion of the County courthouse), is in a position to leave behind significant chunks of leased Class B space in both the Prefontain Building and the Exchange Building.

The City of Seattle's 1996 facilities plan outlined a consolidation into Key Tower, which was acquired in 1995. The City has offices spread out in several downtown buildings including the Dexter Horton, Alaska, Arctic, Municipal and Public Safety buildings. The plan calls for surplussing the Dexter Horton, Alaska and Arctic buildings and potential demolition of either the Public Safety or Municipal buildings.

In total, the proposed moves by the City could involve over one million square feet, but the election of Paul Schell and his inquiries into selling Key Tower and possibly building a new civic campus add an extra layer of uncertainty to the City's plans.

Most of the four million square feet of potential new supply would hit the market between 2000 and 2003. Our projections of new additions are for only 200,000 square feet in 1998 and 600,000 square feet in 1999. Between 2000 and 2003, an annual average of just over one million square feet of new product is anticipated.

This should have the effect of initially meeting the pent-up demand created in 1998-2000, but subsequently create an oversupply and, from a tenant's perspective, much welcome relief in 2002-2003.

Over the period 1998 to 2003 total new product is projected at 5.3 million square feet. This is comparable to the 5.3 square feet added to the market between 1987 and 1991, a period in which tenants had the upper hand in negotiations.

It is true that mergers and consolidations and a cooling off of the regional economy exacerbated the impact of the speculative construction bubble. It is true that the base inventory has increased so that comparable additions are a smaller fraction of existing inventory and should require less percentage growth in jobs. However, it is also true that as rents rise tenants will become more creative about getting more employees into fewer square feet and some tenants will quit a downtown address they can't afford or don't need to pay for.

There may be a "new discipline" in the capital markets. The term "business cycle" may be obsolete. But I wish my lease were expiring in 2002.

Copyright © 1998 Seattle Daily Journal of Commerce.