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1998 Real Estate Survey
What a difference a few years, optimistic lenders and a booming economy make! All sectors of the Seattle commercial real estate market are red hot, from upscale hotels to barebones warehouses, from the suburbs to the CBDs. The only discouraging word: overbuilding.
Below you'll find reports from some of the areas leading commercial real estate firms, letting DJC readers know how their business has been, what projects they're working on, and what they think the future holds for the local markets.
Martin Selig
Martin Selig is back and says everything is "super" once again, according to the developer who redefined Seattle's skyline over the past several decades.
Selig, who at one time controlled six million square feet of office space in downtown Seattle, the Denny Regrade and Lower Queen Anne Hill, recently announced his first office project since 1989 -- the five-story EvansGroup Building on Lower Queen Anne. He has another midrise office project in the works but won't release any details yet.
Selig's holdings have dwindled to 2.5 million square feet, due mainly to the real estate depression of the early 1990s. But Selig says he has done pretty well just to have survived the shakeout.
A lot of past industry leaders have left the scene, he said. When Selig attends real estate gatherings today, he notices "fewer guys with white hair." A lot of people in the business today "look as though they haven't been through the trenches."
Selig says repercussions from the real estate slump are still being felt. Arranging construction financing for office buildings is still difficult, for example. "Everybody got hurt during the downturn and people are cautious."
The mix of tenants is also different now. Mainstays of the 1980s such as banks and law firms are less important now, replaced by expanding high-technology companies.
Rents are finally rising again, and Selig feels that the current supply of office space is enough to meet demand. He doesn't believe there will be overbuilding anytime soon.
Selig is adding staff in anticipation that the current healthy office market will last another five years.
Bentall
Bentall Corp. arrived on the local real estate scene last year in a big way with its purchase of the 19-property Basil Vyzis portfolio and the establishment of a U.S. division headed by Seattle real estate veteran Gary Carpenter.
The company made more big news at the end of the year with another noteworthy acquisition: the 44-story U.S. Bank Centre building in downtown Seattle for $237 million.
Altogether, Bentall purchased $425 million in U.S. real estate in 1997, most of it in Seattle and on the Eastside. The only other real estate Bentall owns in this country are some midrise office towers in the Huntington Beach area in Orange County, Calif.
The purchase of U.S. Bank Centre was an ironic moment for Carpenter since he helped develop the prestigous office project in the 1980s when it was called Pacific First Center.
"It's easier the second time around," said Carpenter, referring to the building's previous financial difficulties. Although Pacific First Center never went through foreclosure, it was recapitalized and a new equity partner brought in. "Dick [Clotfelter, his former partner] and I bowed out."
Carpenter was executive director of CB Commercial's Seattle office for three years before being lured away by Bentall.
Some of Bentall's purchases last year involved entitled land on which the company can build. Carpenter calculates that Bentall has the capacity to build about 2.1 million square feet on the property it holds.
Bentall currently has about a half-million square feet of projects under development.
New construction is planned this year at Bentall's Newport Corporate Center in Bellevue along Interstate 90, including a 10-story, 275,000-square-foot office building.
Bentall is still looking for other acquisitions. Its primary focus is suburban office buildings. Although the company owns some retail property in Tacoma (part of the Vyzis deal), Carpenter says Bentall is not interested in developing retail projects.
He predicts that Seattle area development will continue at a rapid pace in 1998 and that demand will still outweigh supply, but the rate of rent increases may slow somewhat.
Possible negative economic factors include Asia's economic troubles, which could affect service industries here, and a return of inflation which would push interest rates up. Carpenter is also watching how Boeing deals with its production problems.
Wright Runstad
For Seattle-based developer Wright Runstad & Co., 1997 "was a very good year," according to chairman and CEO Jon Runstad.
The company saw substantially increased revenues in its property management operations due to higher occupancies (less than 2 percent), higher rents and lower costs. Because of the stronger market, concessions have diminished.
On the development side, Wright Runstad last year began work on three projects totaling one million square feet: the World Trade Center on Seattle's waterfront (with the Port of Seattle); King Street Center in Pioneer Square; and the 24-story ODS Tower in Portland.
There was the $620 million sale of eight Wright Runstad properties to Equity Office Properties Trust of Chicago, with Equity also acquiring a minority interest in the longtime Seattle company.
This year, Runstad anticipates that construction will start on Sunset North, a three building complex at the company's Sunset Corporate Campus along Interstate 90 in Bellevue.
Runstad says the company is also seriously looking at starting Three Bellevue Center, a 500,000-square-foot office tower in downtown Bellevue, as early as June. Design approvals were obtained in the late 1980s when the project was known as First Interstate Plaza. Design changes are under consideration. "We are looking at making adjustments to floor layouts while staying within administrative design guidelines and this could affect the height of the building," said Runstad.
Runstad is amazed at the high absorption rate of office space along the Highway 520 corridor and in the Redmond/Willows Road area. "There is very little absorption along I-90 and in downtown Bellevue because there is very little space available."
Runstad shares a common concern among building developers/owners: that the current flood of new building announcements could result in overbuilding.
CB Commercial
"Lots of people are happy to be back in the real estate business after a long hiatus," says CB Commercial's new executive vice president, John Records.
Records, who oversees CB's three offices in the Seattle area and one in Portland, predicts a "tremendous" 1998 with demand up in all sectors.
"We'll see a lot of construction to meet the demand but obviously all the proposed projects won't get built. "
The Eastside is very hot, says Records, with almost four million square feet of new projects proposed. Office space in the Bellevue CBD would double in size if they all got built, and, Records says, "Obviously, that won't happen."
Records says "overbuilding" is a relative term; what is bad for developers can be quite attractive for tenants. Vacancy rates in the 5-10 percent range are fine, but 2-3 percent is too tight. "If tenants don't have any options, they'll move to another city."
CB Commercial Real Estate Services Group, headquartered in Los Angeles, is the nation's largest real estate company in terms of transaction volume, number of offices and market coverage. And the company intends to grow.
CB will be expanding a range of services in l998 including appraisal, facilities management and construction management. In the finance sector, CB recently announced the acquisition of Seattle-based North Coast Mortgage Co. by a CB subsidiary, L.J. Melody.
"Everyone is trying to expand to provide a seamless range of services," says Records, "and it's a challenge for most companies."
Records believes smaller firms will have to narrow their focus --geographically or service-wise --in order to survive. This past year a half-dozen or so top sales people left CB's Eastside office for smaller firms. "Although we'll miss them, this is typical of boom periods," he said.
CarrAmerica
Clete Casper of the Redmond office of CarrAmerica Realty Corp., says the national REIT's Northwest focus reflects the company's national strategy: focusing on well-located suburban office and high-tech properties, both for acquisitions and for development.
CarrAmerica's holdings locally are concentrated in Redmond and Bothell. They include the 500,000-square-foot Redmond East Business Campus, where CarrAmerica developed two buildings in 1997; and a 250,000-square-foot component of Canyon Park Business Center.
CarrAmerica also is developing the 434,000-square-foot Willow Creek Corporate Center on the former Data I/O site on Willows Road, where 334,000 square feet will be new construction.
"We're looking for new acquisition and development opportunities in the Puget Sound and Portland areas," Casper said. "Our interest is long term in nature. We're very excited about the current prospects for the real estate industry as a whole, and the economy as a whole."
Casper said the REIT chooses its investments on the basis of its internal research into opportunities, and not by targeting particular markets. CarrAmerica keeps a watchful eye on international events, particulary around the Pacific Rim, that could affect imports and exports through the Northwest.
But the Southeast Asian currency crisis has not become a big worry.
"We see the economy here tied more with the Japanese economy than with Thailand and some of the other Southeast Asian countries," Casper said.
He added that CarrAmerica's investment in this region has been validated by the performance of the economy, by jobs growth and by the kinds of jobs that are being created.
But Casper says it is the company's habit, as a newly public entity (1996), to be circumspect in its pronouncements.
"We tend not to gush," he said.
Nitze-Stagen
Frank Stagen, whose Nitze-Stagen company was one of the pioneers in real estate redevelopment south of the Kingdome (the SODO area), is now feeling the consequences of success in that neighborhood.
"It's becoming so popular, it's getting expensive," he said.
Nitze-Stagen's biggest trophy is Starbucks Center -- formerly SODO Center -- at First Avenue South and South Lander Street. But the company has not been idle since that deal. Last year Nitze-Stagen acquired Merrill Place, in Pioneer Square, from the R.D. Merrill Co., and has a tenant for all the space there that is being vacated by Adobe Systems. The new tenant is Seattle high-tech startup Tera Computer.
Stagen said his attention is focused entirely on the south downtown area, which extends from South Lander Street to South Jackson Street, and from First Avenue to the freeway.
"I clearly see that ... over the next five to 10 years, this entire area will be different," he said.
Coming projects include Nitze-Stagen and Paul Allen's Union Station development, which will add 1 million square feet of office space in five buildings; the two sports stadiums and adjoining exhibition hall; the King Street Station rehab and the King Street Plaza office development to its west; new condominiums in the International District and ongoing efforts to separate train and street traffic.
Stagen, like other investors and developers, continues to seek opportunities in the area. He would like to increase the company's holdings there beyond the present three, but he noted that competition for properties is intense.
"People are acquiring properties down there and making assemblages," Stagen said. "They are trying to assemble a block at a time, and starting to pay up on pricing."
The buyers are frequently institutional investors, either acting alone or in alliance with locals. Stagen himself is talking to possible partners, including Paul Allen, who is a silent partner in the Union Station project.
"It's about as busy as I want it to be, and probably about as much fun," Stagen said. "It's always a challenge to keep your neighbors content and happy, so you work in a nice environment and at the same time keep the city, county, railroads and other stakeholders in the area happy. It's really a question of give and take among the stakeholders.
"This is a very exciting place, with a lot of people trying their very best to come up with something that will be a benefit to the city."
Spieker Properties
Spieker Properties, a Menlo Park, Calif.-based developer and investor in industrial and office properties, did $190 million in new business in the Northwest last year.
"That's our biggest year ever," said regional senior vice president Don Jefferson.
Spieker's Northwest region is comprised of Washington and Idaho. But most of its investments are in the Puget Sound region, with an emphasis on the Eastside and the South End of Seattle.
Jefferson said the company is about to start construction of Phase 3 of its Southgate office complex in Renton, which will add 150,000 square feet. However, compared to the company's activities 10 years ago, development has taken a back seat to acquisitions.
"We didn't do acquisitions before we went public in 1993," Jefferson said. "Now we are doing significantly more volume (in acquisitions); as a public company we have more capital available."
When it comes to acquisitions, Spieker is very selective. The company looks for high quality properties that are well located and that have good prospects for full leasing. Spieker's preferred locations are close to urban centers in traditional markets.
Most recent acquisitions have been in office properties.
"If I saw a cloud on the horizon, it's the prospect of overbuilding," Jefferson said. If all the projects proposed for Bellevue and the Eastside get built, he added, "some folks are going to be in for some challenges."
Jefferson noted that the market turned around so quickly that many people got back into it at the same time. Many projects also began the entitlement process simultaneously, but which ones will come out first is an open question.
"The first few buildings out will do very well," he said. "But it's not easy to predict yours will be first. And once you're into the process, it's hard to stop."
Strong as the Seattle and Eastside markets are, they are not the strongest in Spieker's realm. Number one is the San Francisco Peninsula, particularly Silicon Valley, followed by Portland and Seattle.
On the West Coast, Spieker has 35 million square feet of office and industrial space. Some 5.6 million square feet of that are in the Puget Sound market.
But adding to that portfolio presents some challenges.
"On the acquisition front, a lot of people want to buy properties in this region, but there are not a lot being sold," Jefferson said. "On the development front, there's a lack of suitable land where markets want to be."
What's more, the length and complexity of the entitlement process, plus the possibility of building moratoriums, adds to the uncertainty.
Nontheless, the company is in a growth mode. A number of new people were hired recently, Jefferson said, but he expects fewer new hires in the coming months.
Schnitzer
Schnitzer Investment Corp. is a family-owned real estate and investment firm based in Portland. A member of the Schnitzer Group, it owns or manages over 100 properties throughout the U.S., including more than 50 industrial properties and the remainder in office, multifamily or single-family subdivisions.
In the Northwest, Schnitzer Investment last year spun off a new real estate investment and development enterprise called Schnitzer Northwest L.L.C. Headed by Daniel Ivanoff, the new entity focuses on build-to-suit and spec development opportunities in the Seattle-Tacoma area. The Schnitzer Northwest office is in Seattle.
Tom Zelenka, Schnitzer spokesman, said the company has a long history of investment in the Puget Sound region, but in recent years the firm has expanded its presence.
"We're pretty diversified in terms of variety of ventures," Zelenka said. They include downtown Seattle office properties, industrial and high tech. The company seeks to take advantage of the area's transportation infrastructure, including its trade links to Asia, while at the same time creating optimal conditions for tenants.
Last October, Schnitzer acquired all the assets of the former Koll North Creek business park in Bothell, as well as the Wells Fargo Bank Building in Bellevue. Zelenka said the Koll property includes nine buildings plus 60 acres suitable for development; Schnitzer anticipates adding another 1 million square feet on the site.
The Wells Fargo building, at 225 108th Ave. N.E., could be redeveloped into a 200,000-square-foot office building.
"Our philosophy is to buy and hold or build and hold," Zelenka said. "We tend to do what we say we are going to do."
By way of underlining that comment, Zelenka noted that Schnitzer in the last couple of years has created 1 million square feet of new space, bringing its total in the Puget Sound area to more than 3 million square feet.
The company has been active outside of Puget Sound as well. Acquisitions during 1997 included Columbia Business Center, a 220-acre, 26-building, 2.3-million-square-foot property near Vancouver, Wash.; and a 27-acre vacant parcel near Woodland set for development starting this spring.
"We see continued growth, and we will be aggressively pursuing those opportunities," Zelenka said.
Colliers
For commercial real estate brokerages, business now is better than the good old days ever were.
"Everything's hot, nothing's not hot," says Rob Aigner of the Seattle office of Colliers International. "I just wish we could find product. The lack of product is the challenge of this marketplace."
By "product" Aigner means property for sale. A flood of capital into the market means real estate is snatched up quickly and for high prices. On a capitalization-rate basis, Aigner estimates that Puget Sound commercial real estate is 10 percent to 20 percent more expensive than anywhere else on the West Coast, with the possible exception of San Francisco, San Diego and Orange County, California.
"There are better buys to be made, if you're looking for return," he said. "If you're riding the appreciation curve, Seattle is still strong. Investors haven't lost a lot of money in Seattle real estate -- they are buying a relative lack of risk. And they are paying for it."
For institutional investors, that isn't a problem. Flush with funds, they need a place to put them. And if the prices of real estate in the region are high, well, it's like dollar-cost averaging: Keep investing regularly, but buy a little less when the price is up, and more when it comes down.
"They will continue to invest in the region provided they can continue to find quality product," Aigner said.
New product is still a ways off. Noting that the market is not yet in the development phase of its cycle, Aigner said the current situation is the "announcement phase." Actual new construction is still 18 to 24 months away.
Industry professionals think the good times are going to keep rolling for that long at least. Aigner said that in a recent address to the National Association of Industrial and Office Properties, he asked the audience how long this boom will last. In a show of hands, a majority agreed with the 24- to 36-month estimate.
Seeing that, large brokerages like Colliers are adding staff as fast as they can scoop up qualified people. At the same time, many veteran brokers have either left to form their own brokerage firms, or are considering it. Aigner said this has become a challenge.
"With the advent of broker free agency, it is very difficult," he said. "Brokers are a very independent lot. Each broker is looking at that value question, and determining for themselves, 'Am I getting that value?' "
According to Aigner, Colliers has successfully countered this trend by building on its strengths. Those include a very strong technology platform and some superstar brokers, like Tim O'Keefe and Geoff Boguch, who have attracted some eager young talent to the company.
"We've also got tremendous momentum behind us," Aigner said. "We're really growing the operation. 1997 was the best year ever for the Seattle and Bellevue offices, and from a company office perspective, too."
Colliers has hired two new people in its Seattle office, and one in Bellevue. This year the firm will add eight or 10 more, for an increase of about 15 percent.
Cain & Scott
"It's an exciting time," said Tom Cain of Cain & Scott, a nine-person apartment brokerage firm founded 20 years ago. Cain & Scott has done over $50 million in apartment building sales in the past year, an amount roughly equal to the volume of the year before. The majority of those sales are in King and Snohomish counties.
Low interest rates and aggressive lenders are fueling an overall rise in apartment building sales volume. "The volume is helping all brokerage companies, but it still is a very competitive environment," said Cain.
"There is an inordinate amount of larger complexes selling because the REITs are buying," said Cain.
Quadrant
"We're very optimistic about the economy and the real estate market in the Puget Sound basin," said Steve Dennis, president of Quadrant Corp.
"There's a tremendous amount of activity in both commercial and residential sectors." In the commercial sector, expanding businesses are trying to grab space to accommodate growth needs. Residential activity is based on strong job growth.
Most Quadrant commercial projects are targeted towards high-tech users both in the suburbs and in the city.
Construction of the new headquarters for Adobe Systems Inc. continues in Fremont. Among Quadrant's other recent projects are a building for a computer training company in Bothell and high-tech office buildings in Redmond and North Seattle.
"Close in and the Eastside area are the hot spots," said Dennis, adding that the south and north ends are growing as well. There are Quadrant projects from Olympia to Everett, throughout the corridor, he said.
The company has built 500,000 square feet of space in the last year at a construction cost of over $50 million, a similar level of construction compared to the year before. "All indications are that this is going to be another strong year. There's no slackening in commercial or residential markets."
"We're concerned about affordability," he added, "but that really hasn't slowed people down."
REITS have become "voracious buyers," said Dennis, "which is actually very good because we sell most of our buildings."
Profits are not rising at the same rate as rents and sale prices because construction and other costs of development are also climbing. But money for development is getting easier to find. "There are more lenders getting into the market who are willing to price loans aggressively," Dennis said.
During the last two years Quadrant's professional staff has grown by 15 percent. But Dennis said it is getting harder to find outside resources. "We're finding that consultants and contractors are really very busy right now," said Dennis.
Touchstone
Douglas Howe of Touchstone Corp. said his firm's specialty is class A office space and retail, built on urban and suburban infill sites.
"We create opportunities through assemblage and development," Howe said. "We seek out difficult and challenging (land) acquisition opportunities, where the barriers to entry are great. Competitors can't get into the market easily."
The staff of five at Touchstone has set one geographic limit on projects: They must be within 45 minutes of the office at First & Lenora. A typical Touchstone office project is in the 80,000-square-foot to 150,000-square-foot size range and three to five stories high. The firm also does credit tenant retail, from Tacoma to Northgate.
The 105,000-square-foot new office building in Kirkland will be 100 percent leased when it is completed this August. A 70,000-square-foot building in Eastgate and a 115,000-square-foot building in Issaquah will start construction this May for completion in the first quarter of 1999.
"There are three others in the works, in Seattle and on the Eastside," said Howe.
The firm has been leasing to software developers and medical offices. "We're very particular about tenants," said Howe. "We have a long-term ownership objective."
Howe has been in business 15 years and predicts that the current boom is going to last about two years.
"There's a lot of liquidity in the system -- a lot of money coming in, especially from Wall Street. But the fundamentals are beginning to get shakey."
"Our projects are solid projects, long-term projects. If they're filled within this cycle, we'll be happy."
"In 1998, we will substantially complete four projects totalling $50 million, and in 1999 we anticipate approximately $80 to $100 million -- including a large retail project."
In the years 2000 to 2001, Howe expects to scale down to about $20 million in build-to-suits and retail.
"We'll be changing over more from spec office to build-to suit," said Howe. "That's how we stay alive."
Harbor Properties
Stephen Fina, marketing manager for developer Harbor Properties Inc., is bullish on downtown Seattle.
"Everybody's back in the game that was in before, plus there are some new players," Fina said. "Generally speaking, we are happy because most of these projects benefit downtown."
Fina said the projects are helping to create a 24-hour downtown. "It's amazing, the amount of stuff that's going on," he said.
Harbor Properties, best known for its Harbor Steps apartments on First Avenue, has its hand in several other downtown projects, too.
Included are: the next two phases of Harbor Steps, which would create 300 apartments in two highrise towers to the north of the existing project's grand staircase; a 270-unit apartment building and headquarters for the Local 131 carpenters' union in Belltown; and 96 apartment units where the former "Jello mold" building once stood in Belltown.
Harbor Properties is actively pursuing three additional residential projects in downtown Seattle. Fina said they involve a combined 350 apartment units, all in new buildings.
Fina said Pioneer Square will become hot when the new professional sports stadiums are finished along with the King Street Station and Union Station projects. "I think Pioneer Square is going to be a great emerging area," he said.
Some of Pioneer Square's old brick buildings will be rehabilitated and turned into residential. "The property's too valuable," he said.
Developing downtown can be tricky. Fina said the whole construction process is harder because of limited accessibility, small staging areas for equipment and supplies, and noise restrictions.
"Everything is tighter and you have to be far more sensitive to your neighbors, compared to the suburbs," Fina said.
Outside of downtown Seattle, Harbor Properties has been involved with several resorts, including the Stevens Pass and Mission Ridge ski areas and the Freestone Inn in Mazama.
The Freestone Inn is a 12-room hotel with a conference facility and 17 cabins adjacent to it. It opened in the fall of 1996. Fina said Harbor Properties is considering an expansion of the inn that would create nine additional rooms and another conference facility.
Seafirst
Patrick McDonough, senior vice president and manager of commercial construction at Seafirst, said 1997 was an excellent year, surpassing volumes not seen since the late 1980s.
Last year Seafirst closed over $1 billion in construction and permanent loans throughout the Northwest. McDonough's 1998 prediction: "We're looking to do in excess of $1 billion again."
According to McDonough, the financing market for 1998 "will be strong and cheap." By that, he means financing construction projects will be relatively cheap in the current low-interest-rate market. That will drive a healthy demand for loans.
"There has been a lot of pressure for rates to come down," he said.
McDonough said real estate investment trusts (REITs), currently on a property buying binge, are having an impact in the local financing market. He said commercial banks' local construction portfolios won't grow as rapidly because some of their loans are being replaced by national lines of credit that allow for multiple-building purchases by REITs. In other cases, REITs are simply buying outright with their own funds.
"The good news is the REITs are really strong," McDonough said. "I think it's positive for the real estate industry because there are more equity dollars going into the market." He added that REITs are safer to loan to because they typically have a larger financial stake in their projects.
Another change in the financing industry noted by McDonough was the aggressiveness of commercial banks in seeking loans over the past two years and pension plans looking to participate in both the lending and equity roles.
In the local real estate market, McDonough said there is a slight amount of overbuilding in the Kent valley right now and big-box retail has matured in all areas. However, he said, "Multi-family housing has almost unlimited demand in the near future." The same goes for office space for the next couple years.
Radford & Co.
Last year, Bellevue-based Radford & Co. hit a record $100 million in volume, thanks to its role as the leasing agent for the Galleria retail project in that city's downtown.
"It's going to be hard to top that (in 1998)," said Mark Anderson, Radford vice president. His ballpark estimate for this year is $30 million -- more typical for his company, which focuses primarily on retail in downtown Bellevue and the Eastside.
Anderson said 6 million square feet of new projects are proposed for downtown Bellevue and that is fueling fierce competition for tenants among developers.
"It's so fierce that developers end up battling each other for permits ... or to obstruct each other from getting permits," Anderson said.
Anderson said part of the rush to develop in downtown Bellevue stems from moratoria that other Eastside cities have placed on development. The other part is high demand.
He said the Galleria project will be the only retail development in 1998 because of transportation concerns.
"Traffic and parking are the two big issues in downtown Bellevue," Anderson said. "Whoever solves those problems will get the next development built."
Anderson said about half of the current developers in the downtown market are new to the area, many are Canadian and most are taking an aggressive stance -- which is driving up prices. The list of Canadians includes Bentall, Schroeder Properties, WestBank Projects and Bosa Development.
In the mean time, Anderson said the downtown Bellevue retail market should remain tight. "I think rents will go up about 15 percent," he said, and that could drive some tenants with low profit margins out of downtown and into the Overlake area and points north.
TRF Management
"The market is hot for buying, selling and refinancing properties," said Richard Muhlebach, president of TRF Management Corp. of Bellevue. He said vacancies will continue to drop and leasing rates will continue to rise until more development activity occurs.
Muhlebach said his firm is managing 3.5 million square feet of commercial real estate, mostly in Western Washington, but also in Eastern Washington and Anchorage. He said he doesn't anticipate any changes in 1998.
What he does see changing is the number of transactions his firm does. "Our expansion has been on the transactional side of the business," he said.
"(For 1998), we're looking at probably small growth in the size of our property management portfolio and continued significant transactional activity," he said.
The firm mostly handles shopping centers, but also some medical and office buildings.
Last year, some of the larger deals at TRF included closing a $19.5 million loan for a Pierce County shopping center property, selling the Westgate North shopping center in Tacoma for $12 million, assembling land in Ellensburg for Fred Meyer, and getting offers on three properties.
Muhlebach's biggest concern about the current market is real estate investment trusts.
"One of the biggest changes in the industry in the last 18 months is REITs are continuing to buy more and more properties," he said. "REITs are playing Monopoly and buying everything they land on.
"What will happen when the REITs buy up most of the quality medium-to-large-size commercial and multi-family properties?"
Muhlebach predicted that may impact the industry in two ways: some REITs may sell properties to each other without a broker; and some may use in-house management.
"That will impact the role of the brokers and fee-management companies," he said.
"Whatever the trends are today, we know that in five to seven years from now those trends will reverse and the hot properties of today will become the challenges of tomorrow and the dog properties of today will become the darlings of the industry.
"The only constant in real estate is change. Real estate practitioners must manage through change to survive and prosper."
Kidder Mathews
Bill Neil, senior vice president and principal of Kidder Mathews & Segner Oncor International Inc., said last year's volume was a record $500 million and 1998 should top that.
"We represent a lot of developers who are just now beginning to get permits for construction commencing this spring," Neil said.
Those include Schnitzer Northwest's Bothell project -- what Neil describes as the largest contiguous business park project that is being developed for lease or sale on the Eastside. Schnitzer recently purchased 63 acres of Koll's NorthCreek properties and has plans to develop up to 1 million square feet of office and research-and-development space on the site. Sierra Construction is expected to work there on June 1.
Kidder Mathews also sold 33 acres of land in nearby Canyon Park that was owned by Roger Velanich. About half the site was bought by Washington Capital Management, who is developing two build-to-suit buildings (60,000 and 81,000 square feet) for SeaMed Corp. The other half was sold to Kennedy & Associates, who has hired Trammell Crow to build three speculative buildings totaling 180,000 square feet.
Some of the larger projects Kidder Mathews is leasing include Benaroya's 750,000-square-foot Kent Central project, the 650,000-square-foot Zellman warehouse project in Renton, the I-5 Distribution Center in Federal Way, the Northwest Building Corp. warehouse in Tacoma, and several Opus developments in the Kent valley.
Neil, who primarily works the Eastside market, said he has seen a narrowing of straight office-oriented and industrial transactions. "The Eastside is becoming a more research-and-development and pure office-oriented development market," he said.
Another trend on the Eastside is the shrinking supply of close-in land -- in the area south of Bothell, north of Newcastle and west of North Bend.
Neil said Kidder Mathews is in the strategic planning stages for looking at opportunities outside of its traditional market areas of its offices in Seattle, Bellevue, Tukwila and Tacoma. He said they are looking at the "regional Northwest" for possible expansion.
Kidder Mathews now employs 68 agents in its four offices. Neil said they plan to add three or four more in near future and recently added a few seasoned agents from two Eastside brokerages.
"We have people calling us all the time for brokerage jobs," Neil said. "We only take seasoned professionals."
Neil said most of the brokers moving to new jobs within the industry come from national firms that don't have commission schedules as favorable as local firms.
Pacific Real Estate Partners
Five years ago, Pacific Real Estate Partners of Bellevue helped pioneer a now-common trend: the genesis of small, boutique real estate brokerages.
The four founders of Pacific Real Estate Partners were among the first to break away from the national behemoths of commercial real estate in order to start their own local company.
The company's founders are: Mark Flippo, Bill Pollard and Steve Schwartz, all formerly with Grubb & Ellis, and Stuart Williams from The Norman Co.
"We were on the front edge of the curve because we did it five years ago," Flippo said. "As brokers mature and become more experienced and establish their client list, they can strike out on their own. ... It's a trend to be more entrepreneurial."
Pacific Real Estate Partners specializes in leasing and sales of office, industrial and high-tech space in the Seattle, Kent Valley and Eastside markets. The company now has nine brokers and a total staff size of 11.
"We've been really successful in representing higher-profile companies," Flippo said. Those companies include Safeco Insurance Co., Mozaix, Luxar Corp., Nextlink and Western Wireless.
In addition to its tenant-representation work, about half the company's business is in investment sales, Flippo said. Some of the larger projects the company sold recently include:
"Our guys represented an insurance company that was the owner. They sold it to RREEF," Flippo said.
In other instances, Pacific Real Estate Partners helps developers and REITs acquire sites. In that realm, the company has been working with Schnitzer Northwest, CarrAmerica Realty Corp., Trammell Crow Co., Millenium and Opus, Flippo said.
"Our brokers are all real experienced," Flippo said. "They've all been in the business eight to 15 years. Each year, we add one or two brokers. We plan to continue steady, controlled growth."
In 1997, Pacific Real Estate Partners added two new brokers, both of which have more than 10 years of experience in the business: Troy Gessel, who came over from Colliers, and Scott Carter from Grubb & Ellis.
Flippo says he's optimistic about the vitality of the local commercial real estate market.
"Vacancy rates continue to be really low, demand continues to be high, and we're finally starting to see some buildings that are coming up out of the ground," he said. "The market is extremely healthy."
Washington Partners
Although Washington Partners Inc. has been up and running for only three months, the Seattle corporate real estate brokerage is abuzz with activity.
So far, Washington Partners has represented two major software companies that plan to relocate from downtown Seattle to the Seattle waterfront: Visio Inc., which will move into the World Trade Center building being developed on Alaskan Way by Wright Runstad & Co.; and RealNetworks Inc., which has made a commitment to lease 180,000 square feet of space at the Seattle International Trade Center building on Elliott Avenue.
Washington Partners also is representing U S West, Lexant, Optimas Corp., and Amazon.com in their search for new homes.
Washington Partners was started in November 1997 by four well-known commercial real estate brokers in the Seattle area. They are: Ed Curtis, formerly from CB Commercial; Steve Hisken from Steven Hisken & Co.; Doug Hanafin from Cushman & Wakefield; and Patrick Pendergast from CB Commercial.
"We have no titles at Washington Partners," Curtis said. "We wanted to avoid the hierarchy that develops in large organizations."
"We've tried to be very sensitive to being equal partners," Hisken said. "Everyone's equally important."
Another key broker with Washington Partners is Clay Nielsen, also from CB Commercial. The company has two other staff members: research and data coordinator Mark To, formerly with CB Commercial; and office manager Patti Baker, formerly with The Norman Co.
While the bulk of the company's work is in the realm of tenant representation, Washington Partners also helps landlords lease out their buildings.
For example, Hisken is helping the Port of Seattle lease out its smaller, four-story World Trade Center building on Alaskan Way. Hisken also is assisting developer Nitze-Stagen to lease out Merrill Place.
Pendergast is working with InterPac Development Inc. as the listing agent for two of its projects in the Camlin block of downtown Seattle: the Pine Center office tower at Eighth Avenue and Pine Street, and the Convention Plaza building at Ninth and Pike.
Pine Center will be a 20-story office tower with 17 floors, or approximately 300,000 square feet, of office space.
"They want to get it up and built by the end of 2000," Pendergast said. "We're talking to any and all tenants that can meet that deadline."
Convention Plaza will have 135,000 square feet of office space and 142 residential units.
In addition, Washington Partners is helping to lease out the Second and Spring Building in downtown Seattle and three buildings owned by Fisher Properties Inc. on Lake Union.
"Things are going very, very, very well," Curtis said.
FEI Investment Properties
FEI Investment Properties has been keeping busy since July 1997 when it began as a subsidiary of Seattle-based Financial Engineering Inc. (FEI).
The company is aggressively pursuing investment properties and development sites, says Craig Wilson, a veteran broker who left his 20-year career with CB Commercial to became a principal of FEI Investment Properties.
Wilson said FEI is interested in taking on construction and rehab projects in the $3 million to $20 million range. So far, the company has been involved with the following projects:
"We're looking for more opportunities," Wilson said. "We'd like to do two more projects in 1998 in addition to what we're doing right now, either development sites or rehab opportunities. If we could get started on those new projects in 1998 ... construction could start in 1999."
Wilson said FEI Investment Properties' emphasis is on the Eastside and Seattle markets, but the company will consider investment and development opportunities anywhere in the Puget Sound region. The company now has six people.
"I'm the only broker," Wilson said. "My challenge is finding the opportunity -- either sites to develop, or existing sites that need rehabilitation. Then we go into the construction or rehab phase, then marketing and re-tenanting the building. And then five to 10 years from now, we'll sell it."
In addition to Wilson, the other two principals of FEI Investment Properties are the two owners of FEI: G. Neil Hokonson, who spent 20 years with First City Developments of Washington, and S.N. Sheinin of Vancouver, B.C.
Years ago Hokonson teamed up with Sarkowsky to develop the AT&T Gateway office tower in downtown Seattle, now called Key Tower. Hokonson started FEI in 1993 when he retired from First City Developments.
Another key person at FEI Investment Properties is construction manager Ken Tuskes, who is closely involved with the construction or rehab phase of FEI's projects.
Wilson's projections for the local commercial real estate market are rosy.
"I think the market will be really healthy for the next 48 months," he said. "I could see a five-year stretch.
As for his decision to leave CB Commercial and strike out on his own, Wilson said: "If I had to do it all over again, I would have done it exactly the same way, except I may have left a couple of years earlier -- not because of CB, but because of the market."
Copyright © 1998 Seattle Daily Journal of Commerce. |
