Developers play high-stakes poker on the Eastside

By PAUL SWEENEY
Broderick Group

With 3.7 million square feet planned in a downtown Bellevue office market that is currently only 4 million square feet, the first question people will ask is: Have developers gone crazy?

The reason we are seeing so many active developers in downtown Bellevue is, from a landlord's perspective, we are arguably in the best office market in 20 years.

Rental rates have finally approached the point where new construction makes sense. By way of example, it costs roughly $250 per square foot to construct a new highrise. In simple terms, assuming most landlords require a minimum of a 9 percent return on their costs, $22.50 net rents would need to be achieved based on this $250 per square foot investment. Add operating expenses at approximately $7 square foot for most class A highrises in downtown Bellevue, and fully serviced rates of $29.50 per square foot is the point where new construction makes sense.

Believe it or not rates have hit the $29.50 per square foot mark for some Bellevue lease transactions, with strong momentum in place to push rates even higher over the next year. Hence, the reason for all the proposed office projects in downtown Bellevue.

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

However, despite all the good news for the downtown Bellevue office market, much of the proposed 3.7 million square feet will not be built in the next five years. There are more factors working to prevent these highrises and midrises from being built, than there are pushing them forward, the most important of which is the lack of tenant demand for even half this amount of space.

Without tenant commitments for some of the space, most of these developers (and their lenders) will not move forward. The long list of proposed projects is as follows, and the list must be viewed critically as some are much more serious and committed to moving forward than others.

The most likely candidates in downtown Bellevue are the smaller midrises, because of their ability to be completed faster than highrises, and thus take advantage of a currently healthy market. Touchstone's 340,000-square-foot two-building, five-story project at Northeast 12th Street and 112th Avenue Northeast, and Schnitzer Northwest's pair of six-story buildings connected by an atrium totaling 260,000 square feet at Northeast 2nd and 108th Avenue Northeast, are extremely viable projects and appear to be the furthest along at this point.

Possible highrise projects (10 stories or greater) include:

• Meydenbauer Center: The Tochterman family and Jeff Rhode's 500,000-square-foot office tower next to the Convention Center (which will double in size), will also include 300,000 square feet of retail with theatres, a 525-room Marriott Hotel, and a 50,000-square-foot open area plaza.

• Lincoln Square: Vancouver, B.C.-based West Bank Properties plans a 31-story, 580,000-square-foot office tower at Northeast 8th and Bellevue Way, across from Bellevue Square, to include a 204-unit luxury apartment highrise, retail, an 85,000-square-foot athletic club, theatres and a 502-room hotel.

• Three Bellevue Center: Wright Runstad's 31-story, 500,000-square-foot office tower on 108th Avenue NE.

• Bellevue Technology Center: E & H Properties (Eugene Horbach's) 20-story, 352,000-square-foot office tower at Northeast 4th and 108th Avenue Northeast with a planned athletic club.

• City Center II: A second-phase for City Center Bellevue (formerly Koll Center Bellevue) of approximately 300,000 square feet. This project is in the preliminary planning stages.

• Summit Ridge: Bentall's 600,000-square-foot project at Northeast 4th and 108th Avenue Northeast, also in the preliminary planning stages.

• Bellevue Place Phase II: Kemper Freeman's 400,000-square-foot, 21-story office tower adjacent to the current project. Phase II will also include more retail space. This project is essentially designed since it is a twin to the Seafirst Tower at Bellevue Place, but is awaiting a tenant.

If all these developers knew for certain that they would be alone in developing their projects, I do not think they would hesitate to move forward. Unfortunately it becomes a high-stakes poker game as each watches the competition to see what they will do.

Building a highrise is a little bit like the race to the edge of a cliff. Unless significantly preleased, the first projects permitted and ready to go, take a huge leap of faith in commencing construction. At this point of no return the large financial investment is essentially committed. In the time it takes to design, permit and construct a highrise, approximately three years, the market can change dramatically, making what appeared to be a viable project a risky venture.

The two and three-story projects being constructed outside of our downtowns have a sizable advantage in that their construction period can be 10 to 14 months, a short enough time to entice tenants to pre-lease, as well as to avoid a significant change in market conditions.

Meydenbauer Place is one of several proposed Bellvue projects vying for tenants.

These smaller suburban type projects also have a distinct cost and parking advantage. Construction costs are lower, therefore required fully serviced rental rates are lower -- $20 to $27 per square foot versus the $28 to $32 per square foot numbers required for a highrise. Higher parking ratios of three to four stalls per 1,000 square feet are offered free of charge, versus downtown Bellevue's 2 to 3 per 1,000 ratio in the monthly price range of $100 per stall. These factors make it much more difficult for highrises to compete for tenants with lowrise suburban office buildings.

What these suburban office projects can't offer though are the views, retail amenities, nearby services, bus transportation with the Downtown Transit Center and the central location and community environment Downtown Bellevue does offer.

So the question still remains, will 100,000 square feet and larger tenants commit to a project three years in advance to make these highrises feasible?

The answer has yet to be determined, but the target market is very small. The market is strong enough for one speculative highrise project to be very successful, but two highrises in addition to a couple of smaller downtown Bellevue projects, within five years is too much product, given historical demand. However, if past history is any indication, that doesn't mean we won't see two highrises built.

As previously mentioned, the momentum in the race to the proverbial cliff might cause two highrise developers to jump at the same time, along with a couple of midrises. And once they jump there is no going back.

So who will it be?

A lot can change but the four most likely highrise candidates and the furthest along at this stage appear to be Wright Runstad's Three Bellevue Center, Meydenbauer Center, West Bank's Lincoln Square, and Eugene Horbach's Bellevue Technology Center.

As for some predictions: one of these four developers will likely drop out of the race within the next couple of months. Another who has been on the sidelines, will enter the race. Bellevue Technology Center will surprise everyone with how quickly it is moving. And the race between the two projects that are grandest in scale and scope, Meydenbauer Center and Lincoln Square, will attract the most attention because it appears demand from the retail, office, hotel and residential sectors will only support one of these two massive projects over the next five years.

The race will be interesting to watch as we witness a new era in the development of downtown Bellevue.

Copyright © 1998 Seattle Daily Journal of Commerce.