February 28, 2002

Recession? Don’t worry, it’s just a cycle

By TIM O’KEEFE
Colliers International

What’s that they say? If it looks too good — well, you know. Pretty much sums up the commercial real estate market and our economy for the last few years.

O'Keefe

But let’s remember. Markets correct themselves. This current down cycle is typical after a boom. We are almost right where we started. Well, more like where we should be.

The dynamics of the cyclical business of commercial real estate is a fascinating watch. What’s interesting is how people can be manipulated into panic-mode. How an economic downturn can freeze up the economy, not to mention a country, and then slowly thaw back into liquidity, like clockwork. Conventional wisdom tells us that this too shall pass. It just may take a little time.

Seattle is still an extremely desirable location for commerce. The region pops up on investor and relocation radar screens nationwide. We have all the magnetic criteria of a world-class city. The region’s infrastructure, albeit not perfect, is a work in progress. The traffic? Well, no one said this would be easy. The culture? Extraordinary. The optimism? Unsinkable.

The growing pains, along with the gains, are what keep us competitive and productive. Think of the current consequences as a by-product of our successes and challenges to overcome.

Geographically, Puget Sound cannot be beat. We have the topographic constraints necessary to keep growth in line and balanced. Once the market hits equilibrium again, and it will, we can proceed with controlled growth.

Here’s the review

Downtown Seattle’s office vacancy rate hovered at 13 percent at year-end, up from under 3 percent for the year 2000. Downtown Bellevue’s vacancy rate ascended to nearly a decade high of almost 25 percent at year’s end.

Sellers and buyers are still far apart, therefore we won’t see many sale transactions this year.

Owners of office space have braced themselves for another six to nine months of sluggish demand for office space from tenants, according to a survey of top downtown and suburban office markets nationwide. The national economic turmoil and uncertainty in 2001, along with regional dot-com collapses, made for a nasty one-two punch on the Northwest commercial real estate market. The close of a tumultuous, troubling 2001 was a welcome event.

As vacancy rates rise, tenants and buyers gain control in the leveraging power. We see this more in lease concessions. The amount of available office space drives down lease prices, making it a good time for a tenant to lock in a long-term deal.

Rents fell to two-year lows and appear to be headed lower, although the free fall has seemed to have stopped recently.

With approximately 2 million square feet of sublease space on the market, tenants are exploring early lease renewal options within their current buildings to negotiate favorable extended leases. Asking rates for Class A spaces throughout the submarkets are averaging $26-$36. Sellers and buyers are still far apart, therefore we won’t see many sale transactions this year.

The vacancy rate will need to drop by more than half in order for landlords to regain control. We are seeing sublease space dropping slightly as direct space climbs.

Seattle’s engine will keep running. The economic resolute of this region is healthy and steadfast. If we focus on the future, and play the hand we’ve been dealt instead of dwelling on the “year we’d like to forget,” we’d be better off. We need to adjust and create new ways to look at the way we do business.

Diversification. It’s a word you’ll be hearing a lot this year. And it’s an important one. There’s a lot going on here in the Northwest that should not be overlooked. Read between the lines. Think outside the box. Remain cautiously optimistic. All of that.

And remember — if they say it looks too good to be true. Look the other way.

Who are “they” anyway?

Tim O’Keefe, director at Colliers International, was the firm’s No. 1 producer in North America in 2001.

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