December 14, 2006
Bellevue: What a difference a decade makes
By LORI HILL
Pacific Real Estate Partners
Ten years ago you could barely feel the pulse of Bellevue, and urban planners huddled with developers and investors to figure out how to pump life into the quiescent city.
The loss of commercial and residential growth amplified by increased competition from neighboring suburbs led to a loss of identity and direction. So the city called in the big guns.
In October of 1996, the Urban Land Institute arrived on the scene and did study of downtown Bellevue. The findings were grim and the outlook was bleak, but here we are, 10 years later and the same esteemed institute has ranked the Seattle area, which includes Bellevue, the number one metro area to buy and own office property. In “Emerging Trends in Real Estate for 2007,” the region also ranked in the top four in the nation in the residential, retail and hotels categories.
A bright outlook
The future looks better than bright. This has been a banner year for development in Bellevue. There is over 4 million square feet under development in the shape of swanky hotels, high-end condos and apartments, office buildings and luxury retail.
“We’re doing things right,” said Steve Gilbert, economic development manager of the Bellevue Chamber of Commerce. “We’ve created a live-work-play environment that this affluent population is demanding by creating a functioning, high-density downtown.”
The demographics are indeed enriched. The 2000 U.S. Census pegged the national median household income at $41,994 while Bellevue’s median income was $62,338, with an average household income just under $90,000. Over 54 percent of Bellevue residents, age 25 and older, have a bachelor’s or advanced college degree.
Gilbert cites the high level of education, the low crime rate and the abundance of amenities as incentives for living in Bellevue. This influx of affluent households is attractive to businesses. The result? The key ingredients for a vigorous market that blends a well-educated workforce with a diverse business climate. Throw in proximity to the Pacific Rim and thriving international trade and you’ve got the heartbeat of a fundamentally sound economy.
Investors pour in
When Microsoft pre-leased 320,000 square feet of the Lincoln Square office tower space earlier this year, heads turned. The Microsoft magnet attracts. “When your psychographics are conducive to high-paying jobs, investors take notice,” said Gilbert. “Investors put their money where they see a solid return.”
And there’s been no shortage of investors contributing to Bellevue’s upgrade from a bedroom community to world-class city. An estimated $7 billion is pouring into the downtown grid, in about 30 current and upcoming projects.
All eyes are on the lookout for new landlord(s) due to Blackstone’s recent acquisition of Equity Office Properties. EOP currently controls the market, owning most of the major towers.
In the last 10 years, 13 major office towers sold for over $10 million each. Interestingly, there were no Bellevue CBD sales between 2001 and 2003. A little over half of the 13 sold between 1996-2000 and half from 2004-06.
Within these 13 transactions, we saw the same four buildings trade a second time at substantially higher prices. The value of these four buildings jumped over their relative timeframes and, in most cases, cap rates significantly declined. Of the four, the lowest price per square foot (Quadrant Plaza in 1996) was $172 and in 2006 the highest sale went for a Puget Sound record-setting $575 per square foot (Civica Commons, which sold a year earlier for $458 a square foot).
By comparison, the average square-foot price for the San Francisco CBD market is $321, year to date. In Seattle it’s $289 and in Bellevue it’s $446. Granted, San Francisco has a much higher volume of sales activity than either Bellevue or Seattle on an annual basis. Bellevue, a much younger market with newer buildings, has had only two CBD sales this year versus San Francisco’s 11. Bellevue, however, hovers at the top of most investors’ lists as the market to buy in, whether it is office, industrial, retail or multifamily properties.
A few Eastside facts:
• 18,655 new jobs are projected for the Eastside office market, according to Puget Sound Economic Forecaster
• Office demand for 2006-09 is projected to be 4.1 million square feet
• With current vacancy of 399,223 square feet and no new supply in 2006, the Bellevue CBD, which has over half the Eastside’s Class A office space under development, will have nearly 1 percent vacancy by year end.
• Rents for the CBD average $22-$25, triple net per square foot. The suburban areas are $18-$21. Rents could increase 10 percent to 15 percent over the next 12 months as space declines and demand rises.
So has Bellevue arrived? Is it when a certain national sports franchise names you MVP in their search for a new arena? Is it when the Department of Transportation deems your traffic congestion worse than your sister city across the lake?
“Those construction cranes dominating Bellevue’s skyline are promising additions, both residential and commercial, to an already economically thriving downtown core,” said Rob Aigner, senior vice president and regional manager of Harsch Investment Properties. “Bellevue now stands side-by-side with Seattle as an economic powerhouse. As traffic worsens, residents will demand services closer to home and work and foot traffic will become the congestion of choice.”
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