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May 27, 2021
Amazon’s announcement last year that it will bring 25,000 employees to downtown Bellevue by 2025 has set into motion a period of unprecedented growth on the Eastside. With plans to occupy up to 6 million square feet of office space, Amazon’s Bellevue campus will help solidify the city’s growing reputation as one of the nation’s most desirable places to live and work.
Bellevue has already garnered the attention of the tech world with its highly educated and diverse workforce, with over 69% of the adult population holding at least a bachelor’s degree. In addition, with almost 40% of the population coming from outside the U.S., the city continues to grow as a diverse hub for international tech workers. In the next 10 years alone, Bellevue is expected to experience a staggering 35% to 40% job growth rate.
East Link, Sound Transit’s new 17.7-mile, multi-billion-dollar light rail expansion, is set to open in 2023-24. The new line, running from Seattle’s International District Station to Mercer Island, Bellevue and Redmond, will also connect the Eastside’s two largest employers, Amazon (downtown Bellevue Station) and Microsoft (Overlake/Redmond Tech stations), as well as Overlake Hospital and Facebook’s new campus in the Spring District. With trains expected to run every 6 minutes during peak times, people will be able to travel from downtown Redmond to downtown Bellevue in 10 minutes. Sound Transit estimates that East Link will generate 43,000 to 52,000 daily riders by 2026. In all, 10 new stations are planned, three of which will be in the Bel-Red Corridor.
“It’s no secret that traffic is a major issue on the Eastside, especially on I-405 in and around Bellevue and Redmond,” says Kim Faust, senior vice president for MainStreet Property Group, which is developing several projects near East Link stations. “The beauty of light rail is that, with predictable, dependable and frequent transit, people may finally be able to leave their cars to get to and from the Eastside’s major employment centers. This will help transform the area around the stations into highly desirable new neighborhoods, as evidenced by the development that’s already underway.”
In the past five years, over $6 billion worth of TODs have been completed or announced at or near the planned light rail stations, and another $6 billion to $10 billion worth of TODs could be developed by the end of the decade.
FLURRY OF ACTIVITY
Stretching from downtown Bellevue to the Microsoft Campus, the Bel-Red Corridor has historically been home to low-rise industry and sprawling retail strips. In 2009, in anticipation of the East Link, Bellevue and Redmond embarked on a major rezone and planning process, paving the way for the redevelopment of this 900-acre neighborhood. With mixed-use zoning allowing for buildings up to 150 feet in height and up to 10,000 new jobs anticipated by 2030, the development capacity of the Bel-Red Corridor will eventually rival that of South Lake Union.
The neighborhood has already seen the development of two major TODs: Esterra Park (Capstone Partners) and the Spring District (Wright Runstad). Together these projects comprise over 66 acres of developable land, with anticipated costs of over $3.6 billion at full buildout. The new master-planned communities will include over 2,600 units of multifamily housing, 3.5 million square feet of office space and over 450 hotel rooms.
Though the Bel-Red Corridor is indeed white hot, as are other sites along the new East Link, there are a number of factors that are adversely impacting project feasibility. Land costs have been soaring, with many sites now exceeding $80,000 a unit and $240 per square foot. At the same time, construction costs have been increasing at an unprecedented rate, with overall projects costs up over 50% in the past four years alone. It’s no coincidence that in 2019 our region was declared the 10th most expensive market in the world to build in.
Legacy Partners is developing one of the first new TODs near the Bel-Red/130th St. station. The project will include 292 units and 10,000 square feet of retail.
“The challenge is that costs have risen significantly while effective rents have fallen this past year due to the pandemic’s impact, coupled with new completions,” said Parker Nicholson, senior development manager with Legacy Partners. “The tide is turning however, as employees consider returning to the office. Concessions are evaporating and absorption is spiking even before Amazon’s job surge begins. We believe the Eastside multifamily presents the strongest commercial real estate investment opportunity in the country right now.”
Municipal fees and other permit-related requirements have also increased. Permit fees are substantially higher on the Eastside (Bellevue and Redmond) than in Seattle, due to a number of factors.
As part of a team that recently did a “deep dive” into a hypothetical 290-unit project in the Bel-Red Corridor, we identified a number of municipal fees, requirements and other miscellaneous costs that impacted our project’s overall returns. Located just two blocks from the Bel-Red station, our project included 10,000 square feet of retail and 264 parking spaces. Our findings included:
• FAR fees: $2.3 million fees to go from a Base FAR of 1.0 to a Max FAR of 2.0.
• Permit fees: Over $1.2 million, including over $720,000 in traffic impact/mitigation fees.
• Land costs: The parcel we were looking at was not on the market, but the owner was offered over $280/square foot by a prospective buyer.
• Infrastructure/street improvements: Development in the Bel-Red Corridor is required to provide substantial streetscape improvements.
• IBC Code: Washington’s newly adopted IBC code resulted in an increase in energy and structural costs by approximately $15,000 to $20,000/unit.
Other requirements developers have encountered include Bellevue’s plan to create a new “walkable” street grid throughout the neighborhood. In some cases, newly planned east-west streets bisect large sites, posing a challenge for larger projects. In many instances developers are now being required to dedicate and build out a portion of their property for “partially complete” new streets.
In addition, buildings are restricted to a maximum of 75% impermeable lot coverage, which means that building footprints are smaller, and the large remaining portion must be landscaped or have another permeable surface material.
Though these requirements can add both cost and delays to new projects, the intent from the city of Bellevue is to encourage the development of truly walkable and attractive new urban neighborhoods.
“The transformation from a light industrial environment, where land parcels are large and irregular, is a major challenge,” said Tom Parsons, executive managing director for Holland Partner Group. “The infrastructure needed to create a connected street grid and pedestrian friendly environment is substantial. As the area rapidly transitions to a transit-centric neighborhood, these improvements are very important. The benefits of the densification of this corridor are huge for Bellevue and the close-in Eastside, because the spine of that system through Bel-Red will support thousands of housing units and millions of square feet of office space.”
The immediate neighborhood around the Bel-Red/130th St. station has yet to see the level of development at other stations in the corridor (Spring District and Overlake). High land costs, coupled with the above-mentioned challenges and rising construction costs, may indeed be restraining the pace of growth in this neighborhood. However, with soaring employment growth and subsequent demand for housing, the station will likely experience substantial change over the next three to five years. In addition to Legacy’s Bellevue Station, there are major new projects in the neighborhood being developed by Holland Partners, SummerHill and Seritage/Mack Real Estate.
Given the rising costs and increased municipal requirements, it’s no surprise that new projects today are struggling to make the traditional returns expected by many investors. Yields that typically ranged from 5.5% to 5.8% are now much closer to 5% to 5.1%. While these returns may not be favorable for traditional investors or lenders, the reality is that the Eastside is still an amazingly strong, resilient and attractive market for new multifamily development.
Undoubtedly the Eastside has entered a period of explosive growth, and the upcoming East Link has helped to promote the surge in TODs. Ultimately, the development activity anticipated in the next few years will ensure that this once sprawling suburban industrial/retail corridor will soon become a series of well-connected, vibrant and thriving urban neighborhoods.
Scott Surdyke is a development manager and consultant, specializing in urban mid-rise and high-rise multifamily and mixed-use projects.