August 3, 2000

Real Estate Buzz

The telecoms are coming -- but for how long?

Rick Osterhout finds watching the telecoms fascinating.

For the past year, the news in both the close-in industrial market and the Kent Valley was: "The telecoms are coming."

This referred to telecommunications and other tech companies that sought to buy or rent large warehouse spaces -- and, most appealingly, were willing to pay premiums for it. The companies would customize the space to house tech equipment in what are variously called server farms, telecom hotels and co-location hubs.

Now, Osterhout says, the telecoms may not be coming. At least not in the previously envisioned droves.

"A lot are backing away from properties they tied up," the Kidder Mathews & Segner industrial broker said.

Some have found it harder to get enough power capacity installed than they anticipated, Osterhout said. Some find the "time to market" too short, meaning the time it takes to bring the telecom hotel on-line, or into operation.

"They can't get power and fiber there quickly enough," he said. "Power and time to market are the two things that matter to them."

As a result, people wonder if the invasion of the telecoms will be less invasive, and less market-changing, than initially expected.

"I don't know if we're dealing with a game of musical chairs ... where when the music stops we find that the market's not that deep ... or if we're in the second inning of a nine-inning game," Osterhout said. "Is there more capacity? What's the depth of that market -- that's the big question mark. I think it's fascinating because nobody knows."

The Seattle development company Sabey Corp. caught glimpse of the telecom invasion sooner than others and became "the 800-pound gorilla" by quickly assembling what has become the more-than-1 million-square-foot Intergate Technology Campus in Tukwila.

"He became the market maker. He did a fabulous job," Osterhout said of company head Dave Sabey.

Telecoms still have representatives scouring madly for space, still brandishing those premium rates.

"There's no question that if you own a warehouse and it becomes vacant, you may get three times the rent," Osterhout said. "But then if the market drops out" and the telecoms vanish, the risk-taking developer who paid a lot to upgrade the power capacity may suddenly be unable to find a rent-paying tenant, or at least a premium-payer.

Part of the risk is because developers have been scrambling to emulate Sabey by upgrading spaces. "All of a sudden we have a whole bunch of inventory to bring to the market with fiber and it could be difficult," Osterhout said.

Osterhout and his Kidder partners, Stan Snow and Charlie Mills, have the job of marketing the 100,000-square-foot Golden Grain Building, also known as the old Mission Macaroni space, for Quaker Oats. They've created a two-tiered marketing rate of one price for industrial users, a much higher one for tech users.

In one of the most recent deals, a New York investment company that converts warehouses to tech space bought Odom Corp.'s former wine and beer distribution warehouse near the Starbucks headquarters in the industrial swath south of downtown Seattle.

Argent Ventures paid Odom about $9.5 million for a single-story warehouse at 26 South Hanford St. The price equals about $80 per square foot, Odom executive Jan Koslowski said.

The building, constructed in 1952, occupies a four-acre site. Argent's Web site says the structure will become a "telecommunications and technology facility available for lease in the third quarter of 2000. Jared Mintz of Argent is handling the leasing.

Osterhout, Mills and Snow represented Odom in the sale. Argent represented itself.

Odom moved its beer and wine distribution activities to temporary space of roughly the same size in Fife and plans to construct a similarly-sized new facility nearby in Fife Landing, Odom CEO John Odom said. The company plans to keep its headquarters in Seattle, likely close to SeaTac International Airport, he said.

The company planned the move for some time, motivated largely by its suppliers shifting from the Port of Seattle to the Port of Tacoma, Odom said.

That the telecoms were suddenly out there ready to pay dearly for the space didn't hurt, he said.

"It just made it good timing," Odom said. "We had been planning this move for some time. The timing was just about perfect."

Hotels and more hotels

Seattle-based hotel consultants Jinneman, Kennedy & Associates' latest quarterly hospitality report provides the following leads on hotel developments underway around the Northwest:

• Buggsi Inc. of the Portland, Ore., area bought 1.2 acres in Seatac "and is currently exploring hotel development alternatives." The site is near 181st and International Boulevard.

• Hospitality Associates of Spokane "is aggressively building in the Northwest and elsewhere. ... Projects in the pre-development stage include two 71-room Hawthorn Inn & Suites hotels, one in Federal Way and one in Mukilteo." Also, the company will break ground later this fall on an 80-room Hawthorn Inn & Suites later this fall in Ocean Shores. The company will manager a 97-room Hawthorn Inn & Suites in Arlington that Ralph Monte is developing.

• Hilton Hotels contracted with Koong Cho to develop a 96-room Hampton Inn & Suites in Lacey. Construction likely will start late this year.

• Choice Hotels finished constructing a 90-room comfort Inn in South Tacoma.

Previous columns:

• Real Estate Buzz, 07-27-2000
• Real Estate Buzz, 07-20-2000
• Real Estate Buzz, 07-13-2000
• Real Estate Buzz, 07-06-2000
• Real Estate Buzz, 06-29-2000
• Real Estate Buzz, 06-22-2000
• Real Estate Buzz, 06-15-2000
• Real Estate Buzz, 06-08-2000