October 26, 2000

Real Estate Buzz: Sublease space -- get it while it's hot

Dot-com office sublease space has started flooding onto the market as firms contract or shut down, but observers think the market remains so strong that it can absorb the give-backs and come out healthy.

Time will tell.

Colliers International counted 142,000 square feet of sublease space available in downtown Seattle at the start of this month -- a six-fold surge from three months before. By Oct. 18, the total shot up to 634,000 square feet.

Now comes at least another 75,000 in the week since Oct. 18, for a current total of at least 709,000 square feet, said Colliers researcher Jeanette Ferguson.

Ferguson didn't tabulate the Eastside's total, but subleases are coming fast and furious there, too.

The precise total is almost impossible to pinpoint. Things get fuzzy quickly over details such as whether the space is already vacant or will become vacant later, whether the tenant is a tech company and whether the sublease is available simply because the tenant wants to occupy other space. In the latter case, the net result wouldn't be a rise in vacancy rates, the underlying issue with all of this.

But the message is clear: The numbers have begun rising at a steep rate.

"It's a definite softening of the market," said Ferguson, who began keeping a close watch on the sublease total in response to a media request.

If the pace continues, the ramifications could be substantial. Ultimately, planning for a number of downtown and suburban office projects could stop.

"But I don't think it's going to have a real negative effect," Ferguson said. "Back when space was so scarce (say about as recent as a month ago), tenants looking for big spaces had no choice. Now there might be choices."

Vacancy rates had tightened to record levels of about 1 percent by the end of this year's second quarter in both downtown Seattle and the Eastside -- pushed so low in large measure by the growth of dot.coms and other digital companies. New projects were proposed to meet this heavy demand.

Such tight vacancy rates leave room for some space to come back on the market without throwing things off, Ferguson said. Even if all of the sublease space in the latest count were to remain vacant, that would only push downtown Seattle vacancies to a still-very-healthy 3 percent, she said.

If dot-com troubles continue, however, the picture would worsen.

Before last April's huge sell-off of technology stocks, venture capital firms pumped enormous amounts of money into speculative companies hoping some would hit Internet home runs. The April sell-off turned down the capital spigot, forcing companies to find ways to turn a profit. As a result, reports have come in weekly of new dot-com layoffs that usually mean another space to sublease.

So far, real estate players say most of the laid-off employees seem to get picked up at other tech firms, which suggests the layoffs won't reduce demand for office space too much. Microsoft recently said, for example, that former employees who had left to join dot-com startups have begun streaming back to Microsoft.

Johnson Underwood selling its Issaquah retail project

Eastside developers John Underwood and Craig Johnson sold a third of the 400,000-square-foot Issaquah shopping center they have under construction and have another large portion up for sale.

Home Depot last week paid Johnson Underwood Properties $11.75 million for a 12.5-acre pad on which Home Depot plans to build a 130,740-square-foot store, King County property records show.

Johnson said the price shouldn't be evaluated on a per-square-foot-of-land basis. Rather, Home Depot competed against other buyers who would have leased the pad to Home Depot, so the deal's value rested in rent Home Depot would have paid for the pad.

Johnson said the $11.75 million Home Depot paid equals a cap rate of less than 8 percent -- which says Home Depot paid a high price. Cap rates measures the yearly return a buyer expects to receive on the price based on the seller's projected income and expenses for the property.

"Home Depot had a lot of competition" from competing buyers, Johnson said. "That's because of the location on the 50-yard line and the credit quality of Home Depot (as a prospective tenant)."

The shopping center is called East Lake Sammamish Center. The 48-acre site is located north of the intersection of Interstate 90 and Front Street -- a rapidly developing area that is transforming from scrubland and two gravel mines into office campuses, single-family homes, apartments and strip shopping centers.

Home Depot and a 165,347-square-foot Fred Meyer store anchor the center. Un-signed smaller tenants are expected to occupy the remaining 110,000 square feet. Broker Dorrie Johnson of Redfield Real Estate is leasing the space.

Johnson Underwood has the Fred Meyer space under construction and simultaneously has Dorrie Johnson and independent broker Terry Moss marketing the Fred Meyer space for sale, Craig Johnson said.

Johnson Underwood expects construction of East Lake Sammamish Center to finish in February. The general contractor is Construction Associates. Dykeman Architects of Everett designed the project.

Tech tenant signs in Ballard

AdvanceOnline Inc., which provides training programs over the Web, signed a lease for 10,000 square feet of office space at C.D. Stimson Co.'s Salmon Bay Center on Shilshole Avenue in Ballard.

AdvanceOnline President William Ashman said the company liked the marine character of the former Stimson lumber mill site and the availability of expansion space. "Like us, the Ballard area is growing and it offers our employees a unique cultural flavor with diverse restaurants and waterfront access."

The mill closed in the 1950s when available logs became too small for the plant's massive saws to handle. C.D. Stimson Co. converted the property into one of the area's largest covered marinas, with a 200,000-square-foot complex providing office, light manufacturing and warehouse space. Tenants so far have been mostly fishing-related.

Yates, Wood & McDonald arranged the lease.

Previous columns:

• Real Estate Buzz: Overbuilt? Locals dispute FDIC report, 10-19-2000
• Real Estate Buzz: Dog years versus developer years, 10-12-2000
• Real Estate Buzz: More spec space coming to Lynnwood, 10-05-2000
• Real Estate Buzz: InterNAP may take huge lease at Wosca, 09-28-2000
• Real Estate Buzz, 09-21-2000
• Real Estate Buzz, 09-14-2000
• Meydenbauer: Ritz out, Schnitzer in, 09-07-2000
• Real Estate Buzz, 08-31-2000