By H. Roger Qualman Norris, Beggs & Simpson

While the Eastside office market continues to grab headlines with new projects and major leases announced regularly, the fate of the Eastside industrial market has become questionable. A booming office market, sky rocketing land prices and escalating property values are driving out traditional warehouses and replacing them with gleaming two- and three-story high-tech office buildings that incorporate only a token industrial component, if any at all.

As high-tech companies continue to expand on the Eastside, demand for office space intensifies but developers’ options are limited by a shrinking supply of land. Consequently, redevelopment of existing facilities has become more common. If current trends continue, warehousing may become an endangered commodity within the close-in Eastside markets.

"We all know land is a finite, precious commodity," says developer Jim Neal, president of Metzler North America. "Therefore adaptive reuse of existing facilities that are suffering from either functional or financial obsolescence presents an attractive alternative to new development, provided it fits within the overall comprehensive plan. In my opinion, I think cities on the Eastside recognize this and have done a good job planning accordingly."

One of the more recent and successful examples of adaptive reuse occurred in Redmond with the transformation of LakeRidge Square from a 20-year-old, 235,000-square-foot industrial park into a 610,000-square-foot office campus. Sound risky? Not after the developer, Metzler North America, announced recently that Microsoft has agreed to lease the entire project upon completion at the end of 2001.

Microsoft was also the driving force behind the purchase of the 117,000-square-foot Fort James warehouse located blocks from its Redmond campus. This property will eventually be redeveloped by Microsoft to feed its relentless need for office space.

This trend is not exclusive to the Eastside. Office tenants are cannibalizing industrial properties in Seattle as well. The historic Skyway Luggage warehouse, located on the Seattle waterfront, is being redeveloped by Triad Development to provide 100,000 square feet of high-tech office space. High-tech companies have an affinity for congregating close to one another so the fact that existing neighbors include RealNetworks.com, Visio and Go2Net make the Skyway property a prime candidate for redevelopment.

Even the Kent Valley, Seattle’s reigning industrial district, has become a target of high-tech makeovers. Developer Dave Sabey has turned a former Boeing manufacturing facility in Tukwila into an 800,000-square-foot office campus. Telecom and Internet companies are leasing the new and improved Intergate East at a steady clip.

So where does the traditional Eastside industrial tenant in need of a warehouse go? The answer lies farther north, south and east where abundant land exists for sale at prices that can support industrial development. Developers are betting that tenants will be willing to trade a longer commute for a less congested one and the convenience of urban facilities for a better lease rate.

"There is virtually no industrial land left on the close-in Eastside market," agrees Bart Brynstad, senior director of real estate at Opus Northwest LLC. "The land that is available is too expensive for spec development so it’s quickly being converted to higher and better uses, such as retail and office. We’re getting strong interest from tenants in our I-90 Business Center in Preston, and we expect to have close to 200,000 square feet leased and built by the end of the year."

SeaCon LLC, a local developer and construction manager, also has been lured east by the availability of developable land. The developer will break ground on the first phase of a 30-acre industrial park located in North Bend by late summer.

"Our firm specializes in building facilities for industrial and commercial users so we are very aware of the shortage of industrial property within the close-in market," says Rob Howie, vice president of SeaCon. "We’ve developed several buildings in Issaquah over the years but a lack of properly zoned and appropriately priced industrial land convinced us to go to North Bend for our latest development. We’re getting a lot of interest from industrial owner/users who would rather spend 10 more minutes driving on I-90 than half-an-hour stuck on I-405."

"It’s not about miles any more," agrees Wally Costello, senior vice president of commercial development for Quadrant, developer of the 89-acre Snoqualmie Ridge Business Park. "With the transportation issues affecting our region, people want a predictable commute."

That isn’t to say that distribution centers don’t exist on the Eastside, but they are concentrated in very few areas. Woodinville has matured into the Eastside’s only true distribution market and companies like Underwood Gartland Development and others have built out close to 4 million square feet of warehouse/distribution space. But even the Woodinville market is reaching capacity in terms of available, affordable land, which has pushed development farther north into areas, such as Maltby.

"There aren’t many large parcels left in Woodinville," says Shannon Underwood, a principal of Underwood Gartland. "Those that are available are very expensive and even though industrial rents are increasing, they have not caught up with the increased Woodinville land prices to make new industrial projects feasible. Maltby offered manageable land prices and rents that supported those prices."

As traditional industrial users are forced out of the close-in markets, there will be winners and losers. Just where the next emerging market may be is difficult to predict.

"As to the Eastside industrial market, I see no alternative but to push farther north and east," adds Underwood. "We’ve looked at various submarkets a number of times. We believe that their time will come, but we’re simply not sure if that time is today. It seems that the land prices are already ahead of those emerging markets. Purchasing land is the result of an endless series of mathematical calculations. For us, the numbers don’t add up today to go too far out, but one of these days, they will. I would simply like Opus, Quadrant and Intracorp to go first. We’ll follow right behind them."

Unfortunately, not all businesses can afford to relocate. So if you are an Eastside industrial tenant, now may be the time to extend your lease and secure your position or begin to consider the alternative.