The Eastside real estate boom is on

By PAUL SWEENEY
The Broderick Group

To say the Eastside market today is healthy from an owners perspective is a gross understatement. Rental rates and vacancy rates, the two key barometers in analyzing any market, both are pointed strongly in the owners direction.

Rental rates for the Class A, blue chip buildings have increased an incredible 32 percent to a $29.10/rentable square foot average over the past three years. Sales prices on a per square foot basis have followed. For example, Pacific Corporate Center on I-90, sold in 1996 for $151 per square foot, a very high price at the time. Just two and a half years later the building sold again for $208 per square foot, an increase in value of $5 million.

Schnitzer Northwests 300,000-square-foot Civica Office Commons is just one of many proposed Eastside office projects. Brokers say technology and service companies will keep the market hopping.

So, with rental rates in the $28 to $37 range on a per square foot basis for Class A office product, and limited existing inventory, why arent we seeing a major boom in construction?

The boom is on

The answer is we already are; it is simply so spread out over much of the Eastside, that it is difficult to comprehend the amount. Additionally, the high-rise projects that are so visible and representative of a construction boom have not yet begun, with the exception of Wright Runstads Three Bellevue Center in downtown Bellevue.

Following is an attempt to statistically summarize the activity. The Eastside office market totals approximately 18 million square feet. There is 4.23 million square feet under construction, and 900,000 square feet of recently completed projects. With over 5 million square feet of new construction, a 28 percent increase in inventory, the boom is on.

Does this mean that the tenants market is back? Not at all. Of the 900,000 square feet recently completed, an unbelievable 95 percent is leased, the majority going to the Eastsides ever growing base of technology tenants.

Of the 4.23 million square feet currently under construction, 57 percent is already pre-leased, with much more of this space expected to be committed prior to completion. A market that didnt know how to define the word pre-lease three years ago has become a model for how to build what todays technology companies want, and secure commitments in advance.

Of course most of the pre-leasing occurring on the Eastside is due to the fact that our growing companies really have no other choice. The only way for these companies to secure the space they need is to start well in advance, identify developers with permitted projects, and essentially become a partner early in the process.

Examples of these tenants and their recent pre-leasing activity include Attachmate (153,000 square feet in Bentalls Newport Four project on I-90), Onyx Software (95,000 square feet at Wright Rundstads Sunset North project on I-90), bsquare (95,000 square feet also at Sunset North), Safeco (102,000 square feet at Bentalls Millennium Park in Redmond) and of course Microsoft, the MVP of the Eastside market (178,000 square feet at Paul Allen/Opuss Sammamish Park Place on I-90, 431,000 square feet at Hines Cedar Court project on SR-520 in Overlake, 153,000 square feet at Opus Willows Commerce Park in Redmond, and 43,000 square feet at FEIs Liberty Northwest Center in Overlake on SR-520).

Will the market be overbuilt in 1999?

So, what does the future hold for the Eastside office market? Will we overbuild or be under supplied as has been the case the last two years?

I believe the answer is neither an overbuilt market or an under supply. The Eastside is finally reaching the point of equilibrium, that magical meeting of supply and demand where prices stabilize. We have obviously been under supplied at a time when our economy is soaring and therefore demand is extremely strong.

A 32 percent run up in rental rates in three years provides strong evidence of an office market not keeping up with demand.

It is clear that this recent 5 million square foot construction boom is being absorbed. This year will see vacancy rates start to increase from the 2 percent range, as some of these tenants relocate to new projects and leave behind old space for the market to absorb.

However, this year will still remain a strong landlords market with rental rates continuing to increase, but at a slower rate, in the 5-7 percent range.

2000 and 2001 are a concern

This year looks great from a landlords perspective but 2000/2001 will be a critical turning point for the continued strength of the Eastside office market. Demand is expected to slow somewhat as evidenced by recent Boeing layoff announcements, and the national economy will be a big question mark, as it deals with a struggling world economy and an overheated stock market.

The pipeline of new office space to the market does not look like it will slow. There is a startling 15.7 million square feet of office space planned for the Eastside (almost double our existing base), all at various stages from preliminary plans to fully permitted and ready to break ground.

Many of these projects will not make it to market, but we do expect as much as 5 million square feet will be completed in 2000 and 2001 which matches our current boom.

The difference in timing though is critical for two reasons:

• The current wave is coming at a time when the market is very under supplied. This 2000/2001 wave will be at a time when the market has already reached equilibrium.

• The current wave is coming at a time when the economy is roaring and demand strong. The 2000/2001 wave may come when the economy has slowed, and the new supply may be increased by tenants giving back space, as is typical in a cooling economy.

• This 2000/2001 supply may create a slight pause in the escalating price of Eastside office space. Nevertheless the long-term outlook for the Eastside office market is extremely bright from an owner and developers perspective. New office supply is rapidly being absorbed. The depth of the Eastside market is stronger than ever, as new high-tech tenants establish a foothold and grow, spawning other new technology companies. Microsofts rate of growth will undoubtedly slow but it appears to provide the market with a stable anchor. And of course service companies will continue to grow to support this mushrooming base of technology employees and the high salaries they bring to a booming Eastside.

The Eastside real estate market parallels what occurred in the Silicon Valley 10 to 15 years ago. Whether we want it or not, the seeds have already been planted for sustained growth in this market. This large group of technology and service companies thrive off each others success, and will want to be here for the long-term regardless of the ever-increasing cost of Eastside real estate.

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