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Seattle CBD has some great years ahead
By DOUG HANAFIN
Leasing activity downtown last year far exceeded the most optimistic projections. Occupancy rates are up to unprecedented levels, rental rates are up to all-time highs, and net absorption numbers are up, with big smiles on developers faces.
Some of the major transactions that occurred in 1998 are:
To point out the dynamics of growth, only three years ago RealNetworks total occupancy in downtown Seattle was 3,000 square feet. In 1998, RealNetworks committed to lease 270,000 square feet. The Seattle Trade Center is now 100 percent leased.
Washington Mutual Bank has already agreed to lease much of the space being vacated by RealNetworks at 1111 Third Avenue, causing the RealNetworks transaction to be pure net absorption.
To highlight Visio's growth, three years ago Visio leased 50,000 square feet in downtown Seattle. Twelve months prior to completion of the World Trade Center East, Visio committed to lease all 185,000 square feet. Additionally, during the fourth quarter of 1998, Visio exercised an option to lease an additional 133,000 square feet in World Trade Center North.
Currently, the space being vacated by Visio in the 520 Pike Tower is under a letter of intent to be back filled by a high-tech tenant.
Visio committed to lease 300,000 square feet in 1998.
Although not considered a high-tech tenant, Washington Mutual Bank was a significant player in 1998. It leased approximately 85,000 additional square feet in EOP/Wright Runstad-owned properties.
Newmark Tower is another conversion. It sat virtually empty for the last two years.
Overall, the Washington Mutual expansion has caused an additional 300,000 square feet to be leased in downtown Seattle.
The Smith Tower is another story of a major office conversion that has been met with immediate success. The Sisters of Providence has agreed to lease 55,000 square feet.
Additionally, Tidemark Computer Systems will lease 33,000 square feet in Smith Tower.
The last remaining large space (55,000 square feet) is under negotiations to be leased.
When completed, these transactions will put Smith Tower at about 90 percent leased.
A few other major transactions that occurred this past year are:
Merrill Place released all 180,000 square feet 12 months prior to the vacation of Adobe (95 percent of the replacement tenants were high-tech firms)
Regional Transit Authority leased 80,000 square feet at Union Station
Lowe is under negotiations to lease its entire 100,000 square feet Eastlake project, also to be occupied by a high-tech related firm.
The transactions mentioned above account for the absorption of 2 million square feet. If government expansion, biotech expansion and expansion of other tenants in the market are included, we believe it is safe to assume that an additional 500,000 square feet of absorption occurred, for a total of approximately 2.5 million square feet in 1998.
That total divided by 12 months equates to a need of 200,000 square feet of space to be delivered to the market each month in order to achieve equilibrium. If you study what new product will be delivered to the market, you will draw the conclusion that demand will continue to outstrip supply.
With no new product being added to the market in 1999, rental rates will continue to increase. Sometime during the later part of 1999 one would not be surprised if rental rates for high quality Class A space increase to $40 per square foot, an increase of 15 percent from current levels.
Projects being developed in the downtown core between now and the end of 2000, include:
Other major projects in later years include:
And last, there is $3 billion of both public and private investment that will mean a resurgence of Pioneer Square.
And for the office sector of Pioneer Square:
At first glance, it appears there will be competition for tenants that could cause price-cutting. However, if all projects previously mentioned get built, over the next 24 months 1.3 million square feet will be added to the market. Remember that net absorption for 1998 was estimated to be 2.5 million square feet. Therefore, if net absorption numbers continue over the next 24-month period, there will be demands for 5 million square feet. New supply will only meet 25 percent of the demand.
We do not expect erosion in rental rates; rather, we expect continued growth in rental rates and additional buildings to be built.
Downtown Seattle has several great years ahead for development and expansion of the office market. It has proven to be a great location to conduct business.
Doug Hanafin is a principal with Washington Partners.
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