The development pipeline in downtown Seattle and downtown Bellevue is drying up thanks to the ongoing financial crisis. At least 4,000 proposed condo and apartment units and 3 million square feet of office space have been delayed.
How many construction cranes did you count the last time you drove through downtown Seattle or downtown Bellevue? Ten? Twelve? More?
Count them while you can.
The credit crunch and related economic woes are drying up the development pipeline in the region’s two commercial hubs. More than two dozen projects are on hold, many because developers say they can’t borrow money to build.
The slowdown is hard to see amid the forest of new office, condo and apartment towers under construction in the two downtowns. But work on many of those buildings began in 2006, before the first glimmerings of crisis. Most will be finished by the end of next year.
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As those cranes come down, fewer new ones will go up. Even now they are less numerous than many had anticipated.
In early 2007, the Downtown Seattle Association identified 10 projects as the next wave of downtown development, projects that were “permitted and scheduled for construction.”
Nearly two years later, four of those projects still haven’t broken ground. A fifth, the troubled 1 Hotel & Residences, started then stopped, leaving a deep hole at the prominent corner of Second Avenue and Pine Street.
“It’s a different world now,” says Seattle land-use economist Matthew Gardner. “The banks have shut their doors.”
Financing, or lack of it, isn’t the only deterrent to new development. Pre-sales at many of the downtown condo projects already under construction are dragging. Office-vacancy rates are starting to climb as companies downsize and new buildings come on line. Construction costs have shot through the roof.
“This is a real good time to do nothing,” says LeisureCare owner and CEO Daniel Madsen. His company put the brakes on a proposed 30-story retirement community in Seattle’s Denny Triangle last winter, sensing waning buyer demand.
Other developers have reached the same conclusion. Altogether, at least 4,000 condo or apartment units and 3 million square feet of office space in downtown Seattle and downtown Bellevue have been delayed, or worse. Contractors say the slowdown will mean less work for them and the people they employ.
Many of the stalled projects have key permits. Some were supposed to break ground months ago.
Now some are being redesigned. Other developers have put their properties up for sale. Still more are just waiting for better times.
Brokers and developers agree that few, if any, proposed office buildings will start construction soon. So many condo projects in downtown Seattle’s core have been postponed that there could be nothing new on the market until 2012 once the crop now under construction is completed next year.
That’s what Dean Jones, a principal with the condo-marketing firm Realogics, projects. The outlook for downtown Bellevue isn’t much better, he says:
“The first two quarters of 2007 were boom times. Then someone turned out the lights.”
One development that was supposed to be part of the next wave was SkyGarden, a proposed 24-story luxury condo tower on Seattle’s First Hill. No project’s downfall has been more inglorious.
SkyGarden’s design won an award in 2005 from the local chapter of the American Institute of Architects. Some renderings showed terraces on every level covered with lush greenery, like a high-rise Hanging Gardens of Babylon.
The original developer obtained a land-use permit, applied for building permits and sold the property in July 2007 to Lake Stevens developer Barclays North for $10 million.
Barclays borrowed most of that money from a Minneapolis bank.
“They were saying, ‘Let’s get rolling. We want to do the construction loan, too,’ ” Barclays CEO Patrick McCourt said recently. “Seattle was supposedly recession-proof.’ “
Then the housing market collapsed, and Barclays North projects ran into trouble all over the country. The company — which typically bought raw land, obtained development permits, then sold it to big homebuilders — found itself with lots of inventory, few buyers and not enough cash to cover its obligations.
That included the payments on the SkyGarden property. McCourt said the project was undone by his inability to get a construction loan.
This summer, as the Minneapolis bank moved to foreclose, Barclays North went out of business. Last month, the SkyGarden site was to be sold to the highest bidder at the front door of the county courthouse.
Then, a half-hour before the auction was to begin, the Barclays division that owned the property filed for bankruptcy, buying the company more time.
Permits for the proposed condo tower expire in January.
Still healthier than most
While insiders expect a significant slowdown, no one expects construction in downtown Seattle or Bellevue to grind to a complete halt. This market still is healthier than most, they say.
Amazon.com recently exercised options to add more than 800,000 square feet to its new South Lake Union headquarters campus. A few small to midsize condo projects, including the Abu Dhabi-financed Essex on the Park in Bellevue and Stadium Lofts in Pioneer Square, have plans to proceed.
Developers say some financing still is available for apartments — in part because of the region’s low vacancy rate, in part because tighter credit means more people must rent.
AvalonBay Communities broke ground last month on a 400-unit complex in downtown Bellevue. Work on several other apartment towers in both downtowns is expected to start early next year.
But those projects are outnumbered by others that have been shelved or at least reinvented.
• Colorado developer Ray Tonsing originally planned to build Vida, a 241-unit complex on Northeast Eighth Street in Bellevue, as condos. But over the summer, he converted the project to apartments in hopes of increasing its appeal to lenders. Several other erstwhile condo developers also have made the switch.
Tonsing says his return from apartments will be at least 40 percent lower.
“We decided to stop beating our heads against the wall,” he says. “No bank will finance for-sale [condos] right now.”
• Lenders who two years ago were asking developers to put up 15 percent in equity now are asking for 30 or 40 percent or more, says Alec Carlin of Hummingbird Partners, another developer with a stalled project.
He and his associates pulled the plug this summer on the Heron and Pagoda towers, a mammoth condo-office-hotel-retail complex across Fifth Avenue from the Westin Hotel in Seattle. The final straw was their inability to get tenants, and in turn financing, for the office component, Carlin says.
“People were starting to get nervous about the office market here — all the new buildings coming on the market, and the fears that WaMu was going out of business,” he says. “Then the Clise deal [possible sale and redevelopment of 13 acres in the Denny Triangle] fell through, and the people we were talking to said, ‘Well, we’ll just wait.’ “
• David Hoy of HMI Real Estate says his company had a construction loan lined up for Ventana on Main, a 68-unit apartment complex in downtown Bellevue. But the deal hinged on the bank selling part of the debt to another lender, and it couldn’t find a willing buyer.
HMI planned to start building Ventana this month. Now, Hoy says, it will wait at least until spring.
“Until the capital is freed up, developers can’t do anything,” Hoy says.
• With financing already set, Daniels Development had planned to break ground next March on the 660-foot Fifth and Columbia office tower in downtown Seattle. Now the construction schedule is up in the air.
President Kevin Daniels says he’s waiting for the markets to improve and for a better sense of the effect of Washington Mutual’s collapse. WaMu is downtown Seattle’s biggest office tenant.
• The Pauls Corp. of Denver planned to start work in April on Art House, a 140-unit condo project in Seattle’s Belltown area. Six months later, nothing has happened.
The problem isn’t financing — that was arranged some time ago, says Paul Powers, Pauls’ president. The company put a hold on the project “to take a look-see at the market, to see if our timing would be right,” he says. “Our buyers are affected by the credit crunch, too.”
Some developers say Seattle and Bellevue shouldn’t be caught in a slowdown like this. Microsoft still is hiring, although not as aggressively. Job growth is expected to continue, albeit at a slower pace.
But Seattle’s strengths matter little to lenders caught up in what’s going on nationally and globally.
“It’s a tough world for developers now,” says Gardner, the economist. “Everyone’s kind of battening down the hatches.”
Eric Pryne: 206-464-2231 or email@example.com