The downtown Seattle office market is likely to become more favorable to tenants by late 2009 or early 2010, some commercial real-estate professionals predict.
Commercial real-estate brokers James Keating and Sean Barnes have one word of advice for their clients looking to lease big chunks of office space in or near downtown Seattle:
“By the end of 2009, or the first quarter of 2010, the market’s going to turn,” says Barnes, a vice president in the Seattle office of Jones Lang LaSalle.
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Vacancy rates will rise, they predict. Lease rates will drop. Tenants will smile.
The last couple years have been much better for downtown landlords than for tenants. Demand for space, driven by strong job growth, has outpaced supply, driving vacancy rates down into single digits.
Rents in “Class A” buildings surged 30 percent in 2007 alone, by one reckoning. Tenants had little choice but to swallow what landlords offered.
Barnes and Keating, a Jones Lang LaSalle senior vice president, represent tenants exclusively (Jones Lang LaSalle acquired their former employer, Staubach, earlier this month). Until just a few months ago, they say, they were advising their clients to close deals quickly or risk paying even more.
They switched after some detailed research. It’s a matter of supply and demand, they say.
Supply will increase — a lot. According to their analysis, more than 4.5 million square feet of big, contiguous spaces — in all, the equivalent of about three Columbia Centers — is already available or likely to come on the market, in new and existing buildings, before the end of next year.
More new buildings are scheduled to come on line downtown in 2009 than in any year since the dot-com boom played out early this decade. Altogether, Keating and Barnes figure, more than 3 million square feet of new, premium space that isn’t already spoken for will be delivered before the end of next year.
That’s a significant addition to a downtown base of 37 or 38 million.
On demand side
On the demand side, the national economic downturn is likely to make a significant dent in Seattle sooner or later, the brokers say. Some of downtown’s business giants already have concluded they don’t need as much office space.
“From a tenant’s perspective, more [available] space equals more leverage,” Keating says.
Their outlook isn’t shared by everyone. “We wouldn’t be developing buildings if we thought there was going to be an oversupply,” says Dan Ivanoff, managing investment partner of Schnitzer West, whose 818 Stewart and 1918 Eighth projects are scheduled for completion in the next 18 months.
Regional employment — a key indicator of office demand — still is projected to grow, he says, albeit more slowly.
But there’s growing sentiment that a cooling economy and all the new, unleased downtown office space in the pipeline will tilt the landlord-tenant balance in tenants’ favor in a year or so. The only question is how much.
“Vacancy rates are going to rise,” says Carolyn Davis, senior research coordinator with the Seattle office of CB Richard Ellis. “Tenants are going to have some options.”
Built on “spec”
Touchstone’s West 8th. Vulcan’s 2201 Westlake. Martin Selig’s Fifth and Yesler and 635 Elliott. Schnitzer West’s 1918 Eighth. Opus Northwest’s Seventh & Madison.
All big office projects, between 200,000 and 650,000 square feet. All being built on “spec” — no tenants lined up before construction began, or since
All scheduled for completion in 2009.
Keating and Barnes say those new buildings are only part of the reason why tenants should find the market more accommodating.
For starters, they say, there already are some big spaces available. The 901 Fifth Avenue building, for instance — formerly the Union Bank of California Center — recently underwent a major renovation. It’s still mostly vacant.
Also empty: The 6th & Wall building, former headquarters of Group Health, also recently remodeled.
Other vacancies will be created when several big downtown tenants make moves that already have been announced. Avanade, a global information-technology consulting firm, is leaving World Trade Center East on the waterfront for 818 Stewart, scheduled for completion later this year.
Amazon.com is scheduled to start moving into its new South Lake Union campus in 2010, vacating hundreds of thousands of square feet at Columbia Center and two buildings at Union Station.
There’s more. This spring Qwest, the giant telecommunications company, put its 33-story Bell Plaza up for sale, saying it intended to lease back space from the buyer. Keating says he understands the building is under contract, and that Qwest will occupy only about half the floors.
A Qwest representative confirmed there’s a tentative deal but would say no more.
Two years ago, when it was booming, Starbucks bought one office building in Pioneer Square and started building another next door, intending to eventually occupy both.
Earlier this month the now-contracting coffee company confirmed what Barnes, Keating and other brokers had suspected — it’s exploring selling or leasing both properties.
That’s another 400,000 square feet that’s likely to come on the market by the end of next year. Starbucks also recently said it would vacate 40,000 square feet of leased space in another Pioneer Square building.
Weave all these strands together and they point to a coming oversupply, Barnes and Keating say.
“Landlords aren’t talking about this publicly,” Keating says, “but they’re thinking about it.”
Building owners already are offering concessions to prospective tenants that were unthinkable just a few months ago, the brokers add.
Brokerage Grubb & Ellis sounded the same theme in a report last week. “Concessions such as free rent, tenant-improvement allowances and parking are now very much on the table during negotiations, unlike six months ago,” it said.
Keating and Barnes say their calculations probably are conservative. They didn’t consider all the space that is likely to become available in existing buildings — just those in blocks of 50,000 contiguous square feet or more.
And they didn’t assume Safeco or Washington Mutual would vacate any of the big chunks of space they now occupy, something many observers anticipate.
Seattle-based Safeco is being acquired by a Boston insurance company. Troubled WaMu has announced plans to lay off 6 percent of its local work force. Together, the companies fill more than 1.4 million square feet downtown.
Eastside story differs
The outlook is different for the Eastside: Microsoft and Expedia have pre-leased all the new space scheduled for delivery in downtown Bellevue over the next 18 months.
But Barnes and Keating say vacancy rates might rise there, too, if tenants start to find better deals in Seattle.
KeyBank could be a harbinger. Its 100,000-square-foot regional headquarters lease in downtown Bellevue expires in 2010.
Rick Wirthlin, district president, said in an e-mail that the bank wants “the most favorable lease rate at a location that fulfills the needs of KeyBank employees and clients.” He didn’t rule out relocating across the lake.
Seattle land-use economist Matthew Gardner says he, too, wouldn’t be surprised to see Seattle lease rates slip and vacancy rates climb some. But it isn’t a sure thing, he adds.
Microsoft is considering leasing hundred of thousands of square feet downtown. And Gardner says several other companies he wouldn’t name — newcomers to Seattle — also are looking for significant space.
“It wouldn’t take much from them to bring the market into equilibrium,”he says.
Wende Sauvage, a tenant representative with brokerage Flinn Ferguson, says that, like Barnes and Keating, she detects signs of a shift in the downtown Seattle market.
But she remembers when Washington Mutual moved into its new headquarters in 2006 and vacated more than 1 million square feet of leased space downtown. Many predicted a big bump in vacancies; it never materialized.
The outlook for downtown could change dramatically if the national economy somehow turns around, Sauvage says.
Barnes agrees. “That’s the big wild card,” he says.
Eric Pryne: 206-464-2231 or firstname.lastname@example.org