Greg Johnson, CEO of Seattle developer Wright Runstad, reckons he’s losing “tens of thousands of dollars a day” on an 11-story office the company is building in Bellevue’s booming Spring District. The reason: a 17-day-and-counting strike by concrete truck drivers.
Without concrete for foundations, work has slowed on the building, which is already leased to Meta, Facebook’s parent company, and could stop altogether.
“I hope they work it out quickly,” says Johnson of the dispute between local suppliers and several hundred drivers. “Because every day they delay costs us money.”
For builders like Johnson, the strike captures both the agony and the ecstasy of the construction business in this strange stage of the pandemic.
Unlike during the Great Recession, which slowed Seattle-area construction for years, the industry has rebounded much faster this time. Local construction employment, which plunged during the four-week shutdown in March 2020, has already surpassed its pre-COVID-19 levels. Many builders can’t keep up with demand for offices, apartments, warehouses and other structures.
Yet as the strike demonstrates, builders are also navigating a lot of obstacles.
The boom has given new leverage to those who work in the industry. Three months ago, it was the carpenters who were striking for higher wages. Now, it’s concrete drivers who “are watching companies make money hand over fist” and want “a piece of that pie,” says Jamie Fleming, spokesperson for Teamsters 174, which represents the drivers. (A spokesperson for the concrete companies calls their latest offer “generous and historic.”)
The construction boom also has been notably uneven. While the Eastside has seen an explosion of new projects, downtown Seattle has cooled and now has a large surplus of office space.
As important, the boom is heavily reliant on tech firms like Meta and Amazon, whose steady hiring of well-paid workers is propping up demand for offices and housing. But some builders wonder whether these and other employers — and their work-from-home employees — will emerge from COVID with less interest in expensive office space.
“If you’re building high-rise office buildings in downtown Bellevue, and you have the good fortune to have pre-leased them to Amazon, then you’re a genius,” says Bob Wallace, a veteran developer whose firm, Wallace Properties, has several Seattle-area office and housing projects in the planning stage. “And if you’re anybody else, you’re looking at the decision pretty carefully, because right now, there are just so many unknowns.”
Shortages everywhere
In the near term, the construction business — a huge source of local employment and tax revenues — faces more mundane challenges.
A long-standing labor shortage, made worse by COVID, is delaying some projects and threatening future growth.
Lack of workers has “caused us more grief than the COVID,” says Matt Griffin, principal and managing partner at Pine Street Group, a Seattle developer whose work on the $1.9 billion Washington State Convention Center Addition and a nearby office tower was slowed in part by the labor shortage. “We have 1,000 people on the job site today and we’d probably like to have another 100, maybe 200,” Griffin adds.
Builders are also paying more for everything from wood and steel to kitchen appliances and HVAC systems, in large part because of pandemic-related bottlenecks affecting the global supply chain.
Plywood costs 66% more than it did in 2019, according to the Mortenson Construction Cost Index. Copper pipe costs 78% more. Lumber prices, though down from earlier this year, are still up 89% over 2019.
“It’s everything,” says Nick Morton, a project superintendent with Seattle-based Toepfer Construction. The “framing package” for a house he recently built went from around $30,000 in the planning stage to “closer to $80,000” by the time materials were purchased, he says.
Many builders have tried to manage rising costs by locking in materials prices months in advance or have pushed for “escalation” clauses that cover some unanticipated increases. Overall, some developers have seen total project costs jump anywhere from 5% to 10% since the pandemic started.
Despite the higher costs, many developers and their investors have plunged ahead. The number of Seattle-area apartment units under construction as of late 2021 — 26,396 — is nearly where it was in early 2020, according to Kidder Mathews, a commercial real estate agency.
Builders’ enthusiasm isn’t surprising. By early 2021, the rapid vaccine rollout had signaled “an end in sight” for any demand slump, says Kim Faust, senior vice president of development at Kirkland-based MainStreet Property Group, which broke ground this summer on a 214-apartment mixed-use project near the Space Needle.
As important, because hiring stayed strong during COVID, rents, lease rates and sales prices rose fast enough to outpace rising costs and keep builders confident that completed buildings can still be profitably leased or flipped. Rent for a two-bedroom Seattle-area apartment was $1,944 in late 2021, up 9.2% from early 2020, while vacancy rates dropped from 5.6% to 4.6%, according to Kidder Mathews.
“The better the economics, the more you can overlook the cost overruns,” says Dylan Simon, a Kidder Mathews executive vice president who specializes in apartment and land sales.
Still, there are limits to that spend-more, charge-more construction model, developers and brokers say. At some point, office and apartment tenants will balk at higher rents. Developers are also bracing for higher finance costs if federal efforts to curb inflation lead to interest-rate hikes.
If costs continue to escalate, “we’ll see more of those jobs get to a point where it doesn’t pencil out for the developer anymore and it’ll get put on the back burner,” says Bill Ketcham, general manager of the Seattle office of Turner Construction, whose local projects include five office buildings in Bellevue’s Spring District.
All boats aren’t rising
To some extent, that dynamic may be already playing out in and around downtown Seattle, which hasn’t kept up with the construction boom sweeping through much of the rest of the region, especially the Eastside.
In the third quarter of 2019, Seattle boasted 5.2 million square feet of office space under construction, compared with 3 million square feet on the Eastside, according to Colliers, a commercial real estate agency.
Two years later, the ranking has almost reversed: Seattle had just 2.1 million square feet of office space under construction, while the Eastside had 4.6 million. According to Colliers, more than two-thirds of that Eastside space is already leased to Amazon, which, along with Meta, has focused much of its future growth east of Lake Washington.
In fact, while 88% of the Eastside’s under-construction office space is pre-leased (almost unchanged from late 2019), Seattle’s pre-lease rate has fallen to 17%, from 82% before the pandemic. Seattle’s office market “really just went on hold for about a year,” said Greg Inglin, executive vice president at Colliers for Seattle and Bellevue.
It’s not just COVID. Even before the pandemic, Seattle was seeing a rise in office tenants “subleasing” unused office space to other tenants. That trend burst into public view in 2019, when Amazon, reportedly angry over Seattle’s “head tax” on employers, decided not to occupy the 722,000 square feet it had leased in the then still-under-construction Rainier Square tower.
Since then, Seattle’s sublease office market has ballooned from around 1.8 million square feet, or around 3% of the city’s total, to around 3.7 million square feet, according to Colliers. Though that’s down from a peak of 4.4 million square feet in April, Seattle’s office vacancy rate was 14.5% in the most recent quarter, compared with 9.7% on the Eastside, according to Colliers.
Some developers and business leaders blame Seattle’s stall in large part on the city’s politics and taxes as well as concerns about public safety. For others, however, the shift eastward has as much to do with tech firms’ need to be where the talent is: Many tech workers are older now, with families and a desire to live — and work — on the Eastside.
Whatever the causes, the net result is the same. Seattle “has been chipping away at” its office surplus, Colliers’ Inglin says, “but when you have that much sublease space, and demand is really at a standstill, it’s somewhat of a stagnant market.”
What happens to office work?
No one is seriously writing off Seattle’s office market. Office demand, like construction generally, is deeply cyclical; in the last decade, South Lake Union was the Northwest’s hot growth story for both office and apartment construction.
The sheer size of Seattle’s office market (around 75 million square feet versus 33 million on the Eastside, according to Colliers) along with its still-large cluster of tech firms and pool of tech talent all but guarantee an eventual reemergence as a must-be location for employers, many industry officials say.
Already, more prospective tenants are touring Seattle again, developers and real estate experts say, not least because the Eastside office market has become so tight. “There is not enough high-quality [Eastside] space that, to be frank, Amazon hasn’t already spoken for,” says Jacob Pavlik, Colliers’ Pacific Northwest research manager.
Investors, certainly, are still betting on downtown Seattle.
In April, investors snapped up $342 million in bonds to help finance the convention center addition, which meant the pandemic-hammered project could be finished by mid-2022.
Sales of downtown Seattle office buildings, meanwhile, totaled nearly $2.5 billion in 2021 through mid-December, according to data provided to Colliers by Real Capital Analytics on properties greater than 10,000 square feet. That’s down more than half compared with 2019 (a monster year for office sales across the region) but it’s near or above sales from Seattle in 2016, 2017 and 2018. Prices have also risen — from $578 per square foot in 2019 to $674 in 2021 — as buyers have bid up tighter supplies, according to Colliers.
(For comparison, office sales in Bellevue in 2021 were about one-twelfth the scale of Seattle’s, and office prices there have fallen from $742 to $639 since 2019.)
The bigger question, for both Seattle and the Eastside, is how long employers will continue to lease new office space at anything like the pace of the last decade.
To be sure, tech hiring shows little sign of slowing. But trendsetting employers like Amazon, Microsoft and Apple have repeatedly postponed their office returns, or have shifted to hybrid mixes of in-office and remote work, or have simply stopped talking about return dates — and that has clouded forecasts of future office demand.
Publicly, many local industry and government officials are patiently optimistic. Once the pandemic truly subsides, most work-from-home employees will start coming back to the office at least part-time, which will keep future office demand from dropping too far from its prepandemic trajectory. Uncertainty over a return date doesn’t affect “the underlying fundamentals of the [office] market, just a change in the time scale,” said Jesse Canedo, Bellevue’s economic development manager.
Privately, however, some builders say future demand won’t really be clear until they see how many employers actually set deadlines for a return to those expensive offices — and how many workers comply.
In the meantime, builders face a worker quandary of their own. As older carpenters and other tradespeople retire, the industry must find ways to attract younger workers. And in markets like Seattle, that’s getting harder to do — in no small part because of the higher housing prices that helped sustain the construction boom in the first place.
“There’s no one in the trades that really lives in the city,” says Morton, the contractor. “They can’t afford it.”
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