1918 Eighth Avenue is a 36 story office tower under construction in the Denny Triangle at the north end of Seattle's downtown. The building was conceived years ago when the economy was doing well. Photo by Deborah Wang.

It's a Tenants' Market for Downtown Seattle Office Space

06/22/2009

There may be signs of recovery in the region's housing market, but not so for the region's office market. A recent survey from Price Waterhouse Coopers says commercial property values in Seattle are expected to decline up to 15 percent this year, that's more than the national average. The survey predicts the market will remain in recession for two more years.

That is not good news for landlords, and for owners of the new commercial properties that are coming on the market this year.

At the corner of 8th and Westlake in downtown Seattle, workers are rushing to put in flooring, install lighting, and polish up the elevator doors on West 8th, a brand new office tower that is opening in just a few weeks.

According to Bill Pollard, a broker with Pacific Real Estate Partners, the building has a long list of amenities: health club, day care center, concierge services, state of the art conference facilities, outdoor veranda, and unparalled views.

Pollard: "Normally in a building, only the top floors get the good views and everyone else kind of suffers. I could take you to every floor in this building and there is nothing around us. So you have these kinds of views at all levels."

The building was first conceived back in 2006. That's when the commercial real estate market in downtown Seattle was bubbling. The developer, Touchstone Corporation, built the building "on spec," which means it began construction without any confirmed tenants. It was a vote of confidence in the strength of the office market.

But then the economic crisis hit. Washington Mutual collapsed, emptying out hundreds of thousands of square feet of downtown office space that was once occupied by the bank.

Howe: "Those two factors have created what I call kind of a perfect storm for office space; we are oversupplied for all the wrong reasons."

Douglas Howe is the president of Touchstone. He says the company has yet to fill any of the offices in the brand new, high–tech 28 story building.

Howe: "What we have experienced is fear paranoia, procrastination. And tenants have been in the marketplace looking for space the past 18 months, but they continue to go back and rethink it."

Companies are just not committing to the space, Howe says.

And it's not just Touchstone's problem. Directly across the street, construction crews are finishing up an even bigger high rise office tower, built by developer Schnitzer West. And Vulcan has just completed a new office building just up the street. All three projects were developed on spec years ago, when the economy was doing well.

Altogether, some 2 million square feet of brand new, Class A office space is set to open up in downtown this year at just the wrong time in the business cycle. Matthew Gardner is a principal with Gardner Economic, a land use consulting firm.

Gardner: "We are going to be delivering an awful lot of space to the marketplace, specifically this year, and as such when we have an economy which is currently contracting, that's going to push up our vacancy rates dramatically, and I certainly expect vacancy rates to be well over 20 percent by the end of the year."

That would be like one in five houses on your block being empty. And as vacancy rates go up, prices are going down. Downtown Seattle has gone from being a landlord's market to a tenant's market. Gardner says tenants can get amazing deals now from their landlords.

Gardner: "They are seeing writing on the wall and they are certainly seeing a lot of their tenants coming to them, and telling them we need to renegotiate our lease early, and ultimately landlords want to keep warm bodies in their spaces and lights on."

One of the biggest landlords in downtown Seattle is a company called UNICO. It manages 1.7 million square feet of commercial space in five buildings that are actually owned by the University of Washington.

Wang: "How hard do you have to work to keep people?"

Lamb: "In this environment, very hard."

John Lamb is UNICO's Chief Financial Officer. He says just under a dozen of his tenants have gone bust since the economic crisis began. Many more are struggling, and they've have come to him looking for a better deal. Lamb says in certain circumstances, UNICO will reduce rents by up to 30 percent, and even give them several months rent free. He says it's something you have to do to keep tenants happy and buildings occupied.

Lamb: "We're about 90 to 91 percent occupied, which is a healthy number, but it doesn't mean that some of our tenants coming up for renewal may not be enticed by another landlord to go somewhere else. So we are working very hard to keep absolutely everyone that we have."

It's not easy to compete with the fancy new office space that's coming on line, according to Lamb. UNICO's buildings are older; they lack the wow factor of a brand new building. So UNICO's strategy has been to compete by being really good at customer service.

The company recently offered free yoga classes to UNICO tenants. They were taught by an employee who works in one of UNICO's buildings, and were held in a now vacant furniture store.

UNICO has also put together a farmers' market for its tenants, a bicycle repair shop during National Bike to Work Month. It's shown free outdoors movies in the summer, and has given away reusable grocery bags. John Lamb says those are the kind of funky things that the tenants seem to like.

Lamb: "And when their lease renewal comes up, all those memories come back and they say, hmm, I really like this environment."

Wang: "You want them to have a warm and fuzzy feeling about you?"

Lamb: "Exactly. Not easy to do in this business climate, but that is what we are trying to do."

But Lamb says it's going to be a while before the market begins to stabilize. He says vacancy rates will continue to rise, and don't be surprised if some commercial office buildings in Seattle end up facing foreclosure.

Douglas Howe, the president of Touchstone, says he thinks the downturn is changing the rules for commercial real estate development. It no longer makes sense to build buildings "on spec," like the still empty one his company just finished downtown.

Howe: "I don't see us building any speculative office any time soon if ever again.

Wang: "Just been too painful a process?

Howe: "Correct."

But that doesn't mean he's going to stop building. Touchstone has eight to 10 buildings in pre–development right now. But they won't hit the market for two to three more years, and hopefully by then, the downturn will be over.

I'm Deborah Wang, KUOW News.

© Copyright 2009, KUOW