Seattle Bubble

Here’s another tidbit about commercial real estate in the Seattle area. Quite appropriately, the headline uses the word “gambling” to describe what’s going on with office buildings in Bellevue:

Spec development, as in constructing an office building without pre-lease commitments on the gamble that it will attract tenants upon completion, is the new buzzword among real estate developers in downtown Bellevue.

Developers of at least four different office tower projects proposed for the city’s central business district are scrambling to be next in line after Lincoln Square developer Kemper Freeman Jr. to begin construction.
…
It’s a gambit that can cost a developer dearly if the expected tenant demand for office space turns out to be less than anticipated by the time the building is completed.

In past office development cycles, some developers have wound up losing their buildings to foreclosure. In at least one case, a prominent Seattle developer lost his home when the local office market went bust in the late 1980s.

Good thing there’s no chance of that happening again. Heh. How soon we forget.

(Clayton Park, King County Journal, 01.08.2006)

Complete article follows below, since the King County Journal has since gone offline.

Spec development, as in constructing an office building without pre-lease commitments on the gamble that it will attract tenants upon completion, is the new buzzword among real estate developers in downtown Bellevue.

Developers of at least four different office tower projects proposed for the city’s central business district are scrambling to be next in line after Lincoln Square developer Kemper Freeman Jr. to begin construction.

Freeman, who won a major pre-lease commitment this summer from Eddie Bauer, intends to start construction of a new 28-story office tower at Lincoln Square early this year.

Eddie Bauer plans to move its headquarters from Redmond into a 200,000-square-foot office space at the new Eddie Bauer Building at Lincoln Square in the summer of 2007.

Chicago-based Equity Office Properties last month announced plans to break ground next summer for its long-proposed 26-story City Center Plaza tower — with or without pre-lease commitments from tenants.

Anticipating tenant demand

It’s a gambit that can cost a developer dearly if the expected tenant demand for office space turns out to be less than anticipated by the time the building is completed.

In past office development cycles, some developers have wound up losing their buildings to foreclosure. In at least one case, a prominent Seattle developer lost his home when the local office market went bust in the late 1980s.

Patrick Callahan, the senior vice president for Equity who oversees the company’s operations in the Pacific Northwest, said the 559,000-square-foot City Center Plaza building is expected to be ready for occupancy in early 2008.

The new office tower will be built next to the Bellevue Transit Center, just east of Equity’s 27-story City Center Bellevue building, which was built in 1987 and is slated to be renamed City Center West.

“We’re very confident in downtown Bellevue and the Eastside overall,” Callahan said. “Certainly Bellevue can support significant development.”

Equity is downtown Bellevue’s biggest office landlord, already owning eight buildings in the central business district with a total of 2.5 million square feet of office space — roughly 40 percent of the market.

Last spec project successful

“The demand (for office space) we’re seeing from our customers is very healthy,” said Callahan, who noted that his company was successful with its last spec project in downtown Bellevue: the KeyCenter building, which opened in 2000, and is now close to 100 percent leased, he said.

Since Equity’s announcement in December, three other developers have told the Journal they, too, now are prepared to begin construction next year of the following proposed office tower projects — if necessary, without pre-lease commitments:

* The Bravern, a mixed-use complex just north of Meydenbauer Center that will include two office buildings — 24 and 15 stories tall, each with retail space on the lower levels — and a separate two-story retail building.

The project would offer 497,000 square feet of office space and 248,000 square feet of retail space.

The developer, Bellevue-based Schnitzer Northwest, could begin construction as early as March 1, project manager Tom Woodworth said. The project could be completed as soon as fall 2007.

When Schnitzer initially announced its plans for The Bravern in October, the developer said it intended to start construction next summer, with completion expected in fall 2008.

Woodworth confirmed earlier this month that his company is prepared to begin construction without pre-lease commitments, but added, “I’m not sure we’ll ever have to make that decision. We expect to be substantially leased by the time we commence construction. … We’re talking with major office users.”

* A third and final new office tower is planned at The Summit, an office complex on the southeast corner of Northeast Fourth Street and 108th Avenue Northeast.

The complex already includes the 13-story Puget Sound Energy Building, which opened in 2002, and an 11-story building that was finished in July.

The proposed 15-story, 311,000-square-foot Summit 108 Building (the project’s working title) would replace the much smaller six-story Summit Ridge building, which was built in 1971.

Canadian developer Bentall Capital is prepared to begin construction of the new Summit 108 Building as early as this coming June, said Gary Carpenter, the executive vice president who heads Bentall’s U.S. operations.

The new building could be ready for occupancy as soon as March 2008, he said.

“At the present time, we believe we will be going spec” with the project, Carpenter said.

“Any additional office building other than your own is a concern,” as a developer, Carpenter said. “Fortunately, the (Bellevue office) market has the strength to absorb it.” even if it must compete for tenants with several other new buildings, he said.

* The Hines Bellevue Office Tower, an 18-story, 400,000-square-foot office building that is set to start construction in June 2006.

The building, which will include 14,500 square feet of street-level retail space, could be completed as soon as October 2007, said Rob Hollister, a vice president with Houston-based Hines, who oversees the real estate development company’s operations in the Pacific Northwest.

Hollister said his project has an advantage over the office building projects proposed by Equity, Schnitzer and Bentall, because the Hines Bellevue Office Tower will be built on the site of the partially started Tech Tower building, which was abandoned in 2001.

“Our hole’s already done,” Hollister said, referring to the unfinished parking garage that will now become part of the new Hines Bellevue Office Tower.

“We do not have a specific pre-leasing requirement” in order to commence construction, Hollister said. “We have the ability to go spec, but I don’t think we’ll need to.

“We’ll be the next to market after Kemper,” Hollister added confidently, referring to Freeman’s Eddie Bauer Building, which will have 540,000 square feet of office space and will become part of a complex that also includes a three-level retail mall, a movie theater, condominiums, a Westin hotel, and a five-level underground parking garage.

Only two or three winners?

Several longtime Eastside office market observers have said the coming office development boom in downtown Bellevue will likely turn into a race that will produce only two, maybe three winners — including the Eddie Bauer Building, which all agree will be most likely the first to open.

But Tom Bohman, an Eastside office broker with Cushman & Wakefield, who previously subscribed to the three-winner race scenario, said he now thinks the possibility exists that the office market could be strong enough to fill all five new office projects.

The reason for his change of mind, Bohman said, is a difference in office market conditions, compared with the last building boom, which occurred in the late 1990s.

With no new office buildings set to be ready for occupancy on the Eastside until at least the summer of 2007, available office space in downtown Bellevue will likely become even more difficult to find as the local economy continues to improve.

Colliers International, a commercial real estate brokerage, recently reported that the office vacancy rate in downtown Bellevue fell to 8.76 percent in the fourth quarter, down from 10.05 percent the previous quarter and nearly 30 percent in 2003.

Office vacancy rate down

The overall office vacancy rate for the Eastside now stands at 9.12 percent, down from 10.97 percent in the third quarter, according to Colliers.

Oscar Oliveira, an Eastside office broker with Colliers, said it’s definitely plausible that the looming office development race in downtown Bellevue could result in as many as five winners, but warned that there might be some dark horse contenders entering the fray before all is said and done.

In any event, Bohman said, “It’s going to be an exciting time” in downtown Bellevue this year. “You’ll see a lot of action.”