It’s a Great Time to Rent (Office Space)

A great article in today’s Seattle Times by Eric Pryne gives a nice review of 2009 in commercial real estate around Seattle.

In 2007, developers excavated a deep hole in downtown Seattle at Second Avenue and Pine Street for the foundation of a 23-story luxury hotel and condo tower.

They filled the hole in 2009.

That pretty much captures the kind of year it’s been for commercial real estate in the Seattle area.

The development pipeline dried up. A few projects were halted midconstruction.

Office and industrial vacancy rates soared. Rents fell. Condo developers, desperate for sales, resorted to auctions and big price cuts to unload units. Banks foreclosed on some properties.

And 2010 won’t be any better, according to year-end forecasts by developers, brokers and other industry insiders.

“2010 in my world is going to be rough,” Bart Brynestad, who heads the Seattle office of industrial developer Panattoni Development, told one recent industry gathering.

“I think we have just seen the tip of the iceberg on what’s coming,” said Tom Parsons, senior vice president of developer Opus Northwest.

The tip was sobering enough. During 2009 developers delivered 2.4 million square feet of new office buildings in greater downtown Seattle — the equivalent of more than 1 ½ Columbia Centers. At last count, more than 90 percent of it remained unleased.

The attached graphic (pdf) shows that office vacancy rates have gone from around 8% in 2006 and 2007 to nearly 20% in 2009.

Looks like it’s a great time to rent office space in Seattle.

(Eric Pryne, Seattle Times, 2009.12.27)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

42 comments:

  1. 1
    Marc says:

    We’re currently looking for larger office space and are hoping to take advantage of the weak market. So far, however, I’ve discovered that commercial landlord’s are as or more delusional than the most stubborn, kool-aide chugging residential seller out there. They seem to have a thing for keeping their asking price high. I’m told they’ll bargain but have yet to see a great deal.

  2. 2
    SpringStreet says:

    Rumor out there has it that commercial lease rates remain really high, with developers hoping to wait it out: imagine a 10-year lease at a “low” (reasonable) rate from a tenant, vs. a nice high rate.

    It’s clear when you look at the Bellevue skyline, full of Microsoft logos: nobody’s getting a deal on commercial office space, and only the select few to whom money doesn’t really matter are able to lease those properties at the asking rates.

    Is $40/ft.^2 per year really affordable? Office space in New York City has gone as low as $10/ft.^2 per year in some spaces, according to a quick Bing search, and typically are around $29.

  3. 3
    DavidB says:

    My company has been trying to sublease office space in downtown Seattle in a prime location for the past year. We can’t even lease the space for half what we’re paying for it, $18/sq ft.

  4. 4
    Tim McB says:

    It’s a Great Time to Rent (Office Space)

    I always loved that movie (Office Space that is)….um I’m going to need you to come in on Saturday…and Sunday as well. Did you fill out your TPS report? Classic…

  5. 5
    mukoh says:

    The developers and underlying owners which in a lot of cases are REITs, have a normal business network, with each other, from weekly luncheons to golf time on the course. The whole concept to these guys is to keep the prices at bay at the least between each other. Just imagine one project dumping its prices by 30%, and filling it up. But in the long run whiping the other players prices out. Nobody wants to be THAT guy. However some companies have negotiated big breaks for themselves in current leases, as that is not disclosed through CBBA or other sources. Downtown space aside which is an attractive place, developers in areas of Snohomish county are realing with emty retail/office space. A friend of mine went to build a 24000 Sq Ft retail strip mall not in the best area as well.
    As his motto was “It seemed like a good idea at the time.” This was finished out in January. Its still 100% empty. Possible tenants are calling with demands like $24k credit to do TIs, and only a one year lease, etc..
    Not willing to drop as it will make no sense he sits there with an empty building. Great light show at night.

    My business partner negotiated office space in Alderwood area for $10 a foot including net. Considering on CBBA this type of space is listed at $18-$25 a foot.

    Its going to be a difficult market for the guys who hold that property, as it has been overbuilt insanely in a market that has contracted faster then retail homes.

  6. 6
    Nick P says:

    Our small business has been looking for a warehouse in Seattle for some time. We only want about 2000 sqft but would buy or rent more if needed. While I have researched some vacancies on office/warehouse spaces (some that I have looked at have been vacant for 3 years or more!) , I am only now just noticing prices beginning to come down. I think commercial owners are getting the hint that commercial is following the residential. Maybe it is that commercial owners are able to hold out for longer periods?

    Now if they just had a Zillow for commercial properties. Anyone know of a better way to buy a warehouse than driving around?

  7. 7
    David Losh says:

    RE: mukoh @ 5

    WOW!

    So let me get this straight because I learn so much from these comments; Owners of Commercial Real Estate, which in a lot of cases are REITS, sit around, and fix prices the way us house cleaners do.

    As professional House Cleaners we do have coffee in the mornings, and attend luncheons so we can all compare notes on what to charge, because none of us want to be that guy, or gal, who’s too busy, to have coffe, or lunch.

    We professional House Cleaners don’t have any fixed costs, like labor, to consider, we just don’t want to be that guy. Nobody wants to be THAT guy.

    Good Gawd!

  8. 8
    AMS says:

    RE: mukoh @ 5 – “The developers and underlying owners which in a lot of cases are REITs, have a normal business network, with each other, from weekly luncheons to golf time on the course. The whole concept to these guys is to keep the prices at bay at the least between each other.”

    This is one of the strongest claims of illicit activity that I’ve heard in quite some time.

  9. 9
    S-Crow says:

    RE: mukoh @ 5 – Since I’m out in Sno.Co. I’ll not name developers etc.. of office/retail with whom I’ve submitted offers. So, that being said, I think that many are clearly not understanding that we are in a whole new economy. A few are “getting” it, but I think that one in particular that develops near Costco and vicinity in Everett is absolutely still reading news articles from 2006.

    I’m unsure why some of these brokers list some of these properties at $16-20 Sq FT NNN. At some point a commercial broker has to have some pride and just not take an overpriced property. As business took me down to MSFT today and surrounding the Redmond Town Center area, there are soooo many vacant offices for lease. Even though the downside is a problematic economy, the upside is that I’ve never had so many people contacting me for my business this past Fall.

  10. 10
    AMS says:

    “In 2007, developers excavated a deep hole in downtown Seattle at Second Avenue and Pine Street for the foundation of a 23-story luxury hotel and condo tower.”

    This is the hole we discussed the other day. I really don’t understand how a project can fail at the point where the hole is dug. It seems that it should have either never been dug or made it farther off the ground than just being refilled and repaved. Maybe there are complexities, such as city permits and such. If the project begins, then the City will let it continue? IDK, what’s up with just digging a hole?

    Reminds me of the Whole Foods hole in West Seattle.

    What’s the ROI on all the cash invested to dig and refill a hole?

    Next thing you know, they’ll be buying land to build a monorail…

    CRAZY!

  11. 11
    corncob says:

    Is price fixing legal if you are a landlord? Seems like it shouldn’t, but who knows these days…

  12. 12
    LUC says:

    From my own experience, the current Biotech company I work for just recently moved from First Hill (across from VM) to the 38th floor of the 901 5th building. The landlord built-out our labs and office area to our specs. Taking into account all the concessions and building allowances our rent is approximately $26-28/sq ft. The savings are about 10K a month.

  13. 13
    AMS says:

    RE: corncob @ 11 – I’m not an attorney, but the answer is that price fixing is illegal unless there is some oversight body that approves rates, such as the now defunct Interstate Commerce Commission (ICC), or a Public Utility Board. There are rent controlled areas, but that keeps price lower, not higher, and landlords don’t sit around the lunch table talking about price, service, market segment, and so on.

    Exactly what constitutes a violation is another topic. Is the “low price guarantee” of a big box retailer designed to keep prices higher? (For those who don’t immediately see it, the message is broadcast to keep prices higher, otherwise the big box would have to punish the competitor, and so on, thus local prices had better stay high. Remember the days of Standard Oil having price wars when the stations were both owned and controlled by the same entity?) So far these price supports have not been found to violate anti-trust regulations.

    If price fixing is going on, the analysis changes greatly. It’s much more complicated, and cheating becomes an issue.

    Unfortunately, I must assume that there is no price fixing, but I always assume that there is the potential for price fixing. It’s a failed assumption risk. When analyzing an auction, I generally make the assumption that the bidders all act independently of each other. If this assumption is relaxed, the analysis is much different.

    Note how this all applies to residential housing. If everyone values a home independently, then other house values wouldn’t impact a given appraisal. If the market values the homes based on increasing the value from other recent sales, then we can get to the case of feedback. The market assumed that the sales were independent, but the values were actually based on other artificially inflated valuations, and so on and so forth.

    There are actually real estate agents that have suggested that sellers should keep prices higher, and that would fix the problem. Essentially some agents have suggested that price fixing should be present in the housing market. Even if sellers thought this was a good idea, there is going to be some cheating, similar to what happens when OPEC decides to cut production.

    Is there price fixing going on? Who knows, but maybe, probably not, could be.

  14. 14

    By AMS @ 10:

    “In 2007, developers excavated a deep hole in downtown Seattle at Second Avenue and Pine Street for the foundation of a 23-story luxury hotel and condo tower.”

    This is the hole we discussed the other day. I really don’t understand how a project can fail at the point where the hole is dug. It seems that it should have either never been dug or made it farther off the ground than just being refilled and repaved.

    I would assume they lost their financing.

    As to refilling it, it’s sort of too bad they couldn’t have just built the lower parking garage portion of the building, with the idea being to finish it off later. But I guess the problem with that is someone might want to do something else entirely with the property later.

  15. 15

    By AMS @ 8:

    RE: mukoh @ 5 – “The developers and underlying owners which in a lot of cases are REITs, have a normal business network, with each other, from weekly luncheons to golf time on the course. The whole concept to these guys is to keep the prices at bay at the least between each other.”

    This is one of the strongest claims of illicit activity that I’ve heard in quite some time.

    And that’s all it is–a claim.

    The thing is the owners have great incentive not to lower prices, because the value of their buildings when sold, and when encumbered, are based on the rents.

  16. 16
    AMS says:

    RE: Kary L. Krismer @ 15 – The sale value is also based on % rented too.

  17. 17

    That’s a great point, Kary. I would think that 99% of the businesses or residents that will eventually occupy that space would benefit from a few levels of underground parking. Even a temporary Diamond lot with 5 floors down.

  18. 18

    RE: Tim McB @ 4

    “Hey Peter, check out channel 9!”

  19. 19
    David Losh says:

    This should be addressed much more responsibly.

    Now is NOT a time to be signing a lease for commercial space. Commercial Real Estate is the next shoe that will drop probably beginning in 2012. The availability of commercial dirt alone should keep pricing in check for a decade.

    The second part about that is retail is taking on new meaning with the internet. For that matter a bio tech lab can be anywhere and connect virtually through a variety of internet innovations.

    Snohomish County will just be one foreclosure after another. There is no reason to keep those properties and pay good money after bad. If you are leasing there, make sure it’s with one of the older buildings that has great equity. Probably anything ten years and newer is questionable. Don’t worry they will be bought at auction with a hefty discount.

    Do your reasearch and remember that these developers, and land lords, are lucky to have any one give them the gift of a rent check.

  20. 20

    RE: David Losh @ 19
    David,
    Do you see the main reason to not sign a commercial lease the increasing likelihood that the building you signed a lease on will be foreclosed, or just that rental rates will be dropping substantially so waiting is a good idea, or both?

  21. 21
    AMS says:

    RE: Seattle Homes @ 17 – The construction and operating costs of an underground parking structure are quite high. I’d be a tough sell to suggest that building is a good idea just because there is a hole in the ground.

  22. 22
    mukoh says:

    RE: Nick P @ 6 – Nick check commercialmls.com has most of the commercial market listings.

    RE: David Losh @ 7 – David for the misinformed not pointing fingers, REITs do not own the buildings, they are the underlying holders that put the money up for the developer to develop.

    Relax with your teetering, just stick to what you know.

    This is not price fixing, but simple communication and business that has been around before we even know what business is.

  23. 23
    mukoh says:

    RE: Kary L. Krismer @ 15 – Spot on. :)

    RE: David Losh @ 19 – How much office space do you rent right now Dave? Your advice is feeble at best.

    RE: S-Crow @ 9 – S-Crow, completely agree. Commercial guys or owners of large properties are out to lunch. My partner who got his office space took 6 months submitting offers to different spots. Probably wrote about 15 LOIs. The particular space is on 164th and was at $20+NNN. He offered $10 all in. Was waiting on a counter, but the landlord accepted. One property a few blocks from it is the new Bank of A building. The people there want $30+NNN.

    RE: AMS @ 8 – AMS, nothing really illicit, you get 10-15 guys who are the only players in any given field, they will at least coordinate efforts to not drop the bottom out of the market as it will hurt everyone.

  24. 24
  25. 25
    AMS says:

    RE: mukoh @ 23 – “AMS, nothing really illicit, you get 10-15 guys who are the only players in any given field, they will at least coordinate efforts to not drop the bottom out of the market as it will hurt everyone.”

    It’s well-established that discussing prices over lunch is illegal.

    The “low price guarantee” as I discussed (#13) is not so clear, but it is considered by many as a coordinated effort to not drop the price.

  26. 26
    voight-kampff says:

    RE: AMS @ 10
    Many land owners in seattle who owned a parking lot or old building in the downtown area saw the potential bonanza in building condos to maximum heights ( which had just been raised ) to maximize their square footage. Many owners/developers were at various stages of bringing these condos to market. There were dozens. They generally started “selling” units before they even broke ground by taking deposits. Starwood capital was responsible for the hole in the ground at 2nd and pine. In the pre-sale phase, financing for buyers dried up due to the unique nature of the units ( you could let the hotel lease your unit when you were away) banks didnt want to touch them . They tried to quickly re-design the building to make more conventional condos, but alas they were no match for the seattle bubble(tm)!!! Alot of developers saw the writing on the wall before any ground was broke, but in this case… not so much.
    From my observations over many years, most any high-rise development be it condo or office, is built in boom/bust cycles. It takes a lot of time,permiting, design review etc for these buildings. So in some ways developers have to roll the dice, and some developers get caught with a hole in the ground as it were.

  27. 27
    David Losh says:

    RE: mukoh @ 23RE: muck @ 22

    Gotcha.

    Like I said you are an amateur investor who likes to talk big, even if it is as an anonymous commenter on a blog.

    You are however what make the wheels go round and round. You’re the guy with the money.

  28. 28
    David Losh says:

    RE: Ira Sacharoff @ 20

    Commercial Real Estate is all negotiation.

    There will be a number of commercial projects that renegotiate the debt. Commercial loans have a time limit, a balloon payment. Those balloons are usually set at 5, 7, 10, and 15 years. In my opinion better and better deals will be cut to reduce interest rates, or figure creative repayment of the principle balances.

    Take the bio tech company. They were a strong tenant who saved $10K per month. It’s all dollars and cents that look good on every one’s balance sheets. Could they have held out? Maybe, but it sounds like they got a more prestigious address for a savings. That’s a win for everybody.

    I did make a comment about foreclosures in Snohomish County. That’s an area where probably cheaper, and cheaper rents will be needed to attract business. I just don’t see any other way to reduce the debt load other than to foreclose on the thousands of poorly conceived development projects out there.

    If you’re serious about being in business for an extended period of time, it’s my opinion, the closer in you get the better for you. It’s all a matter of dollars and cents. It’s a return on the investment. Shared office space is going to be more and more common for say, title, escrow, attorney, and loan originators.

    He may not be interested but my buddy Scott Cunningham of Prime West Financial may be interested in leasing out his office space on 39th and Aurora. It also happens to sit next to a hole in the ground of a failed commercial development.

    There’s just lots of space available. Take your time, and be tough.

  29. 29
    Scotsman says:

    RE: David Losh @ 7

    LOL- that cracked me up.

  30. 30
    Scotsman says:

    RE: Kary L. Krismer @ 14

    Funny, that was my first thought too- go ahead and at least build the parking portion and earn some revenue.

  31. 31
    AMS says:

    RE: voight-kampff @ 26 – Maybe the industry norm of only having enough money lined up to dig the hole should change? This case is not unique. It’s happened in Bellevue, for example. Just dig and hope the money will arrive? What is this, stone soup?

  32. 32
    Haybaler says:

    RE: David Losh @ 28 – Regarding this part of David’s post..

    .”If you’re serious about being in business for an extended period of time, it’s my opinion, the closer in you get the better for you.”

    Location, Location, Location.

    I was speaking to a woman from Rochester, Wa yesterday about a large purchase of hay for her fledgling horse boarding business. She stated that she had invested in the construction of a 100ft by 200 ft riding arena in order to attract boarding tenants to her facility, and others, who would use it on a pay per use basis. …. She wondered why usage was so minimal because it is really nice. (the granite countertops of the equine world)

    I wondered what she had been thinking about the demand for a facility like that being so far away from population centers. If that facility were located here near Puyallup it would be utilized at all hours.

    The basic principle of Location being paramount is going to trump anybody’s daydream every time.

  33. 33
    mukoh says:

    RE: David Losh @ 27 – Dave I am definatly a guy with some money. I am not however big. As I don’t need to be. I have my steady six figures a year. I just happen to rotate in circles of friends that are way bigger then I ever want to be.

  34. 34

    By AMS @ 21:

    RE: Seattle Homes @ 17 – The construction and operating costs of an underground parking structure are quite high. I’d be a tough sell to suggest that building is a good idea just because there is a hole in the ground.

    Well clearly you wouldn’t do it as a plan from the beginning. It just seems though like a better stopping point so that you could continue later–sort of like was done in Bellevue a few years ago with one building (that was built higher at the time they stopped).

  35. 35

    By AMS @ 16:

    RE: Kary L. Krismer @ 15 – The sale value is also based on % rented too.

    Yes, but if you don’t plan on selling or refinancing in the next year, you could gamble. Also, it’s possible that a lower rent would prevent a refinance 1-3 years out if it had too much of an effect on value.

  36. 36
    Fran Tarkenton says:

    By AMS @ 25:

    It’s well-established that discussing prices over lunch is illegal.

    I disagree. When we colloquially talk price fixing, we refer to a violation of the Sherman Act. Under that Act, price fixing is illegal*, but signaling to competitors one’s intent, such as through a discussion where information is exchanged but no agreement is made, is legal conduct. Under the present circumstances, it would be legal at a lunch to go around the table and have every party say (1) the price he’s currently charging; (2) the price he hopes to charge; (3) his belief of where prices are headed; and (4) any other thoughts he wishes to share.

    *I’m not even sure that it’s per se illegal anymore. You may need combined market power to act illegally. The Supreme Court overturned /Dr. Miles/ a year or two back, substituting rule of reason analysis for per se analysis for analyzing vertical price restraints.

  37. 37

    By David Losh @ 28:

    If you’re serious about being in business for an extended period of time, it’s my opinion, the closer in you get the better for you.

    That’s sort of old-think, IMHO. One of the things still hurting the landlords downtown is they forced out a lot of their traditional clients during the dot-com boom, and those people discovered that there really was no reason to be downtown.

    Back when I was practicing, the bankruptcy court switched to electronic filing, so I could file and obtain any court pleading from anywhere in the world. After that, It seemed sort of silly to have an office right across the street from the courthouse.

    In that regard, I’ve never understood Microsoft’s fascination with Bellevue proper. Why does anything they do need to be in a downtown urban area?

  38. 38
    AMS says:

    RE: Fran Tarkenton @ 36 – I guess I really do need to carefully define what “discussing” means…

  39. 39
    Fran Tarkenton says:

    RE: AMS @ 38

    As long as you define “discussing” to mean “agreeing” then we’re in agreement.

  40. 40
  41. 41
    David Losh says:

    RE: Haybaler @ 32RE: Kary L. Krismer @ 37

    Haybaler at #32 answered what i was thinking.

  42. 42
    Nick P says:

    RE: mukoh @ 22 – Thanks that helps. It doesnt have everything but much more than I can find driving around.

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