The Commercial Real Estate Crash

It once seemed unstoppable. Now, the Seattle-area commercial office space market is headed for a rough period of adjustment. But while many developers and investors are feeling the pain, others see plenty of new opportunities.

The vacancy rate, which was already at 18.5 percent in Seattle's central business district at the end of the third quarter of 2009, according to Cushman & Wakefield, could climb to anywhere from 20 percent to 30 percent, brokers now say.

Bellevue's central business district is in slightly better shape than Seattle's, with an overall vacancy rate in the third quarter of last year at 14.8 percent, thanks to greater pre-lease commitments for new buildings and Microsoft's expanded presence there, according to Matthew Gardner, principal of Gardner Economics LLC in Seattle. Still, those numbers are high following the long run during which vacancy rates in many markets in the region fell below 10 percent.

And the market is headed for tougher times. Amber Waltner, a research associate with Cushman & Wakefield, expects rising vacancy rates to push average market rents down by another 4 percent by the end of the year.

"The current glut of office space in the Seattle market is due primarily to two factors: overbuilding and the bankruptcy of Washington Mutual," says Sean Barnes, senior vice president of Seattle-based Jones Lang LaSalle Americas Inc. In 2009, more than 1.1 million square feet of existing office space hit the market in large part due to the collapse of Washington Mutual. In addition, another 2.3 million square feet of office space was added to inventory through new construction with planned delivery in 2009 and 2010.

Craig Kinzer, principal of Kinzer Real Estate Services in Seattle, says many companies have built new headquarters in the past couple of years, which opens up space they were previously leasing, "so you have excess supply, not just from developers building, but from entities that are putting out space themselves."

In addition, says Dan Lowen, president of Seattle-based Caerus Realty Capital LLC, most companies have cut back staff as a result of the recession, noting that these businesses, in turn, are locked into long-term leases of up to five to seven years. Some of those firms are attempting to sublease excess space right away, but Lowen says it generally takes time for the space to come back on the market as a vacancy until the tenant signs a new lease for less space. Layer on to this situation the fact that Amazon.com

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