Downtown Bellevue prepares for another growth spurt

| FROM THE PRINT EDITION |
 
 

Get ready for the new downtown Bellevue. The cool downtown Bellevue. The downtown Bellevue that doesn’t need to define itself as a subset of its across-the-lake big sister, Seattle.
Since the post-war building boom began, downtown Bellevue has been a city designed for motorists. With its wide streets, long city blocks and spacious parking garages, it’s easy to navigate by car — and there’s almost always a parking spot available.
That comfortable accessibility, along with excellent schools and a relative lack of crime and panhandling, have made Bellevue an attractive place to live. But an important ingredient has been missing. The young talent that the region’s tech companies must attract to remain competitive prefers a vibrant downtown filled with activities and entertainment options.
That’s finally beginning to happen. A growing number of condo and apartment towers downtown are steadily increasing the density of the core area. And the Eastside’s biggest city is about to see another wave of construction that will add thousands more workers and residents to its central business district, filling the streets with people looking for places to live, work and play within walking distance.
A city that was created as a suburb of Seattle is about to grow up and emerge full blown with its own separate identity, creating two poles of growth across Lake Washington that will make it a kind of Twin Cities.
Already, nearly two dozen commercial and residential development projects are in the works for downtown Bellevue, according to data provided by the City of Bellevue and CBRE, an international real estate services firm with five offices in the Puget Sound region. The pending wave of development rivals the 30 projects in the pipeline during the previous building boom eight years ago. 
“A lot of cities take 100 years to build. We’ve been at this 35 years and have got a pretty good ‘wow!’ going,” says David Schooler, president of Sterling Realty Organization. The Bellevue real estate firm, better known as SRO, owns and manages more than a million square feet of commercial property in Washington, Oregon and Colorado.
In recent years, the number of people living in downtown Bellevue has been climbing steadily. Since 2000, the downtown population has quadrupled and now stands at about 10,500 residents. The increasing youth and diversity of these new residents is striking. In the decade between the 2000 and 2010 censuses, the median age of downtown Bellevue residents dropped from 57 to 34. More than one third of them are either Asian Americans or foreign workers from Asia. 

The increasing urbanization is set to accelerate. Construction of 863 more residential units and a 376-room Marriott hotel is already underway in downtown Bellevue, with plans for an additional 1,751 apartments and condominiums in the works. Three other proposed hotels could add 552 more guest rooms to the city’s stock.
For its part, Sterling recently announced plans to grant a long-term ground lease of 5.46 acres in the central business district to the Rockefeller Group. The New York-based firm plans a phased development — its first in the Northwest — of 2.4 million square feet of commercial space that, over time, will grow to include three office towers with retail shops and public areas. 
A January report from the Broderick Group, a local real estate services firm with offices in Bellevue and Seattle, predicts 10 proposed projects will add 3.25 million square feet of new office space to the Eastside during the next four years. Five of those 10 office developments are to be situated in Bellevue. If the Broderick Group’s projection proves accurate, the Bellevue submarket will absorb nearly 80 percent of that gain, or 2.55 million square feet of office space — the lion’s share in downtown.
Driving the push: shrinking vacancy rates for office space. Roughly 94 percent of the Class A office space in Bellevue’s central business district is leased, making it one of the tightest markets in the nation. There are no big blocks of 50,000 square feet or larger available to accommodate a major tenant wanting to expand or open offices downtown.
Low supply is driving up rents to where new development once again makes economic sense. The Broderick Group expects average gross rental rates on the Eastside to climb to $38.38 per square foot in 2017, up from $29.63 last year.
Local real estate expert Kip Spencer estimates about two million square feet of demand from tenants seeking office space in and around downtown Bellevue.  One undisclosed tenant wants 250,000 square feet, while Bellevue-based Intellectual Ventures is looking for more than 80,000 square feet, Spencer says.
Employers increasingly view office location as a key factor in recruiting top talent. With Gen X and Millennial workers preferring the convenience and buzz of city living, the growing urbanization of downtown Bellevue is helping landlords siphon tenants from more suburban office projects and be more competitive with Seattle properties.
The city’s well-regarded schools are another advantage downtown Bellevue employers can leverage to recruit workers.  Bellevue School District is seeking voter approval for a $450 million construction bond to further improve its schools.
Kemper Freeman Jr. gets a lot of the credit for downtown’s emergence as an urban neighborhood. Once a suburban bedroom community whose core largely shut down after 6 p.m., the city developed a nightlife when Freeman’s Kemper Development Company expanded its Bellevue Collection shopping/residential/office complex in 2005 to include Lincoln Square, featuring office space, high-rise condos, a 16-screen cinema and several new dining options and entertainment venues. 
To cater to Bellevue’s increasingly diverse population, Kemper Development recently recruited Din Tai Fung, a famous Taiwanese dumpling house, and MōkSHA, an Indian restaurant. These days, roving packs of jeans-clad tech workers cruise the streets at noontime, while the once deserted sidewalks near Kemper’s 4 million-square-foot Bellevue Collection complex are bustling well into the evening because a growing number of residents are choosing to live downtown. 
Kemper Development continues to tweak the Bellevue Collection with plans to expand both Lincoln Square and its landmark regional shopping mall, Bellevue Square (see chart at right). The Lincoln Square expnsion will add a residential/hotel tower and an office tower. Bellevue Square, which essentially has defined downtown Bellevue for half a century and, for many shoppers, remains its focal point, will add a hotel tower, a residential tower and a new  retail podium. Both projects are expected to add dramatically to an urban feeling of density and street-level vitality. 

To be sure, there remains some uncertainty in the outlook for Bellevue. Some of these projects may not be built for many years. Microsoft, which took much of the office space during the recent development cycle, has been notably quiet about its future needs. Instead of continuing to expand, some wonder if  Microsoft’s new CEO, Satya Nadella, could choose to shed some assets, putting some of its Bellevue space back on the market. 
“Microsoft, by taking new development in the last cycle, saved us from a major downturn on the Eastside. Their growth or lack thereof is a big question mark,” says Steve Schwartz, managing director in the Bellevue office of the global real estate services firm Jones Lang LaSalle, who wonders where the growth will come from. “The big question all the stakeholders have relative to new development downtown is, ‘Where’s the beef?’”
Meanwhile the largest prospective office tenant looking for space, Expedia, “has been hanging out there for so long that they technically are in the market but I’m not sure how seriously,” Spencer says. The online travel booking service has been rumored to need anywhere from 250,000 square feet to as much as 500,000 square feet of office space, according to Spencer.
Tech companies typically aren’t big on preleasing space in new buildings, partly because they grow so fast and new high-rises can take two to three years to construct. 
And lenders remain cautious, wanting to see a significant amount of space spoken for before they’ll write developers a check. 

Some developers may still be willing to gamble that if they start building on a speculative basis, the pent-up demand for space is strong enough that the tenants will come.
“In the last cycle, Microsoft saved the day. But you also have to understand that Microsoft has never preleased a building, ever,” says Mike Schreck, a senior vice president in the Bellevue office of the real estate services firm Colliers International. “A lot of people do not quite understand that fact. Do they have a demand right now? Who knows? Could it happen shortly? Sure. They occupy four buildings in downtown Bellevue and they love the location.”
Even as companies hire more workers, these firms allocate far less space for workers. Ten years ago, businesses typically figured 250 square feet for each employee. That number has been chopped to 150 square feet or less, with some firms allotting just 100 square feet. A case in point: Hipcricket. The mobile advertising software company recently relocated its 120 employees from a 20,000-square-foot space in Kirkland’s Carillon Point to a 13,500-square-foot space in the 110 Atrium Building in downtown Bellevue, even though the company is on a hiring spree.
Hipcricket’s new location is substantially smaller, but the space is largely open with only three private offices. The floor plan allows employees to collaborate more easily, says Philippe Poutonnet, vice president of marketing. “Everybody knows more about what goes on in the company.” 
While a weaker Microsoft and less office space per worker could slow Bellevue’s growth, the long-term trend toward dense urban development is well in place. Even as Hipcricket puts more employees in smaller spaces, it hopes to attract new employees as the downtown area adds more restaurants, bars and entertainment venues. Indeed, employment across the Puget Sound region is now back to its 2008 level, and economist Dick Conway, whose firm publishes the Puget Sound Economic Forecaster, expects  280,000 office jobs will be added in the Puget Sound region by 2023, with roughly 200,000 created in King County. Figuring about 150 square feet per worker, that prediction translates to a need for 30 million additional square feet of office space, or roughly three million square feet of space a year during the next 10 years.
The broderick group predicts three office projects totaling 680,000 square feet will be delivered to the Eastside market in 2016, four office projects delivering 1.6 million square feet of space in 2017 and three more office projects totaling 956,800 square feet in 2018.
As the economy gets stronger, tenant demand is likely to increase, with pressure coming from such expanding sectors as the gaming industry, where Bellevue companies like Valve are growing to respond to global need. Pam Hirsch, senior investment director for Schnitzer West, says there is also pent-up desire for new space from smaller Bellevue firms that chose not to relocate during the recession. She anticipates seeing more demand from tenants needing 50,000 to 100,000 square feet of office space. Schnitzer expects to start construction of its own proposed 360,000-square-foot 415 Office Building in the second half of this year.
The development that could do more than any other to expand and strengthen Bellevue’s downtown as a vibrant urban center is Wright Runstad & Co.’s Spring District. The mixed-use development promises to create a new neighborhood on 36 acres of largely industrial property that lies along the proposed light rail line that will connect the Eastside to Seattle by 2023. What’s special about the plan is that it is being explicitly designed to create the  pedestrian-friendly urban feel that young workers favor, with local brewpubs, narrow streets, sidewalk cafés and parks. 
The project, a key link in the redevelopment of the nearby Bel-Red Corridor connecting downtown Bellevue to Redmond, substantially expands Bellevue’s urban core. Wright Runstad President Greg Johnson says that in transforming the industrial area into a mixed-use development, he saw the potential to create an authentic neighborhood featuring reuse of materials and sustainability and ready access to mass transit. He’s confident there will be “an overarching demand for office space” as companies hire more workers, despite the “structural shift to a smaller workplace.”
Wright Runstad has already applied for permits to put up two office buildings in the Spring District. Three other proposed projects on the Bel-Red Corridor are also moving forward, which would reinforce Bellevue’s attraction as an urban center. When completed in 2023, the new light rail line will make it easier to travel without a car within Bellevue and to Seattle. 
“Both cities have a lot to offer,” says Mike Brennan, Bellevue’s director of development services, “but what they have to offer in some important ways is very different.”
Once Seattle and Bellevue are better connected by light rail, the two cities combined could create an even more powerful center for ideas and innovation. In the meantime, Bellevue’s appeal will get a big boost when the Tateuchi Center, a 2,047-seat performance hall, opens downtown. The center could break ground as soon as the spring of 2015. Center officials are talking to Seattle arts organization such as the Seattle Symphony Orchestra and Pacific Northwest Ballet about bringing performances to  Eastside patrons who don’t want to fight traffic to attend performances in Seattle. 
 City planners are also taking advantage of a slate of proposed projects to make the city’s 410-acre business district more walkable. Planners are calling for more cross-block and midblock connections within Bellevue’s huge superblocks, says Brennan.
Wright Runstad’s Johnson believes Bellevue is entering a “virtuous cycle” in the coming years. “The streets are more lively and that makes it more attractive to people to live there,” he asserts. “The restaurants are getting a little better. I think Bellevue will continue on its positive path.” 

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