Virgin on Business: The (Un)real Estate Boom
It’s coming, because this time is always the same as last time. Right?
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The term “see-through building” described not an architectural design style but the leasing status of downtown Seattle office buildings in the early 1990s, the result of a surge of speculative construction spurred by all the demand for space that was expected to arrive — and didn’t.
It’s been a while since anyone used that figure of speech or fretted about what it said about the underlying economy’s health. Maybe it’s time we should. The sight of construction cranes filling the skyline, the near daily announcements of proposed projects and companies on the hunt for tens of thousands of square feet to accommodate expansion and downtown Seattle office-space vacancy rates at half their recessionary levels make this, counterintuitively, an excellent time to consider what’s ahead for the commercial real estate industry and, by extension, the economy.
Which means we need to talk about the tech industry.
Every time this region has a boom in commercial real estate, an even more ominous phrase than “see-through buildings” emerges. That would be “this time, it’s different.” Every time this region has a commercial real estate bust — and it has had some doozies — the reassurances spring forth that “OK, sure, that time wasn’t different than the time before, but we’ve learned our lessons and next time, really, will be different.”
So, is this time different?
Reasons it’s different:
• Much of the current office-space demand in Seattle (and downtown Bellevue) is driven by tech. In the early 1990s, commercial real estate’s woes were related to a national recession and a Boeing slump; tech was something happening off in suburban low-rise office parks in the hinterlands of the Eastside.
• The buildup to the plunge in the early 2000s was, like now, tech driven, but it was a different kind of tech, featuring dot-com startups trying to grab footholds in e-commerce, or companies marketing to those startups. When most of the dot-coms went away, so did the demand for the space.
• The current building and leasing boom is driven by established companies — Amazon, Microsoft, Google, Facebook and Expedia, et al — with real business plans and revenues. Tech-space demand is being fueled not so much by the always-precarious retailing subsector as it is by cloud services, which has the potential to be more stable and enduring.
Observant readers will notice we’ve skipped over the most recent recession. That’s for two reasons. Tech not only wasn’t a driver of the downturn, it was barely a participant. And while commercial real estate took its lumps, it was residential real estate that generated the most headaches for developers and lenders.
Reasons it’s not:
• No one has repealed the law of the business cycle, not for commercial real estate, not for tech, not for anyone. The gaps between peak and trough may vary, the heights and depths may not be the same, the causes won’t always match up, but in the end, cycles gotta cycle.
• Tech, in particular, having enjoyed an extended run of success, is overdue for contraction, retrenchment or consolidation. It may come from a general recession that causes business and consumers to stop spending on new tech. Or it might be the result of the collapse of the advertising model so many ventures are still banking on, a development I've been predicting for years.
• Or it might be that tech companies decide they want to drop out of the bidding wars — a prediction we’re going to stick with in the belief that reality will eventually catch up.
So be vigilant for warning indicators of changing conditions and trend shifts, and know what to look for. Spotting a see-through building isn’t an indicator of what’s coming. It’s a sign of what’s already here.
Monthly columnist Bill Virgin is the founder and owner of Northwest Newsletter Group, which publishes Washington Manufacturing Alert and Pacific Northwest Rail News.