Office Overflow

September 18, 2008

By Jeff Bond

Bruce Asper is hoping the 901 Fifth Avenue Building downtown will be in the sweet spot of Seattles current office space market.

Aspers firm, Beverly Hills-based Kennedy Wilson, has spent about $35 million refurbishing the 570,000 square-foot building, including turning the property into a silver LEED-certified green office tower.

The upgrades should give the 65-percent vacant building an edge over many of the other properties in the downtown area that will soon be competing for tenants as a flood of new office space is anticipated to hit the market in the next two years.

There will be millions ofsquare feet coming online between 2009 and 2011, Asper says. The question will be Can the market handle that much new office space?

According to the real estate brokerage company Grubb & Ellis, nearly 2.9 million square feet of office space were under construction in downtown Seattle during the second quarter of 2008, but only 6 percent of the new space has been pre-leased.

The gush of new square footage may force vacancy rates to jump from current levels of about 8.9 percent. In turn, rental rates, which saw major increases in 2007, are expected to begin falling in 2009.

The slowing economy is also adding to the office space supply by forcing some of Seattles corporate titans to cut back. Washington Mutual has begun vacating some of its offices in the WaMu Tower and is reportedly trying to sublease 85,000 square feet of the space. Grubb & Ellis wrote in its second-quarter report that Starbucks may try to find companies to sublease a majority of the 200,000-square-foot 505 First Avenue building in Pioneer Square. The new building, which wont be completed until the middle of 2009, was leased to the coffee company before its recent financial troubles and consolidation moves.

Another wild card in the downtown area is Safeco Corp., which was acquired earlier this year by Boston-based Liberty Mutual. Safeco currently leases more than 400,000 square feet of space in various buildings in the downtown area. Grubb & Ellis brain trust predicts that the insurer might become the latest local blue-chip company to sublease some of its office space, as parent company Liberty Mutual looks for ways to save money.

While all this office space is good for businesses looking to expand or move into new digs, it will cause major problems for the developers building these new towers. One main issue is that these pricey new buildings will require higher rental fees to make up for ever-increasing construction costs.

Those higher fees are why Asper says his 901 Fifth Avenue Building is in a good position. He says established properties, such as his, will lease for less than $35 a square foot, while the new buildings will have to charge rates beginning at $44 a square foot.
We really believe we are in good shape, Asper says. I expect the real-estate market in Seattle to be flat for the next few years, with older buildings getting leased and the newer buildings having trouble.