New lease on life for "Class of 2009" downtown office buildings
Seattle Times business reporter
Call them the Class of 2009. That's when developers finished these 10 office buildings in greater downtown Seattle, give or take a few months.
Together they added 3 million square feet — the equivalent of two Columbia Centers — to the downtown office market, the biggest one-time bump in two decades.
Their timing couldn't have been worse.
Begun during the boom, the buildings came to market after the bust. None had lined up tenants before breaking ground. Once completed, most sat largely empty for months — "see-through buildings," insiders called them.
Along with Washington Mutual's demise, they helped push Seattle's vacancy rate to record highs.
Now it's been a year since the last of the 10 was completed. For most — and for the downtown market as a whole — the worst seems to be over.
More than half the space in the new buildings has been leased or otherwise spoken for. Some big tenants — Amazon.com, data-storage firm Isilon Systems, The Polyclinic — are moving in because they need room to grow, a positive sign for the Seattle economy.
"Those were nice surprises for our market," said Oscar Oliveira, managing director at brokerage Broderick Group. "They reflect well on Seattle's [economic] fundamentals."
The new tenants also helped ease the pain the recession inflicted on the new buildings' owners.
The leases landlords are signing now are for much less rent than they anticipated when they arranged financing back in 2006 and 2007. Some are losing money, said James Keating, a senior vice president with brokerage Jones Lang LaSalle, "but you lose less with a full building than you do with an empty building."
The projects are worth much less today than what they cost to build. One example: Prudential Real Estate Investors and Seattle developer Touchstone took out a $184 million construction loan in 2007 to pay for 28-story West 8th.
The county assessor now values the tower at $103 million.
For some developers the losses so far are only on paper. For others, they're very real.
Faced with foreclosure, the owners of two empty buildings, 7th & Madison and 1100 Eastlake, agreed to turn the projects over to lenders late last year. Both have since been sold, and filled. But public records suggest the original investors lost a total of at least $40 million.
This turmoil isn't unprecedented. In 1989 developers completed four high-rises downtown, adding a whopping 4 million square feet to the market.
Supply overwhelmed demand. The vacancy rate climbed. Rents plummeted. One developer, threatened with foreclosure, sold the 62-story skyscraper now known as the Seattle Municipal Tower to the city for about 60 percent of what it cost to build.
So what's happened with the buildings in the Class of 2009 "is just history repeating itself," said Keating, a veteran tenant representative.
The new buildings that were half-empty 20 years ago eventually filled, just as the latest crop of new buildings is filling up now — some more rapidly than others. Keating, Oliveira and other insiders say it's evidence the tide is beginning to turn.
"We're a long way from a landlords' market," Oliveira said, "but there's something to be said for the momentum we're starting to see" with tenants taking large blocs of space in the new buildings.
The recession took developers by surprise, said Douglas Howe, a Touchstone principal: "We went through an 18- to 24-month freeze."
The market isn't overbuilt, he insists; West 8th and its 2009 classmates should be leased up in a year or so.
Still, Howe added, "It's going to be quite a while before any lender or investor builds spec [speculative] office again."
Here's a status report on the new buildings:
1100 Eastlake: Built by a partnership led by veteran local developer Bruce Blume, the 177,000-square-foot, five-story building in South Lake Union was almost entirely empty when construction lender Key Bank moved to foreclose on it last October.
That was averted shortly before Christmas, when Blume handed the building over to the Fred Hutchinson Cancer Research Center, whose campus is across the street. The center, looking to expand, had acquired Key Bank's note on the property for $36 million — $10 million less than the bank had invested in the building.
"The Hutch" plans to move in by June 2012.
2201 Westlake: The first of the new buildings to fill up, Vulcan Real Estate's 300,000-square-foot, 12-story project has just two office tenants. Global health nonprofit PATH leased about one-third of the building in 2009, moving from a smaller building in Ballard. Last year, fast-growing Amazon.com took the rest.
Brokers say location is the secret to 2201's success. PATH wanted to be in South Lake Union, a hub for health-related enterprises. And Amazon wanted space close to the 1.7-million-square-foot headquarters campus Vulcan is building for it just blocks away.
The online retailer's appetite for real estate still may not be sated. Rumors abound that it may lease more space in more new buildings, or keep some of the 800,000 square feet in older buildings in and around downtown that it is slated to give back when its South Lake Union campus is finished.
635 and 645 Elliott: Is Dendreon, Seattle's hottest biotech, in or out? Neither the company nor developer Martin Selig will say.
Dendreon said last spring that it had signed a letter of intent to lease all of Selig's 191,000-square-foot 635 Elliott for 15 years. City permit records suggest it also could take up to half of 140,000-square-foot 645 Elliott as well.
But, eight months later, that lease still hasn't been signed. The hangup, brokers say, is finding financing to finish the waterfront buildings to Dendreon's specifications, always more expensive for a biotech tenant. Dendreon is looking at space elsewhere, brokers say.
Selig has signed one tenant at 645 Elliott: radio and billboard giant Clear Channel Communications occupies one of the four floors.
West Eighth: Russell Investments seriously considered the 499,000-square-foot tower at Eighth Avenue and Westlake Avenue for its new headquarters before selecting the former WaMu Center in late 2009.
Today about one-third of West 8th is leased. Its largest tenant: the Casey Family Foundation, which has taken 73,000 square feet, about 30 percent more space than it leased at its former home in South Lake Union.
While courting tenants, Prudential also refinanced West 8th's debt last summer.
1918 Eighth: The largest building in the Class of 2009, it's also one of the emptiest. The 36-story tower at Eighth Avenue and Virginia Street is about 20 percent leased, with financial-services firms dominating its tenant roster.
But developer Schnitzer West has begun courting prospective tenants more aggressively lately, brokers say.
County records indicate that last year Schnitzer and Bank of America modified the $220 million loan Schnitzer took out in 2008 to build the 669,000-square-foot tower. Just how that affects the building's financing is unclear.
The county assessor values the building at $131 million.
818 Stewart: 1918 Eighth's little brother, this 14-story Schnitzer West building at Ninth Avenue and Stewart Street was the first of the new office projects to open, in late 2008. That helps explain why the 238,000-square-foot building now is about 90 percent leased, brokers say — Schnitzer was able to sign some tenants before the market collapsed.
The building's largest tenant, occupying five floors, is global information-technology consulting firm Avanade.
Seventh & Madison: The empty, nine-story building sat forlornly above Interstate 5 for more than a year before developer Opus Northwest handed it over to construction lender U.S. Bank last fall to head off foreclosure.
Two months later the bank sold it to HAL Real Estate Investments for $31 million — about half of what Opus had borrowed.
HAL came with a tenant in tow for the entire 211,000-square-foot project: The Polyclinic, a multispecialty medical clinic based on First Hill that wanted room to consolidate and expand. Spokeswoman Tracy Corgiat said the clinic will occupy about 100,000 more square feet, net, once it moves into the new building next year.
The deal is contingent on winning city approval to convert 7th & Madison from office to medical use. But some brokers say office always was a hard sell at this location, on the First Hill side of I-5.
Fifth & Yesler: A home run. That's what brokers say Selig hit last year when he got the federal government to lease most of his 17-story, 275,000-square-foot tower for 10 years. Agencies are scheduled to start moving in in April.
Selig had to fight to get them. He wanted the regional office of the Environmental Protection Agency — a big lease — and filed an administrative appeal when the government awarded it to another building in 2009.
Ultimately, the EPA stayed put. But after the appeal had played out the General Services Administration, the government's real-estate arm, decided Selig's offer, too, was "advantageous to the government," a spokesman said.
505 First Ave. S.: Owner Starbucks embarked on construction in 2007 to accommodate its own planned expansion — until it started shrinking. The coffee giant put the unfinished, 286,000-square-foot project up for sale or lease in 2008.
The Pioneer Square building was the last member of the Class of 2009 to be completed. Just one of its seven floors had been leased until earlier this month, when fast-growing Isilon Systems announced it was taking 140,000 square feet — half the building — for 10 years, with options for still more space. The company said it plans to increase local employment from 300 to 500 this year. Its new space is 60 percent larger than its former home on the downtown waterfront.
Starbucks wouldn't say whether it plans to sell the building or keep it.
Eric Pryne: 206-464-2231 or firstname.lastname@example.org