Tuesday, December 12, 2006

Office, commercial realty outlook 'great'

The region's office, industrial and commercial markets will expand in 2007, making it a good year to be a landlord in Seattle but a tough time to be a tenant, according to a major real estate brokerage.

"Overall, the forecast for '07 looks great," said Grubb & Ellis Senior Vice President Craig Hill. "The market is extremely strong."

Employment in the Puget Sound region is expected to grow by 2.5 percent in 2007 and by 2.3 percent in 2008 -- more than twice the projected national average. That means strong demand for office space.

Yet vacancy rates, which today are about 7 percent in downtown Bellevue and about 10 percent in downtown Seattle, will drop next year -- "perhaps even precipitously, and more in Seattle than in Bellevue," Hill said.

Not much new office space will come onto the market to satisfy the growing demand. Only one major building, Lincoln Square, is slated for completion on the Eastside, and no major building will be completed in Seattle.

Add that all up and it yields rental rates -- already $30 to $32 per square foot for the nicest buildings -- that will increase by between 7.5 percent and 10 percent next year, Hill said. Of course, as rents climb, concessions to tenants, such as improvement allowances, tend to decline.

"If you're a landlord, the office market is the place to be," Hill said.

Helping to ease the office-space drought, 2 million square feet of construction will get under way in Bellevue by the end of 2007. In Seattle, developers haven't made it clear how much construction will be under way in 2007, said Grubb & Ellis research analyst Nick Papa. But seven buildings are planned for availability in 2008 and 2009, he said.

In the industrial segment, the main concentration of local real estate -- located in the Kent Valley, including Renton, the Port of Tacoma and Fife -- next year will continue its current vacancy rate of 6.5 percent, said Brian Dennehy, a senior adviser at the brokerage.

Within the past 18 months, about 3 million square feet have been built or begun in the Kent Valley, intended for use by distribution facilities of more than 200,000 square feet.

That means "tenants seeking warehouse or distribution space will find a glut" to choose from, at rents flattening out to about 50 cents per foot, he said.

The Boeing Co.'s first 787, due out in late summer, may prompt subcontractors to relocate to industrial property north of Seattle, Dennehy said. But power shortages in one area of Snohomish County may slow further development.

In Sodo, Georgetown and other traditionally industrial areas of South Seattle, vacancy rates remain low, at 3.5 percent to 4 percent, as they have for the past 10 years. As retailers replace manufacturers, which move out because labor is so much cheaper elsewhere, land values are rising in those neighborhoods.

It's reaching $30 per square foot on First Avenue South and Fourth Avenue South -- unjustifiably high for distribution or manufacturing, Dennehy said.

Parking is getting tight, and many older buildings are being bought up by developers.

"There's a demand for other than straight industrial uses. It's going to be interesting to see what happens," he said.

Most recently, a partnership of Kauri Investments, American Life and Ariel Development bought the six-story Palmer Court building in Sodo, plus an adjacent 10,000-square-foot lot, from Vulcan Inc. for nearly $8.9 million. Kauri Chief Executive Kent Angier said plans call for putting the refurbished building's 57,000 square feet of office space and 10,000 feet of retail space on the market early next year.

In the commercial arena, sales of Puget Sound-area land and buildings to retailers are projected to rise 5.2 percent next year and 5.7 percent in 2008. More locally, Seattle's lack of developable land remains an obstacle to retailers seeking large commercial sites, said Senior Vice President Jane Lanford.

One major project she said is under way is a 600,000-square- foot retail center near Goodwill Industries at Rainier Avenue South and South Dearborn Street, built by Ravenhurst Development and TRF Pacific.

Most of the area's commercial development is occurring south of the city, with 800,000 square feet being built at Renton's The Landing; 400,000 square feet being added to Westfield Southcenter; the construction of Federal Way Crossings, a 250,000-square-foot shopping center across from Costco; and 80,000 square feet being added to the current Kent Station mall.

On the Eastside, Bellevue's Shops at The Bravern has added the first Neiman Marcus in Washington as its anchor tenant -- a clue to where one famously upscale store believes the megabucks are to be found.

"Based on demographic profiling, obviously there's more money on the Eastside than in Seattle these days, and that's not expected to change," Lanford said.

Low vacancies, land prices and construction costs are pushing retail rents up to $45 or more per square foot, she said.

In a fourth arena -- investment -- the real estate market could face higher interest rates next year, Grubb & Ellis said. Office buildings may be among the most popular investments, because of strong job growth and rising rental rates, Hill said.

P-I reporter Dan Richman can be reached at 206-448-8032 or danrichman@seattlepi.com.