Commercial real-estate market suffered in 2009; more of the same forecast for 2010
By Eric Pryne
Seattle Times business reporter
In 2007, developers excavated a deep hole in downtown Seattle at Second Avenue and Pine Street for the foundation of a 23-story luxury hotel and condo tower.
They filled the hole in 2009.
That pretty much captures the kind of year it's been for commercial real estate in the Seattle area.
The development pipeline dried up. A few projects were halted midconstruction.
Office and industrial vacancy rates soared. Rents fell. Condo developers, desperate for sales, resorted to auctions and big price cuts to unload units. Banks foreclosed on some properties.
And 2010 won't be any better, according to year-end forecasts by developers, brokers and other industry insiders.
"2010 in my world is going to be rough," Bart Brynestad, who heads the Seattle office of industrial developer Panattoni Development, told one recent industry gathering.
"I think we have just seen the tip of the iceberg on what's coming," said Tom Parsons, senior vice president of developer Opus Northwest.
The tip was sobering enough. During 2009:
• Developers delivered 2.4 million square feet of new office buildings in greater downtown Seattle — the equivalent of more than 1 ½ Columbia Centers. At last count, more than 90 percent of it remained unleased.
• Michael R. Mastro, for decades one of the region's most prolific real-estate developers and lenders, was forced into what probably is Western Washington's biggest, most complex bankruptcy.
• The mostly empty, 42-story tower known until recently as the WaMu Center sold for one-third what it cost to build three years ago.
• Confronted with slow sales, Vulcan and Schnitzer West, among the region's real-estate giants, each converted a nearly finished center-city condo project to apartments.
• Even the Four Seasons Private Residences — ultra-luxury downtown Seattle condos intended for the recession-proof rich — dropped its prices in hopes of jump-starting stagnant sales.
All this happened in what was supposed to be the nation's top real-estate investment market. That's where the Urban Land Institute, a growth think tank, ranked Seattle a year ago.
For 2010, the institute dropped the region to eighth place, still relatively high. But that's more a reflection of the greater weakness of other markets than the strength of this one.
And none of the other 50 top markets fell further in the institute's scoring over the past year. Seattle has lost its edge, said Jonathan Miller, the report's author, because of Washington Mutual's collapse, layoffs at Microsoft and Boeing, and an overbuilt office sector.
More space on way
The last of the big unleased and unsold development projects conceived during the real-estate boom will come to market next year. They include The Bravern and Escala condominium towers in downtown Bellevue and downtown Seattle, respectively, and 505 1st Ave. S., an office building in Pioneer Square.
Those projects will increase supply further when demand shows no signs of a resurgence. Downtown Seattle's mostly empty new office buildings could take three or four years to fill, Jim Neal, a principal with Talon Private Capital, told one recent industry forum.
Brokers expect office vacancies will keep rising in 2010 while rents continue to drop. Tenants are demanding, and receiving, such favorable deals that some landlords with deep pockets may soon conclude it makes more sense to keep their buildings empty until the market recovers, said Anne Chamberlin, a principal with brokerage Pacific Real Estate Partners.
Urban high-rise condo prices also probably have further to fall, said Seattle land-use economist Matthew Gardner, although prices at suburban, midrise complexes could stabilize soon.
Industrial vacancies will keep climbing until at least midyear, said Panattoni's Brynestad: Demand for warehouse space is down because local ports are handling fewer imported goods.
Not surprisingly, few new projects of any kind broke ground in 2009. Pine Street Group had planned to start a 650-unit apartment complex in downtown Seattle at Sixth Avenue and Lenora Street. At the insistence of its equity partner, Pine Street recently put the project on hold for one to three years.
Oversupply of rentals
Insiders expect even fewer new starts in 2010. More than 5,000 new apartments were completed in King, Snohomish and Pierce counties this year, Gardner said, "so there's going to be an oversupply."
And when the market does recover, he added, landlords will meet any demand for new condos by converting apartment buildings. "We are not building any more condos. Period."
Few properties changed hands in 2009. Only five office transactions of more than $20 million have been recorded this year, Chamberlin said, down from 117 in 2007.
But that could change dramatically, locally and nationally, as more lenders take back financially distressed properties and put them up for sale at bargain-basement prices, the Urban Land Institute and others say.
Jim DeLisle, a University of Washington professor of real-estate studies, said he fears a 40 to 60 percent drop in commercial real-estate values from their 2007 peaks.
The threat of a bloodbath eased this fall with new federal guidelines that give banks more flexibility to extend loans, said broker Craig Kinzer of Kinzer Real Estate Services. "Prices will stabilize and not free-fall," he said in an e-mail.
The new guidelines already are having an impact, Kinzer said: He points to recent construction-loan extensions for Olive 8, a new downtown Seattle high-rise hotel and condo project plagued by slow sales, and 7th & Madison, a vacant office building completed this year.
Still, the big picture is less than rosy. Gardner, the economist, said most of his work a few years ago was for developers exploring the feasibility of potential projects.
Now, he said, his clients are mostly lawyers and banks, looking for ways to salvage financially troubled properties: "We haven't done any feasibility work in a year."
Commercial real estate won't recover until after the rest of the economy does, insiders agree. "We need jobs to get this thing moving again," said Opus Northwest's Parsons.
King and Snohomish counties have lost nearly 100,000 jobs since employment peaked in early 2008. It would take at least 36,000 new ones just to fill 90 percent of Seattle's vacant office space, Parsons estimates — and the city accounts for only half the region's vacant space.
Gardner said Seattle could start adding jobs again in mid-2010. The worst of the recession is over, he maintains.
But he doesn't expect commercial real estate will return to anything approaching normal until 2014.
The outlook has dimmed considerably since early 2008, when the recession hadn't hit Seattle hard yet. Many insisted then that Seattle's real-estate market would piggyback on a strong local economy and escape the downturn relatively unscathed.
"About a year and a half ago, we thought we were different," DeLisle told one recent forum. "Nobody is really different."
Eric Pryne: 206-464-2231 or epryne@seattletimes.com
Real Estate | Commercial real-estate market suffered in 2009; more of the same forecast for 2010 | Seattle Times Newspaper (28 December 2009)
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