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April 16, 2015

Amazon's first new office tower will include 10 more restaurants

Daily Journal of Commerce

Nat Levy

No matter where you look, Seattle's real estate market is hot. Virtually everyone lists it among the top five or 10 U.S. cities.

So the Washington NAIOP chapter held a brokers' panel Wednesday to answer the burning question: "Is the sky the limit?"

Experts in retail, office and industrial real estate offered their views on where we are now and where we are headed. Here's a look at each segment:

More restaurants

When Amazon opens its first new tower in the Denny Triangle later this year, it will add more than 1 million square feet of office space and 10 new restaurants to the neighborhood.

Maria Royer of Real Retail, a panelist at the NAIOP event, said this is part of an overall strategy to use the street-level space in and around Amazon buildings to create a "district" that attracts workers and pedestrians in both South Lake Union and the Denny Triangle.

Real Retail works with Amazon on its retail space in South Lake Union and the Denny Triangle.

Many retailers have been hurt by the ascent of Amazon. Those that continue to survive and thrive must provide more than a typical shopping experience for customers. This can involve innovative design, or combining unique retailers such as those found at Pike Place Market. The idea is to give people a reason to go to a store rather than buy online.

"If you don't offer an experience, then you just aren't going to survive," Royer said.

Seattle is quickly becoming one of the top retail markets in the country, she said. Stores here are seeing high sales per square foot, and new ones are opening every day.

Many major retailers - such as Apple and Nordstrom - find their Seattle stores are among their top five performers.

Land and rents still are cheaper here than in markets like New York City and San Francisco, so retailers feel more comfortable trying out new concepts in Seattle.

Multi-story industrial?

In the last 25 years, the Seattle area's industrial property has shifted from being controlled by a few local and national firms to one dominated mostly by institutional investors, said Matt Wood of Kidder Mathews, another panelist at the event.

Today 65 percent of the industrial landlords are institutional. In 1990, the figure was 15 percent. There were only a couple of national developers in the 1990s, and today there are a lot more.

Vacancy is at an all-time low in King and Snohomish counties, Wood said. Pierce has a little higher vacancy because so many projects are being built there. All three counties are seeing projects starting construction before any preleasing.

As land becomes harder to find, Wood expects to see more multi-story industrial buildings. These will go beyond some distribution space on one floor with a mezzanine or office space on top.

Wood spoke of projects that are basically two industrial buildings on top of each other, with ramps to access the higher levels. These are becoming popular in places like Singapore and Japan, but haven't caught on yet in Seattle.

"It's very expensive, but it makes sense when you have very little land and very expensive land," Wood said.

Wood said one national developer, who has a 13-acre site under contract along Marginal Way in south Seattle, is considering a multi-story industrial building.

He did not name the developer, but permit records show that a pair of two-story industrial buildings are planned at 6050 E. Marginal Way S. An entity that shares an address with the San Francisco office of the industrial developer Prologis is listed in permit records as the financially responsible party.

The records show one 331,212-square-foot building and a second 209,347-square-foot building, as well as parking for 332 vehicles.

Online commerce is the big driver in the industrial market, Wood said. Amazon has built distribution centers all over the country to speed up its delivery time, and now other retailers are starting to follow suit.

Wood said Walmart is looking for a million square feet of distribution space close to the city. Usually, Walmart takes smaller industrial spaces far from metropolitan areas, but the need to compete with Amazon and other online merchants has changed Walmart's approach.

A blip for Bellevue

Three office projects are under construction right now in downtown Bellevue, and they represent a 21.5 increase in the supply of office space in the neighborhood, said Jones Lang LaSalle's Steve Schwartz, another NAIOP panelist. So far, only about five percent of that space has been leased.

There are rumors that Microsoft might offer 150,000 square feet downtown for sublease. When you add Expedia's departure for Seattle in a couple of years, that's a lot of office space for downtown Bellevue over the next few years.

Despite all these changes, Schwartz said downtown Bellevue will stay strong. Today the vacancy rate is 5.5 percent, compared to 10.1 percent in Seattle. There will be some increased vacancy, and rents could stagnate for a while, but Schwartz said he expects a quick rebound.

"Other than perhaps a short term blip and near term softness, (Bellevue's) always been a big deal town, and all the underlying fundamentals are strong: housing, labor force, retail and quality of life," Schwartz said. "We've got a good story to tell there."

Patrick Callahan, CEO of Urban Renaissance Group and Touchstone, moderated the panel. He said Bellevue has faced adversity before. In 2003, the vacancy rate downtown was close to 25 percent. But by 2006, the city rebounded to become one of the hottest office markets on the West Coast.

Seattle is booming now. Rents for Class A office space in Seattle increased 15 percent in the last year, compared to 1.1 percent in downtown Bellevue, Schwartz said. New construction in Seattle represents a 16 percent increase in supply, but half of that is already preleased.

Parker Ferguson of Flinn Ferguson said there are a lot of tenants still looking for space. He counts about seven to eight million square feet of demand from tenants, meaning companies that have spoken with listing brokers and toured spaces. Nearly two thirds of these active tenants are tech companies, Ferguson said.

These companies ask a lot of their buildings. It wasn't long ago that the main considerations were price and parking. Today, tenants want to be near good restaurants and coffee shops; they want to be in hot neighborhoods; and they want bike parking, showers and gyms in their building.

© 2015 Seattle Daily Journal of Commerce. All rights reserved.

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