What if they built a skyscraper and no one came?

What if they built a skyscraper and no one came?

  • 04 Nov Off
Original article appeared in the Puget Sound Business Journal by:  Marc Stiles, Staff Writer


Despite its gloomy weather, Seattle’s outlook can be downright sunny. Among the most optimistic bunch are the office developers.

Spurred by some of the nation’s strongest job growth and enabled by investors eager to get a piece of Seattle, developers are building 17 office buildings across the region totaling 6.3 million square feet. That equals 10 percent of the existing best-in-class space, and doesn’t include a dozen other proposed projects with millions more square feet.


Amazon already has spoken for much of the space under construction, but vast amounts remain unleased.

This surge of skyscrapers without tenants sets up the specter of another bubble bursting. This risk “is the big elephant in the room,” Mitch Roschelle, who leads the national real estate practice for financial services firm PwC, said in Seattle this week.

Whether that elephant will crush the Seattle-area office market provokes an intense debate that is shaping the high-stakes decisions developers must soon make as billions of dollars of additional steel and glass await a final go-ahead.

The bears in the debate point to the foreign capital flooding into Seattle real estate as a bigger driver of development than tenant demand. At least one project under construction in downtown Seattle, the 43-story Mark, is being funded with overseas money. Then there’s the prospect that the world economy is weakening and that local job growth – the foundation of all real estate – is slowing down and projected to cool off even more.

The optimists point to exceptionally strong demand among tenants, rental rates that have climbed nearly 10 percent for top-shelf space in downtown Seattle, and falling vacancy rates.

In addition, Amazon last week reported an unexpected quarterly profit and Microsoft earnings beat Wall Street expectations. Seattle-based Tableau Software has been leasing up more office space on both sides of Lake Washington, as are Bay Area tech companies Google, Apple, Facebook and Salesforce.com.

Boom and bust town

All the happy talk, however, overlooks the historical record. In Seattle, the bubble has burst virtually every cycle going all the way back to the 1897 Klondike Gold Rush. Job growth takes off, investment capital pours in and developers go on a building binge at precisely the wrong time.

One thing that could derail today’s Good Times Train is a hiccup at one of the hometown companies, but that seems unlikely with business strong at Nordstrom, Starbucks and Boeing.

“I don’t see any black-swan event on the horizon,” said Dan Dahl, a commercial real estate broker with Colliers International.

What seems more likely to go wrong is that developers will get even more exuberant and start building the additional projects at a time when the average amount of office space needed for each worker is shrinking.

Two to watch

In Seattle, people are especially watching two big projects moving through the city approval process: Skanska USA’s 31-story 2&U and Wright Runstad & Co.’s 59-story redevelopment of Rainier Square.

Together they command 1.3 million square feet of space, or roughly equal to what’s already under construction down the street at the Madison Centre and the Mark.

Whether she would start building 2&U depends on the week, said Skanska Executive Vice President Lisa Picard.

“It just seems like (market leasing activity) ebbs and flows quite a bit,” she said. “Things can change so quickly so it’s really hard to say.”

Wright Runstad, for its part, intends to prelease “a measurable portion” of the new Rainier Square before starting construction, said company President Greg Johnson.

He added that the company is “aggressively pushing toward our scheduled early 2017 construction start” because preleasing efforts are gaining substantial traction.

“We will only know if there’s too much development underway after the projects in this cycle are delivered,” Johnson said.

Those developers with office projects under construction say this cycle will be different than past ones.

Kemper Development is building a 31-story project called 400 Lincoln Square. At 710,000 square feet, it will be the largest office tower in downtown Bellevue when it’s completed in just over a year.

Yet only 25,000 square feet of space, or 4 percent of the total in the building, has been leased.

Kemper CEO Kemper Freeman isn’t worried. Earlier this year, he said there’s enough demand “to more than fill two buildings” the size of 400 Lincoln.

Data from Colliers International back Freeman up. On the Eastside, the brokerage firm says the demand among tenants in the market totals 3.9 million square feet. Demand is not quite as robust in Seattle, measuring 3.2 million square feet.

That’s more than enough demand to soak up the 3.9 million square feet of speculative office construction in the region.

But it’s complicated. Colliers calculates demand based on a range of sources, according to Sam Wayne, the company’s senor research analyst. He noted the demand numbers are not definitive, and that they’re “constantly fluctuating.”

Plus, if a company is looking for space on both sides of Lake Washington, Wayne said, it is counted twice.

On the other hand, 38 percent of the spec office space going up in Seattle is pre-leased, with around 7 percent in Bellevue.

Tracking the tenants

Tracy Edgers, managing director of Union Bank in Seattle, said the demand numbers seem reassuring, but he would dig deeper.

“I don’t think tenants so much will pull back, but we need to make sure they are there,” said Edgers, whose bank is financing some office projects in the region, though none are speculative developments.

“There’s a lot of supply being developed for the tenants,” he added, “and we don’t know who they are yet.”

As for Colliers’ data, he said, “Show me the numbers. Until you break it down, you really don’t know how reliable that number is.”

No one, of course, has a crystal ball to show how long the current development boom will last, but the consensus is that “while it may be rough here in the next two quarters, 2016 and 2017 are going to be strong, but 2018 and 2019 is where we (will) have a slowdown or mild recession,” said Craig Kinzer, founder of Seattle real estate advisory firm Kinzer Partners.

Edgers said that the current trend line “looks great,” but he’s not going to make any predictions, “because there are enough economic variables that could send it in one direction or the other.”

The real estate industry hinges on job growth, and Seattle has some of the best in the nation, though it’s expected to slow down.

In 2014, the number of jobs in the Seattle metro area increased nearly 3 percent, and this year it’s tracking at around 2.8 percent. Economist Matthew Gardner of Windermere Real Estate is forecasting 2.4 percent for 2016.

“What you worry about is the hiccup that interrupts the job growth,” Edgers said.

What that might be, no one knows. But based on Seattle’s oh-so-predictable boom-and-bust cycle, it’s a safe bet there will be one.

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