Major deals fill prime office buildings; rent hikes likely soon
Seattle's downtown office space glut has just about vanished - and cut-rate rents are likely to disappear along with it.
A string of major tenant deals with Key Bank, Seattle City Light, Keane Inc. and - maybe soon - Phamis Inc., is filling nearly every big block of office space in the downtown market, and should push vacancies into the single digits, some market surveys show.
Add the fact that no new buildings are even contemplated, and "some (tenants) are really going to be in trouble next year," warns broker Tim O'Keefe of CB Commercial.
Real-life rents have already risen about 10 percent in the past year, several surveys estimate, due mostly to the trimming of tenant-relocation goodies such as free rent and payoffs of unexpired leases at tenants' old spaces. Rent hikes of another 10 percent are certainly possible this year.
After a full decade of cheap rents and abundant building options, the rapid tightening may come as a shock to some office occupants, says Doug Norberg of Wright Runstad & Co., a major downtown landlord.
"Markets often refund more sharply than people expect," said Norberg, an executive vice president. "Remember, we're coming off a real estate depression that was as bad as the 1930s.
"Others forget how fast things fell (in the 1980s). The rebound will be a mirror image of the fall."
The uptick in rates has been accompanied by a shift in the landlord-tenant psychology. Norberg confirmed.
"Perception is always what drives the market. People are very much driven by fear or greed."
Now, "tenants are swinging towards fear, and landlords ... the opposite."
Phil Hall, who runs his own tenant-representative shop downtown, offers his own caution for space-shopping tenants: "The longer you hang out, the more expensive it's gonna be and the fewer options you'll have.
"Plus, the landlords that you're dealing with today are asset managers, pension funds and banks. The mentality of these guys is different than the go-go developers of the '80s. I don't think they're willing to get into their checkbook (to make deals) as quickly."
Neither Norberg nor Hall predict a massive increase in rates, and typical downtown rents - perhaps $20 a square foot for the best buildings - are still $5 to $15 too low to make new construction feasible.
Not a single downtown skyscraper will break ground before the start of the next century, predicts developer Martin Selig.
Moreover, small tenants don't have much to worry about - yet. There's still plenty of 5,000-square-foot spaces tucked among downtown's more than 2 million square feel of vacancies.
Still, various market surveys show downtown tenants consumed at least 1 million square feet in the 1993-94 period.
"If you continue with that rate, it's pretty amazing what will happen," said broker Garth Olsen of Cushman & Wakefield.
Theoretically, vacancy rates could fall to 5 percent by year-end 1995.
But Olsen predicts that some big tenants may be forced south, to the inexpensive, vacancy-riddled markets of Renton and Tukwila, long before things get that tight.
Those unlucky tenants may have to pull up stakes because the following deals recently gobbled up much of the good downtown spaces:
* The biggest fireworks have been at the 62-story AT&T Gateway Tower, which sat half-empty for more than four years and then filled 11-plus floors in a rash.
Seattle City Light signed a deal for nine floors last December, and Key Bank last week announced it would increase its presence in the building from four floors to six by consolidating employees from other buildings downtown. Key has options for two more floors by 1998.
As part of the deal, Gateway has been renamed Key Tower. And suddenly, Key Tower leasing representatives are saying their building is 95 percent full.
* The deal that many office players are watching closely is Phamis Inc., a rapidly growing medical software company that is exploding out of its space in Pioneer Square.
Phamis is looking for more than 100,000 square feet downtown, confirmed Olsen, the firm's broker.
No deals are signed, but a strong candidate is rumored to be the "black box" at 1001 Fourth Ave., another of the relatively few highrises with large chunks of empty space.
But Olsen said no deal has been signed, and he emphasized that Phamis employees "really love Pioneer Square."
Phamis' current 46,000-square-foot lease at Court in the Square doesn't expire until June 1996, reveal company documents filed in a public stock offering last fall. The firm recently took another 13,000 square feet on a short-term basis in Pioneer Square's Westland Building, said leasing agent Connie Wing of Colliers Macaulay Nicolls.
* Selig has greatly improved one of his chronic underperformers, the 40-story high-rise at 1000 Second Ave. that was itself once known as Key Tower.
Selig filled the long-vacant 10th and 11th floors via a 32,000-square-foot lease with Keane Inc., a company that runs consumer help-lines to serve the customers of software companies.
Keane expanded from about 10,000 square feet in another Selig building, Blanchard Plaza, largely because the finn has won a growing share of Microsoft Corp.'s customer-service troubleshooting business, said tenant rep Parker Ferguson of the recently formed Flinn Ferguson brokerage.
Keane has options for yet another floor in 1000 Second, Ferguson said.
Selig recently filled another two floors at 1000 Second with a large daycare center. Combined, the deals pushed occupancy in the building to 87 percent, Selig said.
Selig also has scooped up all the AT&T operations bailing out of Gateway Tower. He recently filled two floors in his Fourth and Vine Building, or about 36,000 square feet. with AT&T workers coming out of Gateway, Bellevue and Kent.
* U.S. Bank Centre, another highrise with some big splices to fill, is close to signing tenants for two additional floors, said leasing agent John Hanson of LaSalle Partners.
The deals would admittedly steal tenants from other buildings, but Hanson said one tenant would be increasing in size. If both deals closed, the 44-story U.S. Bank Centre would be 90 percent full, after a long spell in the low 80s, Hanson said.
* Even the Pacific Building, a property that's been half-empty since the Continental Inc. financial group left several years ago, has plugged many of its holes.
Tenants have filled several lower floors in the 23-story building on Third Avenue.