The Commercial Real Estate Crash

The economy may be turning around, but the commercial real estate market has yet to hit bottom.

By Dennis Law | February 2010 | FROM THE PRINT EDITION

Credit: Illustration by Keith Negley

Real estate image It
once seemed unstoppable. Now, the Seattle-area commercial office space market
is headed for a rough period of adjustment. But while many developers and investors
are feeling the pain, others see plenty of new opportunities.

The
vacancy rate, which was already at 18.5 percent in Seattle's central business
district at the end of the third quarter of 2009, according to Cushman &
Wakefield, could climb to anywhere from 20 percent to 30 percent, brokers now
say.

Bellevue's
central business district is in slightly better shape than Seattle's, with an
overall vacancy rate in the third quarter of last year at 14.8 percent, thanks
to greater pre-lease commitments for new buildings and Microsoft's expanded
presence there, according to Matthew Gardner, principal of Gardner Economics
LLC in Seattle. Still, those numbers are high following the long run during
which vacancy rates in many markets in the region fell below 10 percent.

And
the market is headed for tougher times. Amber Waltner, a research associate
with Cushman & Wakefield, expects rising vacancy rates to push average
market rents down by another 4 percent by the end of the year.

Vacancy Rates graph

"The
current glut of office space in the Seattle market is due primarily to two
factors: overbuilding and the bankruptcy of Washington Mutual," says Sean
Barnes, senior vice president of Seattle-based Jones Lang LaSalle Americas Inc.
In 2009, more than 1.1 million square feet of existing office space hit the
market in large part due to the collapse of Washington Mutual. In addition,
another 2.3 million square feet of office space was added to inventory through
new construction with planned delivery in 2009 and 2010.

Craig
Kinzer, principal of Kinzer Real Estate Services in Seattle, says many
companies have built new headquarters in the past couple of years, which opens
up space they were previously leasing, "so you have excess supply, not just
from developers building, but from entities that are putting out space
themselves."

In
addition, says Dan Lowen, president of Seattle-based Caerus Realty Capital LLC,
most companies have cut back staff as a result of the recession, noting that
these businesses, in turn, are locked into long-term leases of up to five to
seven years. Some of those firms are attempting to sublease excess space right
away, but Lowen says it generally takes time for the space to come back on the
market as a vacancy until the tenant signs a new lease for less space. Layer on
to this situation the fact that Amazon.com