Commercial real estate transactions across the greater Puget Sound region have continued into the second half of 2022, although the pace of activity may slow down from what the industry saw during the first half of the year. One transaction that is planned to close by the end of the third quarter is in Lynnwood, where Los Angeles-based Hudson Pacific has agreed to sell its 179,985 square foot Northview Center office property for $46 million, or roughly $256 per square foot. The company made the announcement of the sale in its second quarter of 2022 results. The buyer is Nitze-Stagen, a leading Seattle real estate development, investment and management company, according to a statement made by the company.
Hudson Pacific purchased the property in July of 2013 for $48.5 million, according to Snohomish County records, so this transaction comes at a loss for the company. The acquisition was part of a larger four-building office portfolio that Hudson purchased in 2013, so the dollar-for-dollar comparison may not be fully appropriate in this case.
According to Hudson’s reporting, the building is 81.2 percent leased and 69.5 percent occupied. The property generates annualized base rent of roughly $3 million, which comes to $24.24 per square foot.
“We purchased the building because it fits within our strategy of acquiring Opportunity Zone sites near transit hubs providing tenants an eco-conscious and connected lifestyle,” said Daniel Gallagher, vice president of acquisitions and development for Nitze-Stagen.
“It also leverages our capabilities to successfully manage commercial spaces. We are known for the adaptive reuse of Starbucks Center but in the past few years, we have undertaken a variety of commercial and flex-industrial projects in SODO, Georgetown, Rainier Valley, and South Lake Union – all in amenity-rich areas for day and evening uses,” Gallagher added. “We are excited about Lynnwood’s growth and look forward to owning the high-quality, Class A building with a significant amount of surrounding land that will benefit from the delivery of the new Lynnwood Light Rail Station. It also creates another opportunity for our Opportunity Fund investors to grow with us and benefit from smart and sustainable development within our region. Our investors share our passion for the Pacific Northwest and recognize the benefit of TOD investing, supporting civic infrastructure over the long-term.”
Nitze-Stagen does not see the need to make any substantial changes to the building and will renew past marketing efforts to fill the remaining vacancy in the building with a focus on companies that are prioritizing employee convenience without wanting to sacrifice expedient access to the downtown core, according to a statement by the company. Nitze-Stagen believes that Northview is especially well positioned to provide flexible office space for a hybrid workforce.
The company worked with Chicago-based Perlmark on a $7 million mezzanine debt investment for the acquisition of the property. The investment was made on behalf of Pearlmark Mezzanine Realty Partners V, L.P. The senior loan was provided by Prime Finance, and Nitze-Stagen is the manager of the borrower.
Hudson Pacific worked on the marketing of the property with the Capital Markets Team of Newmark. One person working on the sale is Nick Kucha, vice chairman of the firm’s Pacific Northwest Capital Markets team.
Hudson Pacific chose to sell Northview Center because it deemed the asset as one that is not part of the company’s overall strategy going forward, according to earlier reporting by The Registry. “We decided to market Northview Center for sale because it doesn’t have the right long-term strategic fit for our portfolio. It’s a single asset located in Lynnwood, well outside of our core market in downtown Seattle, which is where we’ve grown our Class A office portfolio of more than 2.5 million square feet,” said Mark Lammas, president of Hudson Pacific Properties.
The transaction will likely set a baseline for suburban properties in the Seattle region in the second half of the year. Across Puget Sound, and especially outside of the urban cores, the market has been impacted by what brokerage group Broderick Group terms the trifecta of interest rates, inflation and remote work. In its Eastside Office Market Overview for the second quarter of 2022, the firm noted that from a statistical and transactional perspective, Q2 2022 mirrored the first three months of the year. Vacancy rates again trended slightly higher, large tenant activity was essentially absent and while rental rates have been growing for smaller quality spaces, rental rate growth is expected to flatten or even decrease for large spaces over the next 12 months.
It should be noted that Lynnwood is north of Seattle and not in the Eastside, but the market dynamics across the region are impacting the industry in similar ways.
The company does see suburban markets as fundamentally sound with Class A vacancy at a minimum and no new speculative development will be delivered to the market until 2024. Yet, companies will likely continue to right-size for the next couple of years, which will have an impact on valuations and sales such as the one in Lynnwood.
