By Jack Stubbs
“The downtown Seattle central business district is part of a larger ecosystem in terms of what drives development in Seattle. There’s been resurgence in the downtown as a place to live and do business,” Greg Johnson, CEO of developer Wright Runstad, said. All sectors of the development marketplace in Seattle’s central business district have been experiencing rapid growth over the last several months—the various commercial, residential and hotel developments springing up in the CBD submarket confirm the strength of the downtown market from a development perspective.
Further, the current vacancy rate for the CBD office market also confirms the increasing desirability of the downtown area for tenants and developers alike. In the second quarter of 2014, the vacancy rate for Class A and B office space was 11.6 percent in the CBD submarket. By the time second quarter of this year came along, the vacancy had decreased significantly, presently sitting at 10.8 percent, according to an office market report by real estate agency Jones Lang LaSalle.
This brings the average asking rent for Class A and Class B space in the CBD submarket to $36.99 per square foot today, the highest average of the seven downtown submarkets. Office and commercial development in the CBD shows no signs of slowing, either. According to another office report done by JLL, there is currently 24,535,865 square feet of office inventory in the CBD submarket, with 2,198,515 square feet of that total currently under construction.
Several of the more notable office and mixed-use developments currently under construction and in the pipeline of the CBD submarket include: The Mark, a mixed-use office and hotel project located at 5th and Columbia at 801 5th Avenue. The Class A development will include 528,000 square feet of office space (with all the related amenities) and 184 luxury hotel rooms. The project—which is being jointly developed by Daniels Real Estate and San Francisco-based Stockbridge Capital Group—is currently under construction. Completion of the office space and tenant move-in is expected by December of 2016; the hotel is expected to be ready by April of 2017. The building is currently 37 percent leased, according to a JLL report.
Madison Center, an approximately 750,000 square foot 36-story high-rise mixed-use office and retail tower (which also includes a roof terrace and 7-level parking garage) is another project currently under construction, located at 505 Madison Street. The Madison Center project is being developed by Schnitzer West and is expected to be ready for occupancy sometime in 2016—the mixed-use development is currently 5.4 percent leased.
Rainier Square, a project developed by Wright Runstad and located at 1333 5th Avenue, is one of the most eye-catching mixed-use developments currently under construction downtown. The development—which features an iconic curved 540,000 square foot Rainier Tower—will include 181 luxury rental units, 765,000 square feet of office space, 34,000 square feet of retail space (first floor), 155 hotel rooms and a parking structure with room for 1,200 cars. Rainier Tower is currently 91.4 percent leased. Construction of the tower is expected to be done by early 2019; the office and retail space will be ready for occupancy by the third quarter that year; and the residential units will be ready for occupancy by the end of 2019. Rainier Square, which will span a whole city block, is currently in the preleasing and final design stage of the construction process.
Midtown 21 is another mixed-use office and retail project, located at 1007 Stewart Street, and is being developed by Trammell Crow Company. The 21-story 332,400 square foot project is currently under construction and is partially preleased.
Another notable mixed-use office and retail development in the CBD submarket pipeline is Stanska USA’s 2&U, a 34-story retail and office tower located at 1201 2nd Avenue. The Class A office tower—which is expected to be completed in 2019—includes an estimated 700,000 square feet of office space and 20,000 square feet of retail space.
The high demand for developed space in the CBD submarket—and the many various developments occurring there—is due to two main factors, according to Dennis Meier, strategic adviser at the Seattle Office of Planning and Development. “There’s a mixed phenomenon in terms of where the demand is coming from for those [developments], somewhat related to the increase in employment and also changing demographics that has contributed to downtown living being more appealing to a wide variety of people.” While there are multiple factors driving the wide-ranging development activity downtown, one common trend has been developers’ implementation of a mixed-use orientation in their projects.
Many of the more prominent developments currently under way downtown—such as The Mark, Midtown 21, and Rainier Square—showcase various degrees of mixed-use in their orientation. The trend of mixed-use downtown is due in large part to the unique zoning requirements for that area, according to Meier. “Our downtown zoning probably encouraged mixed-use more strongly than other areas because it allows much greater development potential with higher height and density limits than [other submarkets]. Projects can maximize their development potential by including both commercial uses, like office or hotel, and more floor area with housing to gain a larger project overall. More and more [developers] are finding that [mixed-use] is a workable program,” he said.
While the zoning requirements in the CBD submarket are a positive factor for developers looking to establish mixed-use developments there, limited land and inventory downtown means that developers are having to get creative about how they utilize properties and space, according to Meier. “There’s always going to be a land constraint [downtown]. As land becomes increasingly scarce, we’ll see situations where smaller buildings like parking garages will likely be redeveloped,” he added.
While there is undoubtedly a finite amount of commercial and office space downtown, there will be enough inventory to accommodate all the developments occurring there, according to Meier. “The belief is that what is available in the downtown area is sufficient to accommodate the anticipated growth over the next twenty years.” Changes to the zoning laws downtown—such as when the city increased the height-density limits in 2006 to accommodate more growth—mean that while space is at a premium, it isn’t necessarily running out. “We don’t feel as though we’re at a crisis stage where we’re running out of land. There’s always the possibility that additional capacity and growth might be created through changes to the zoning,” Meier added.
Although much of the development downtown is due to a multitude of different drivers, the CBD submarket nevertheless offers certain amenities for potential developers that other nearby submarkets might not, according to Greg Johnson of Wright Runstad. “You get a different type of amenity downtown. [There are] all of the physical attractions of being downtown, where the restaurants, music scene, great hotels and world-class waterfront are. If you’re financial services or law firm, there are many more things at your disposal if you’re downtown versus if you’re in South Lake Union or Lower Queen Anne,” Johnson said.
Another factor that differentiates the CBD from other submarkets in the eyes of developers—and thus their potential employees—is the issue of transportation and accessibility. “From a transportation standpoint, the CBD is right where I-5 gets the closest to the waterfront. The regional transit spine, the light rail and busses, go through a downtown tunnel that diverts toward Capitol Hill before it goes to South lake Union. The transportation is a driving criteria and is what makes downtown more attractive,” Johnson added.
The tech industry, more broadly, has also been a driving factor for commercial developments downtown—and developers would be wise to cater to prospective tech tenants looking for developed space, according to Greg Inglin, senior vice president in the Office Properties Division at Colliers International in Seattle. “Nearly 60 percent of the [demand for space] is tech or creative office users. Tech tenants care about a space that is going to help them to recruit and retain employees: an open layout, open ceiling, a creative-type space. [Tenants] use the space as a recruiting tool and they want it to be in a great location,” Inglin said.
While the CBD remains an attractive destination for developers to locate their projects—the robust commercial development activity confirms the submarket’s desirability—one of the primary challenges being faced is the preleasing of the space, according to Inglin. The Mark and Madison Center are two mixed-use projects under construction downtown that confirm Inglin’s idea, with preleasing rates of 36.9 percent and 5.4 percent, respectively. “Those [tech] tenants will certainly look at the buildings in the CBD, the problem is the chicken and the egg: A lot of the tech tenants won’t get serious until the building is actually under construction or delivered. It’s hard to start a building when you don’t have any tenants. As a developer, it’s risky,” Inglin said.