Thursday, June 21, 2007

The Cranes Are Back, and So Are the Tenants 

The Cranes Are Back, and So Are the Tenants - New York Times

The peaks and valleys of the commercial real estate industry are epitomized by what is going on in Bellevue, Washington.

Just as many people are learning hard lessons via residential investments, no one can ever expect a boom time to last forever. Bellevue has weathered the tough days and is now in a resurgent period.

Will people be more cautious next time? Are the sudden reappearance of cranes a clue that the cycle will only turn over again?

CONSTRUCTION cranes quickly disappeared from the skyline of this affluent city near Seattle, office vacancy rates shot up as high as 28 percent and developers postponed once-ambitious projects when the dot-com boom went bust six years ago. Bellevue had become a city where no developer seemed to want to be.

“Everything was too good to be true, and then reality came through,” said Kemper Freeman, the president and chief executive of Kemper Development, one of Bellevue’s largest land owners and developers.

But this city, whose fortunes rose and fell with those of the technology industry, has been staging a comeback.

Nowadays, a dozen or so construction cranes loom over work sites in Bellevue’s downtown. Some 2.2 million square feet of office space, some of it speculative, and more than 2,500 apartments and condominiums are under construction, according to the Bellevue Downtown Association, a nonprofit group. Projects like Mr. Kemper’s Lincoln Square, a 1.4-million-square-foot development with hotel rooms, condominiums, an office tower and a shopping mall, have been restarted and are near completion.

Already, companies are planning to move into Bellevue, which is about 10 miles east of Seattle and, in the 2000 census, had a population of almost 110,000. Microsoft is expanding its offices here, while Eddie Bauer has chosen the city for its new headquarters and Neiman Marcus is opening its first Pacific Northwest store here.

In the first quarter this year, office vacancy rates stood at 4.5 percent, among the lowest levels since 2000, according to a report released last month by Colliers International, a commercial real estate brokerage firm. The rate in Seattle, by comparison, was 9.3 percent in the first quarter.

Tom Woodworth, a senior investment director at Schnitzer West, a Bellevue developer, said he was not surprised by Bellevue’s rebound. “This is where the jobs are and where there’s developable land,” Mr. Woodworth said.

Schnitzer West had no tenants signed up last year when it began construction in downtown Bellevue on the Bravern, a 1.6 million-square-foot mixed-use complex with three floors of high-end retailers and 450 condominiums, and the Advanta Office Commons, three seven-story buildings east of downtown.

Local real estate brokers had privately questioned whether the company would be able to fill its space because of competing projects under construction. But Schnitzer proved the naysayers wrong in April, when Microsoft agreed to lease a total of 1.3 million square feet in the Bravern and Advanta.

The lease — the biggest in the region, according to local real estate brokers — made Microsoft the largest tenant downtown and gave Bellevue an added boost of confidence. Microsoft will start moving 4,000 new or existing employees into Advanta by year-end; it expects to move into the Bravern by the end of 2008.

Microsoft also has plans to take over 320,000 square feet in Lincoln Square, which is expected to be completed by this summer. Lou Gellos, a company spokesman, said Microsoft was halfway through an ambitious expansion program that will add a third more space, or 3.1 million square feet. The company has been running out of room at its crowded campus located nearby in Redmond.

Big leases have resurrected Bellevue’s office market before. Equity Office Properties Trust, which once controlled about a third of the city’s downtown office space, used cheap rents to attract Symetra Financial, a spinoff of Safeco Insurance, and drugstore.com to downtown Bellevue three years ago, a move that helped to kick-start the leasing market. Then Mr. Freeman persuaded Eddie Bauer to lease 200,000 square feet at Lincoln Square for its new headquarters. A building boom was born.

Investors are also pouring money into the city. This year, there were $2.6 billion in real estate transactions, versus $34 million six years ago, according to Real Capital Analytics, a real estate consulting company. Sales prices have soared, to an average of $376 a square foot this year from $146 in 2001. In Seattle, prices average $364 a square foot, according to Real Capital.


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