Commercial real estate brokers worry about Seattle buildings

After climbing for years, are office lease rates in downtown Seattle getting ready to turn south?

Some commercial real-estate professionals think so. Consider this:

More than 2 million square feet of new office space — the equivalent of 1 ½ Columbia Centers — will come on the market in greater downtown next year. Almost none of it is pre-leased.

On top of that, there's the possibility — many say the likelihood — that downtown bastions Washington Mutual and Safeco could vacate some of the 1 million-plus square feet they collectively occupy.

Troubled WaMu last week announced it would lay off 6 percent of its local workforce. Seattle-based Safeco is being acquired by Liberty Mutual of Boston.

All that potential new supply prompts Matt Christian, senior director in brokerage Cushman & Wakefield's Seattle office, to predict that downtown lease rates could dip by next spring, and continue dropping into 2010.

Rates haven't declined since the dot-com bust in the decade's early years.

If Microsoft, which is in the market for 350,000 square feet downtown, makes a deal, the picture could brighten, Christian said. But the downturn also could get so severe that developers of some of the new downtown buildings could lose them to their lenders, he added. "There's going to be some pain."

Not everyone shares Christian's view.

"I'm not in the negative camp yet," said Oscar Oliveira, a vice president of brokerage Colliers International, "because there have been too many surprises here the last few years...

"There still are some big engines driving the market. If anything, I think there's a chance it could get flat."

For lease rates to drop downtown, he said, big institutional investors who bought millions of square feet in the region last year would need to go along — and they have shown no inclination to do so. Those new owners quickly raised rents, and in some cases have chosen to leave space vacant rather than lease it for less.

Several prospective tenants are looking for large blocks of office space in downtown Seattle — Microsoft is just one of them, said broker Owen Rice of CB Richard Ellis. If those deals come through, and if WaMu and Safeco keep their space downtown, lease rates could hold up, he added.

But Kip Spencer, co-founder of the commercial real-estate database Officespace.com, said all the new office buildings coming on line next year "will create a more competitive environment among landlords. Right now that environment does not exist."

More competition could mean lower rates, Spencer said.

The situation in downtown Bellevue is far different: Almost all the office space now under construction there is pre-leased, mostly by Microsoft.

But for the software giant, the Eastside could be facing the same uncertainty as downtown Seattle, said Tom Bohman, another Cushman & Wakefield senior director.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com