Downtown office markets may soon see vacancy rates in the teens

Here's some solace for the region's office market as landlords face a bleak 2009: In downtown Bellevue, and perhaps downtown Seattle, this downturn probably won't be as deep as the one that followed the dot-com bust, several industry prognosticators say.

Vacancy rates in the two downtowns will climb well into the teens this year as companies downsize and new office buildings — some still lacking even a single signed tenant — come on line, according to new reports from brokerages Cushman & Wakefield and Grubb & Ellis.

But, for downtown Bellevue, the damage won't compare with vacancy rates that exceeded 20 percent in 2001, 2002 and 2003.

Grubb & Ellis forecasts downtown Seattle vacancy rates this year also will fall short of their dot-com peaks, which weren't as high as Bellevue's. Cushman & Wakefield anticipates Seattle vacancy rates will top those earlier levels — but only by a single percentage point or so.

During the dot-com boom in the decade's early years, fledgling Internet companies gobbled up office space, and developers rolled out new buildings to accommodate them. When many of those companies failed and backed out of their leases, "it took us quite awhile to burn that off," said Craig Hill, a senior vice president with Grubb & Ellis.

New construction and business expansion during the latest boom, in contrast, has been more restrained, said Tom Bohman, a senior director in Cushman & Wakefield's Bellevue office: "The Eastside is not overbuilt as it was in 2001."

Even so, both brokerages' reports forecast rocky rides for the office market in 2009.

While 64 percent of the space in office buildings now under construction on the Eastside has been pre-leased — much of it to Microsoft — just 14 percent of the new space in downtown Seattle is spoken for, the Grubb & Ellis report says.

Building owners and their agents are concerned, although they aren't talking much about it publicly. Microsoft exacerbated their problems this week, confirming that it has backed away from a tentative deal to lease 300,000 square feet in Vulcan's new 2201 Westlake building.

On top of that, some of downtown Seattle's biggest companies are contracting — or worse. JPMorgan Chase, which took over failed Washington Mutual last fall, already has said it will give back all of WaMu's leased space downtown

That may not be all: Matt Christian, a senior director at Cushman & Wakefield, said he anticipates the new owner also will put up for lease 500,000 to 800,000 square feet at WaMu Center, the failed bank's 940,000-square-foot headquarters.

Safeco, acquired last year by Boston-based Liberty Mutual, also could give back some of its downtown space.

For prospective tenants, more supply means their hand is strengthened. Landlords are competing hard for a handful of firms now in the market for large amounts of space, Christian said. They include the Perkins Coie law firm and the Environmental Protection Agency's regional office.

Grubb & Ellis forecasts lease rates will drop 10 to 15 percent this year, while Cushman & Wakefield also anticipates the flood of new construction, combined with a weaker economy, will result in lower rents.

But both downtown Seattle and downtown Bellevue survived the dot-com bust, and brokers agree they will survive this downturn.

The Urban Land Institute recently rated Seattle the nation's top commercial real-estate market, said John Miller, senior managing director for Cushman & Wakefield. When credit markets do thaw, he said, investors will look to this market first."We still have Microsoft. We still have four of the biggest retailers in the country based here."

Hill agreed. "We're much better off than any other place in the country," he said.

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