Saturday 14 December 2019

Building splurge in Seattle led by a local tech giant, but not Microsoft

A building splurge has hit Seattle
A building splurge has hit Seattle

Hui-yong Yu

A proposed 57-story office tower that would be Seattle's second-highest building will have apartments at the skyline, marquee retail on the street and a hotel on the same block.

The $550m Rainier Square project, shaped like a J with a spiked heel in the initial design, is among the first in the city to combine four different types of real estate in one property, said Greg Johnson, president of developer Wright Runstad. The Seattle-based company plans to apply for final review and permits with the local planning department in November, he said.

Developers in the US are building projects with multiple uses -- particularly in cities such as Seattle with strong employment -- as they seek to balance rising demand for urban offices with strong apartment and travel markets. By providing a one-stop place to work, live and shop, they are focusing on sites that may attract companies targeting younger employees who want a short commute and the flexibility of renting.

"The Millennials are driving how people work, play and live and how developments are created," said David Simon, executive vice president at Los Angeles-based landlord Kilroy Realty Corp., referring to the almost 85 million people born from the early 1980s through 2000.

"This generation is a lot different from past generations," he said. "This generation wants to be in communities that are self-contained."

Kilroy has several mixed-use projects planned or under way, including two Hollywood, California, developments: the $400m Columbia Square on Sunset Boulevard, which will include offices, residences and retail; and a $300m office-and- apartment property on land acquired from the Academy of Motion Picture Arts and Sciences.

Adding homes to office projects has become attractive as demand for apartments outpaces that for corporate space. The national apartment vacancy rate has hovered at a decade low for more than a year, reaching 4.1pc in the second quarter, according to Reis.

Office vacancies, by comparison, have shrunk more slowly during the commercial real estate market's recovery in the past four years. The US office vacancy rate was 16.8pc in the second quarter, well above the low of 12.5pc reached in 2007 before the credit crisis.

"Office in certain markets is doing exceptionally well, like in San Francisco and New York, but there is an office stock that is functionally obsolete for the density requirements and demands today," Simon said. "Collaborative environments, those are the growth areas."

A hiring spree led by Seattle-based Amazon.com has boosted demand for offices and apartments in the Northwest city, also headquarters to Starbucks and Nordstrom. Seattle was third in the country, behind San Francisco and San Jose in California, in annual apartment-rent growth in the second quarter, according to Reis.

It ranked 10th out of 79 major markets for office-rent gains, with its vacancy rate of 13.4pc falling below the US average.

A healthier office market translates into more demand for downtown hotels, which derive a lot of bookings from business travellers. Daniels Real Estate broke ground this summer for a 43-storey office and hotel tower in downtown Seattle called Fifth + Columbia. The project also incorporates a historic Methodist church with a domed roof on the same block. As with apartments, Seattle still has too few hotel rooms relative to the surge in demand in recent years.

Wright Runstad is planning multiple types of real estate in its development "because Rainier Square is a prime location for all those uses," said Johnson. "Having all of the uses interconnected in one project with great parking will make each individual use all that more desirable."

Mixed-use real estate is an old concept that's coming back into favour as financing options improve and people grow less dependent on cars. Lenders used to be "nervous" about financing projects by a developer with expertise in, say, offices, yet no experience in apartments, Green said. They are growing more willing to lend to companies that have strong balance sheets and can put equity into the property, he said.

Mixed-use also presented challenges for developers, said Jack McCullough, a land-use attorney in Seattle. Such buildings usually require dual cores to keep office workers separate from residential tenants, he said. Building multiple types of real estate requires more market analysis and also entails investors and lenders taking on greater risks at once.

"You're trying to build into different market cycles often," McCullough said. "You end up with one part performing well and the other dragging."

There aren't many truly mixed-use properties built in the last 20 years, said McCullough. Pro forma refers to projections of income. "It's a lot easier to understand the pro forma and the risk associated with a plain-vanilla office project or multifamily."

Wright Runstad has a 41-year history in the Seattle area, including as the developer of Microsoft Corp.'s Redmond campus in 1985. It's developing a 36-acre (15-hectare) neighbourhood that includes offices, retail, housing and parks in Bellevue.

The Rainier Square project is part of the redevelopment of downtown Seattle land owned by the University of Washington. The school was founded in 1861 on the site of the Fairmont Olympic Hotel and moved to its present location in 1895. Its initial 10 acres, later enlarged to 11, is known as the Metropolitan Tract.

The university wants to extract more income from the tract.

Condominiums weren't an option because the school isn't selling land or air rights.

Wright Runstad has proposals out to potential office tenants for the Rainier Square development. After it files the final design and permit applications, it will begin the formal search for an equity partner to contribute about $200m toward the $550m project and look for retail tenants, Johnson said.

"We are targeting both local and international retailers," he said.

Preliminary plans filed with Seattle's Department of Planning and Development show street-level stores with a red logo that looks like that of Uniqlo, the Japanese clothing chain, and a glassy-white peach that evokes Apple.

The retail portion would be at street level. Above it would be about 790,000 sq ft of offices, with the larger floor plates on the lower floors.

Luxury apartments will take up floors 40 to 57, enabling 360-degree views of the water, mountains and city. They will rent for an average of $1 or more per square foot, Johnson said.

The 14-story hotel that's planned will have about 180 rooms.

The J shape for the new tower was chosen to give the project a distinctive character, provide a variety of office floor sizes and preserve views of the existing office building, Rainier Tower, on the block, said Johnson. Rainier Tower was designed by the late Minoru Yamasaki, the architect of Manhattan's World Trade Centre. The tower resembles a squared- off pencil standing on its point.

The proposed building height of about 795 feet would make Rainier Square second only to the 76-storey Columbia Centre in south downtown. Columbia Centre, at 943 feet, is the second-highest building on the US West Coast after the US Bank Tower in Los Angeles. (Bloomberg)

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