Published November 2002

Demand for commercial space lukewarm for now

In the “good news, bad news” analysis of today’s commercial office and retail market, the good news for Snohomish County is that it never quite got into the frenzy of development that was tied to the tech growth of the late ’90s.

The overdevelopment we saw on the Eastside of King County and in areas of downtown Seattle, in particular, are what’s behind vacancy rates in double digits in those areas. Snohomish County really never benefited much from the tech sector expansion outside of the Bothell/Canyon Park area, it seems, so developers weren’t rushing to build for dot-coms.

Consequently, as the economy softened in 2001, there was less excess supply on the market in Snohomish County, making the blow a little softer and providing reasonable returns for investors in commercial property.

The bad news is that there aren’t clear signs of an economic turnaround soon that might stimulate job growth, which is the principal source of demand for office and retail space. So while most office parks and buildings are holding on, there isn’t really any sign of a spike in demand in the near future that will push occupancy rates up.

Ric Brandt, Senior Associate at CB Richard Ellis, describes the Snohomish County market this way, “One major factor in our real estate market is the considerable amount of sublease space inundating the Puget Sound markets.”

Brandt says that over 1.8 million square feet of sublease space in Seattle and 2 million square feet on the Eastside has forced landlords to drive down rents to fill space.

To some extent, Snohomish County enjoys a spillover effect from growth in King County, which must also be examined in order to project office and retail outlooks.

Snohomish County’s office market needs a robust King County for it to enjoy significant expansion. Because King County still has capacity today — with rates that are closer to Snohomish County than they were just two years ago — it’ll likely be some time before that capacity is absorbed and businesses look to locate in what is commonly referred to as the “shoulder areas” of Tacoma or Everett. That sort of demand is what often pushes occupancy rates above the 95 percent equilibrium level.

In the meantime, organic growth from business activity within Snohomish County seems to be carrying the load and helping keep occupancy rates between 90 percent and 95 percent countywide.

Credit the Everett Arena project and the planned Lynnwood City Center development for helping those local markets, in particular, view tomorrow with more optimism. Credit a few larger lease deals in south county for plugging some big holes there and helping to move occupancy rates up a bit.

The upside to the soft market, says Brandt, is the potential for businesses to negotiate very favorable terms today that will carry throughout a lease and look very low once things turn around. “Free rent is back on the negotiating table, and the tenant improvement allowances for office build-out are becoming more generous.”

But size is an issue that needs to be understood to track the office market in Snohomish County as well. One or two large buildings can throw off the broad numbers.

“If you didn’t include the Boeing properties that they moved out of, the Snohomish County market remains fairly stable.” says Bill Burton, commercial leasing and brokerage agent at Coast Commercial Properties in Everett.

According to Burton, the 5,000- to 10,000-square-foot user segment is actually fairly robust. “The tenant market with needs under 5,000 square feet remains stable, while the group over 10,000 square feet is a bit soft right now.”

Adds Burton, “There are some reasonable deals out there for businesses who make a move to lease space today.”

The outlook, therefore, depends on a few things. King County, for one. Continued local business health for another. But it will be some time before we see office development of any significance in most of Snohomish County. It takes both of these things going well at the same time to do that.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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