COVER STORY, JUNE 2007
WEST COAST OFFICE REPORT
Office is on and in prime time on the West Coast.
Brian A. Lee
Bolstered by continued job growth, the office market in the West has come a long way since the economic downturn earlier this decade. Vacancies are dropping and central business districts (CBD) are hopping with substantial investment transactions and significant development. In DLA Piper’s 2007 “State of the Market” Real Estate Survey, nearly one-third of the real estate executive respondents chose the office sector, including both downtown and suburban, as having the most attractive opportunities for real estate investors in the coming year. The next most favorable property type was multifamily at 25 percent.
In Seattle, the CBD office vacancy rate has fallen into single digits for the first time since 2001, prompting a construction boom. Net absorption downtown exceeded 1 million square feet in 2006, pushing Class A asking rates up to nearly $30 per square foot and Class B rents to 5-year highs, according to Nick Papa, research manager of in Grubb & Ellis’ Seattle office. Major projects include Touchstone Development’s West 8th (483,000 square feet), Vulcan’s 2201 Westlake (302,000 square feet) and Schnitzer Northwest’s 818 Stewart (230,000 square feet).
Schnitzer Northwest has found great success in Seattle’s suburbs as well. The developer’s one and only office lease at its dynamic mixed-use project The Bravern in Bellevue, Washington, was to Microsoft. The software giant reserved all 740,000 square feet of office space at The Bravern while committing to a total of 1.3 million square feet of Schnitzer’s office developments in the city.
“Already the second largest urban core in Washington and the major destination on the east side of Seattle, downtown Bellevue is in the midst of an unprecedented construction boom,” says Gary Guenther, senior vice president with GVA Kidder Mathews in Bellevue. “Including current construction and projects in the pipeline, the amount of downtown Bellevue Class A office space will increase from 5.5 million square feet to more than 8 million square feet.”
In Portland, Oregon, Shorenstein Properties LLC has acquired a 4 million-square-foot office portfolio from Blackstone Group, which acquired the assets through its recent purchase of Equity Office Property Trust. Its first purchase in the Portland area, San Francisco-based Shorenstein takes control of 46 properties and three development parcels that could support an additional 550,000 square feet of office space.
“The portfolio contains an exceptional collection of Class A assets that would take years to assemble and has a well diversified tenant base with more than 700 tenants providing limited credit exposure to any one specific tenant or industry,” says Douglas W. Shorenstein, chairman and CEO of Shorenstein Properties, which has 60 percent of its holdings located in the West. “Given the favorable economic outlook for the region and lack of significant new supply, Portland is expected to post a decreasing vacancy rate in the next 4 years.”
Office rents and construction numbers are heading north in Northern California. Grubb & Ellis reports that office vacancy in the Silicon Valley has dipped into single digits (9.5 percent) for the first time in 6 years. First quarter marked the fourth straight year of decreasing vacancies and rising rental rates in that market. In San Francisco, unprecedented investment activity in the CBD in first quarter 2007 could mean asking rate increases of 20 to 30 percent, according to Nick Slonek, senior vice president and sales manager for Cornish & Carey Commercial
The RedBuilding in West Hollywood, California
In West Hollywood, Charles S. Cohen is developing the 400,000-square-foot Class A RedBuilding, the third and final installment of the Pacific Design Center (PDC). Its signature identity created by renowned international architect Cesar Pelli of Pelli Clarke Pelli will certainly give it style and distinction, while its state-of-the-art space and location in a proven office market with little space to spare means the RedBuilding will receive high demand from creative firms, new media and entertainment companies.
The RedBuilding’s many amenities include an on-site private fitness center, access to two Wolfgang Puck restaurants, and the PDC’s state-of-the-art SilverScreen screening facility, conference center and boardroom. The property will also feature an attended valet motor court, two sky lobbies with concierge service and the elegantly landscaped Palm Court, which sits six stories above the PDC plaza.
Groundbreaking for the $160 million development took place in late March, and completion is scheduled for third quarter 2009.
Marcus & Millichap reported that lower vacancy rates and robust rent growth are expected in the Los Angeles office market due to solid employment gains, particularly in office-using sectors, driving tenant demand higher. Los Angeles, which expects to see office construction slow this year and vacancy rate dip to 9.5 percent, jumped four places to Number 3 in the brokerage firm’s National Office Index, which ranks 42 office markets based on a series of 12-month, forward-looking supply and demand indicators. Orange County and the Inland Empire ranked Numbers 6 and 8, respectively.
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