Business rental rates seen rising in 2008

Where is downtown Bellevue headed in 2008?

Where is downtown Bellevue headed in 2008?

“To take a look at where we’re going it’s important to take a quick look back at 2007, a year of enormous change and three record setting deals,” said Gary Guenther, a senior vice president and principal for GVA Kidder Mathews in Bellevue who specializes in representing tenants, landlords and investors in complex lease and sale negotiations.

Guenther was speaking at the kick-off of a three-part series examining growth trends in downtown Bellevue put on by the Bellevue Downtown Association.

“There are two new sheriffs in town and they’re the major reasons why rental rates have increased as much as 30 to 40 percent since this time last year,” Guenther added, referring to Archon Group and Beacon Capital- two class ‘A’ landlords. “Between these two landlords, they control approximately 6 million square feet of Eastside office space and that includes 55 percent of downtown Bellevue.”

According to Guenther, because of the steep costs of the buildings that Archon Group and Beacon Capital purchased, they will have to quickly and aggressively raise rental rates and cut expenses. But, by consuming the majority of the market, the two companies are able to dictate where the market is at and the other landlords will follow suit and raise rental rates accordingly, he said.

GVA Kidder Mathews projects rental rates to increase through 2010 in Bellevue and vacancy rates for class ‘A’ offices to stay relatively low.

A second major factor impacting Bellevue’s commercial real-estate market is the ever looming presence of the “big boys,” Guenther said, specifically Microsoft and their tech friends and foes.

“This time last year it looked like we were in danger of having a massive over-supply of new construction and then Microsoft stepped up in a big way by committing to 1.3 million square feet of office space in Bellevue with Schnitzer Northwest LLC,” Guenther said, of the deal involving the leasing of office space at The Bravern Office Commons and Advanta Office Commons.

In addition to Microsoft, there’s Google with a large deal in Kirkland, Expedia with roughly 350,000 square feet in Tower 333, Yahoo with 120,000 square feet on 112th and 12th and RIM, the company that makes the Blackberry, committed to 45,000 square feet of the I-90 corridor.

“Moving into 2008 we don’t predict these types of large scale deals happening, but to give you an idea of current demand, right now we’re tracking over 2 million square feet of Eastside office tenants and that includes four tenants over 100,000 square feet, 10 tenants over 50,000 square feet, 21 from 25,000 to 50,000 square feet and a couple dozen others from 10,000 to 20,000 square feet,” Guenther added. “And none of these tenants start with Micro or end with Soft.”

Even though he joked about the tech-company, Guenther admitted that there’s no question that Microsoft is the engine that drives the Eastside office market and the question moving into 2008 is whether they have their foot on the gas or on the brake.

Historically the lifeblood of the Bellevue office market has been the 5,000- to 25,000-square-foot space catering to the small- to medium-size company. Guenther pointed to a number of spaces from 5,000- to 25,000-square-feet that have quietly come back on the market. In many cases the office spaces are fully furnished, have phone systems in place and are good choices for the tenants if the timing is right.

Downtown Bellevue has approximately 1.8 to 2 million square feet of office space under construction with 60 percent of that space already pre-leased. GVA Kidder Mathews projects that downtown Bellevue’s development will continue to be in high demand and in the case of Microsoft and Expedia they are showing that the vertical campus model works.

When looking at locations in the downtown area, tenants are taking into consideration the retail amenities that it provides and are beginning to view it as an important employee recruiting tool.

“These new buildings are expensive to build so we’re talking $50 dollars per square foot for tenants,” Guenther said.

Guenther doesn’t see a lot of small to medium business jumping into these new buildings.

“It’s going to be the larger national companies that have the budget and the ability to put the money into their facilities,” Guenther said.

GVA Kidder Mathews forecasts that rental rates most likely will stay flat through the first half of this year and notch at least a 3 percent increase by this time next year, subject to the economy and demand. Vacancy rates should stay in the 6 percent to 9 percent range subject to the City Center Plaza and what happens with demand. The company also is anticipating at least one large project will be moving forward by the end of 2008.

“There’s a lot of talk about the national economy, but I think we’re in pretty good shape in Bellevue from an office standpoint,” Guenther explained.

Lindsay Larin can be reached at llarin@reporternewspapers.com or 425-453-4602.

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