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Published:
Thursday, December 30, 2010
Vacant offices have kept a lid on rents
By P. Diane Beason
SCBJ Freelance Writer
Local real estate analysts expect to see signs of an economic turnaround in 2011 as businesses gradually expand into vacant industrial, office and commercial spaces as the economy slowly gains momentum.
Vacancy rates are expected to remain higher than normal until 2012, according to Knight Kiplinger, editor in chief of Kiplinger Washington Editors Inc. Nationally, the third-quarter 2010 vacancy rate at office buildings stood at 17.5 percent and industrial space at 13 percent.
Derek Heed, a senior vice president with Colliers International in Bellevue, reported that the Snohomish County office vacancy rate was marginally lower in the third quarter at 17.4 percent, while the county's industrial space vacancy rate was 8.9 percent.
Snohomish County's large industrial property market saw its lowest vacancy rates in 2007 at 5.5 percent and the highest in 2004 at 10.4 percent.
However, industrial and office properties continue to strain under the weight of declining occupancies, rents and property values linked to the recession, according to a quarterly report published by the National Real Estate Investor, “A Special Research Report: Third-Quarter 2010 Real Estate Investment Outlook.” The report's authors expect that office and industrial rents will continue to drop in 2011, although at a much slower pace than 2010. Expect to see rates level out near the end of 2011.
It will likely take at least two years for occupancies to climb back to healthy levels, the report's authors said.
In the meantime, as leases that were signed in 2005, 2006 and 2007 expire, lease renewals are going to produce much lower rents if they have not yet been adjusted to current market values. However, many industrial owners think that rents have stabilized in some submarkets of the county.
The commercial outlook
A longtime downtown Everett financial services firm, Hascal, Sjoholm & Co., CPAs, announced they are moving out of their current location on Colby and Hewitt avenues to the Everett Mall area, effectively vacating an entire 10,000-square-foot floor of one of Everett's finest Class A office buildings, according to Tom Hoban, CEO of the Coast Group of Companies in Everett. The Everett Symphony's demise in 2010 leaves another quality Class A downtown core space vacant.
The largest law firm in Everett renegotiated its lease in the KeyBank tower in 2010 at a lower rate and with less space, having a drag effect on lease rates in the Class A category, Hoban said.
The biggest news was the introduction of the $500 million Providence Regional Medical Center Tower and additional medical space that it delivered to the market to support its expanded operations on its Colby campus in north Everett, he said. This has triggered an effort to expand the hospital's primary care network elsewhere in Snohomish County to create stronger links between patients and the main campus in north Everett.
At the same time, Swedish Medical Center began construction of its large new ambulatory care center off I-5 at 128th Street SE, west of Mill Creek, scheduled to open in 2011.
“The medical category is undergoing more change and activity than at any time in the past decade,” Hoban said.
One of the key obstacles has been the slower than expected job growth, the National Real Estate Investor report said. Some investors believe that the pace of job growth reflects a sluggish recovery.
The Snohomish County unemployment rate in October 2010 stood at 9.8 percent, less than a year ago, but still higher than the state's average of 8.5 percent, according to data provided by the Washington State Employment Security Department.
Some financial analysts have expressed concerns that the European debt crisis could negatively affect the U.S. — at least to some degree — or that there could be a trade war with China. According to Michael Parks, Marple's Northwest Business Letter editor emeritus, “Washington exports more to China per capita than any other state.”
While still uncertain and cautious, investor confidence is picking up and many stockbrokers expect that both investor sentiment and sales activity will increase substantially by mid- to late-2011, said Hessam Nadji, managing director of research and advisory services at Encino, Calif.-based Marcus & Millichap. Investors with cash can find great deals.
Washington state's chief economist, Arun Raha, compares the state's struggling economy to Seattle's sports scene: “It mostly sucks but there are some bright spots and we all hope things will get better.” He added, “We're in a deep hole and coming out slowly.”
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