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Growing demand for office space may aid city plan
"This is the final story in a series about Federal Way's downtown. On June 7 we told you about the multi-million dollar push the city started this summer as well as policy decisions on downtown that the Federal Way City Council soon will face.On June 28 we took a look back at how Federal Way's downtown plan came to be.On July 5 we looked at why the area surrounding SeaTac Mall was chosen for the downtown. On July 19 we examined traffic impacts of changing downtown.On Aug. 2 we explained different strategies for creating a downtown.On Aug. 16 we looked at how and why city leaders want to develop downtown.Mirror's downtown forum comingThe Federal Way Mirror is sponsoring a forum on the city's downtown plan at 6:30 p.m. Sept. 20. It will be held in the upstairs meeting space at Borders Books, 1824 S. 320th St., which is in the heart of the downtown core.A panel of speakers will give a short presentation, followed by a question and answer session for audience members. For more information, call Linda Tarr at 925-5565. ----------------------Internet provider Freei Networks moved from one of the many office buildings in West Campus to the retail-dominated downtown earlier this year.With the February move, the city acquired an office tenant in the downtown that employs 300 people. The company, which started in December, 1998, gained a prominent location in a six-story building on 320th Street.The exposure off I-5, said Erin Hagstrom of Freei Networks about the site's appeal. We get huge exposure with our sign. Freei Networks' move to the downtown is an action city officials would like to see repeated by other companies. The city is pouring millions of dollars into transforming the downtown into a mixed-use mecca that they hope will draw people around the clock.Office buildings will play a key next step in officials' plans for making the downtown the economic focus of the city, said Stephen Clifton, the city's Community Development Services. Now the city center is dominated by retail, and residential is typically the last element to appear in a downtown.Economics favor Federal Way and other South King County cities that can satisfy a growing need for quality office space. The record-low vacancy rates in Seattle and the Eastside mean South King County cities have a much greater opportunity to lure companies that want to lease space in an office building, say analysts with corporate real estate companies. In Federal Way, the vacancy rate hovers close to 5.4 percent, in contrast to the .9 percent and 1.6 percent rates seen in Seattle and Bellevue, respectively, said research analyst Jeanette Ferguson of Colliers International, a Seattle-based corporate real estate company.As companies are priced out of Seattle or the Eastside, they are increasingly looking to cities they previously might not have given a second glance, Ferguson said.It's a little more than a trickle-down effect, she said. It's a waterfall effect.Of the gross floor space in Federal Way's downtown, 2.15 million is retail, 582,660 is residential, 369,377 is hotels and 195,587 is office, Clifton said. The latter includes the Freei Networks building, another office building on 23rd Avenue and numerous small offices tucked into strip malls.So right there, we almost have one and a half times the hotel square footage as office, Clifton said. We want to get a whole lot more (office). Even with today's market, that won't be easy. Developers are typically hesitant to be the first ones to develop high-rise office buildings where a city lacks a record of successful development, he said. At build out, the city center would contain a minimum of 15,000 jobs within a half-mile of the Sound Transit center, planned on 23rd Avenue South near 316th Street, according to the Federal Way Comprehensive Plan. The downtown would have 50 employees per gross acre. Current figures on per-acre employment were not available Tuesday, but Clifton said the city is nowhere near its goal.The city will lose sales tax revenue as office buildings and residences are added to the downtown mix, but Iwen Wang, the city's Management Services director, says it's ultimately a profitable tradeoff. It's the mix of uses that boosts the number of people who spend money in the downtown - and the number a days a week people spend money there.It's the combination that creates the dynamic and the economic engine because the office person will do shopping on their lunch breaks, eat their lunch there, Wang said. You increase the level of spending during the weekdays as well as the families do their shopping and their activity during evening and during weekends.It's really the balancing of all that. Developer Dan Casey, who started Gateway Center about 12 years ago, plans to add an office building to Gateway's 20 acres. The center already is the site of a hotel, movie theater, restaurants and retail shops. He says all those uses feed off one another. Office employees eat at restaurants in the downtown, for example, and movie-goers use the office parking at night while they're in the theater.Casey believes office space will be a lucrative investment for himself and other developers who do similar projects. It's strictly an economic investment, Casey said. It may be more money to build downtown. You get it back. You get it back more than amply.However, cities need to do their part to capture some of that deluge of office building-seekers, said Chris McCoy, business development specialist for the Economic Development Council of Seattle & King County. Start advertising, if they have space, McCoy said of his advice to South King County cities. Businesses are going to smaller towns like Renton or going even farther to Kent and Federal Way, where prices are still in the low to mid $20s. In Seattle, average Class A office rates are $41.07 per square foot, while rates are about $21 per square foot in South King County.Federal Way faces competition from other south county cities as well as Tacoma in its bid to build up its office space.The city of Kent is just beginning to attract Class A office development, said Jacki Skaught, Kent's economic development manager. Until now, warehouse distribution has dominated the city's commercial building use. City employees are taking an inventory to determine how much land could be developed into office use.South King County cities can trumpet more than their higher vacancy rates and lower lease costs, Skaught said. They also can market their free parking, proximity to Seattle, Tacoma and the Sea-Tac International Airport, and more numerous tracts of undeveloped land.What I'm getting is interest from developers who never thought about Kent as a place for Class A office space, Skaught said. Now they're talking to us. Like Kent, the city of Tukwila has historically been dominated by retail and manufacturing commercial uses, said Steve Lancaster, Tukwila's director of community development. But the city is eager to change that.In fact, Tukwila officials hope to find a developer who will construct a 6.6-acre town center on Highway 99 near 144th Street. Tukwila Village - as the project is called - would feature a couple of three-story commercial buildings that could be a mix of office and retail, restaurants, condominiums, a 214-space parking deck and a public plaza. The city recently received a promise of financial help from the federal government.Tukwila's increased interest in office space mirrors that of developers.We've certainly seen more interest in the last few years than in years past, Lancaster said. We still haven't had a huge amount of office development happening but we're definitely seeing that coming our way, mainly because of low vacancy rates in the region and the cost advantage of office space outside of Seattle and the Eastside.We've not had a serious office component, Lancaster said. That diversification we see as healthy for our economy. So does Kent, and for some of the same reasons. It creates more people moving around in the community who need restaurants and services and all the things that go with it, Skaught said. It gives our residents the chance to not commute away. -----------------------------Seattle CBD market at a glance*Vacancy rate in Seattle Central Business District is at .9 percent.* Agents report that no downtown high-rises have a full floor vacant.* Tenants needing more than one floor will have to wait until the fourth quarter of this year, when several larger tenants will move into buildings now under construction.* More than 1 million square feet of the 3.1 million square feet of leasing activity recorded so far this year has been in buildings either under construction or proposed.* Less than a fourth of the 2.8 million square feet under construction is still available for lease. Agents estimate that letters of intent cover at least half the space still available and say they'll be surprised if much space is actually delivered vacant this year.* Average Class A rates are $41.07 per square foot full service.South King County market* Vacancy rate in South King County is about 12 percent.* High rates in the competitive Seattle and Eastside markets have enabled Southend landlords to boost rates by more than 23 percent in the last 12 months, despite climbing vacancy.* As space in the Seattle and Eastside markets remain scarce, rates in the south end are expected to continue to rise by 6 percent to 8 percent over the next year, especially for buildings with high amenities.* While the vacancy rate is about 12 percent, a rate of about 7.5 percent is expected by the end of this year's fourth quarter because of continued strong demand but slowed construction.* Average Class A rates are about $21 per square foot full service. Source: Cushman & Wakefield Research Services -----------------------Tight Seattle office space means tenants looking elsewhereBy TAMMY BATEYAssistant editorResearch analyst Jeanette Ferguson computed the Seattle vacancy rate three or four times and still doubted the result of her calculations.The result was the amazing rate of .9 percent for office space in the city's Central Business District, said Ferguson, who works for Colliers International, a Seattle-based corporate real estate company.I talked to as many people as possible: 'Does this sound right to you?' she said. I was afraid to publish those numbers.That rate means that of more than 30 million square feet of total office space, only about 250,000 square feet are available for companies to lease, said Carolyn Davis, an associate within the research department of Cushman & Wakefield, a corporate real estate company in Seattle.It also means that more and more companies will look to other areas for office space, a trend that Federal Way and other South King County cities hope to capitalize on.In its mid-year report, Cushman & Wakefield describes the Seattle rate as almost unbelievable, as it surpassed the historic low of 1.9 percent recorded at the end of the first quarter.It's much tighter than in previous years, Davis said.As a result, companies are purchasing space in buildings years before they'll be able to move into them. Three years before construction is expected to be completed, IDX Systems Corp., a medical software developer, leased almost 325,000 square feet in the now-named IDX Tower being developed by Hines Interests, LP and Martin Smith, Inc., a local developer, according to Cushman & Wakefield's mid-year report. That's out of a total of 800,000 square feet.Even if companies can find vacant office space, they may not be able to afford it, said Chris McCoy, business development specialist with the Economic Development Council of Seattle & King County. The cost per square foot of Class A office space in downtown Seattle averages $41.07.It started getting tougher for companies to find space in Seattle about three years ago, McCoy said. Since then, the cost has done nothing but go up, McCoy said. Some landlords are raising rates in the middle of negotiations as they learn about comparable spaces leasing at higher rents, according to Cushman & Wakefield's report.The Eastside market is almost as tight and pricey. In downtown Bellevue, the vacancy rate is 1.6 percent and rental rates average $31.71 per square foot. Davis doesn't attribute the tight real estate market in Seattle and the Eastside to any one industry, though some analysts might point the finger at fast-growing high tech, Internet and e-commerce companies.In fact, many dot coms suffered sharp drops in their share prices and venture capital firms stopped funding those that did not foresee profits in the near future, according to Cushman & Wakefield. It's honestly just a lot of economic growth, Davis said of the hot market for office space. People would like to say the Internet companies account for all of it. That's not all the growth. That's some of it. Basic companies like law firms and banks are expanding too. "