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BELLTOWN DENNY REGRADE MARKET ANALYSIS
PREPARED FOR: KBFM
MARCH 9TH, 2012
feet meters
300 PREPARED BY: DAVID KNIGHT, JAMES MAYTON, MARY FIALKO & JEFF BERNARD
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BELLTOWN/DENNY REGRADE MARKET STUDY Purpose of Market Analysis Study We are pleased to present our market analysis for the Belltown/Denny Regrade submarket area. Our team was asked to research and analyze future rent growth for any potential new Class A office space in the area. The goal of the study is to provide rent rates to be used by KBFM to determine the viability of developing office properties on land holdings in the Belltown/Denny Regrade area. There is strong support for future rents growing above the cost of construction for KBFM. We recommend pursuing class A office space development while cautioning KBFM to carefully consider and monitor risks to this unique submarket. While strong rent growth provides motivation for starting development soon, the success of new development in this submarket may be influenced by a few key market participants as well as other macro and micro economic factors. The following report starts with an executive overview, explains some key methodology assumptions and breaks out our findings in detail. Please feel free to contact our team with any questions or additional analysis requests as specific development plans are put in place.
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page ii
Print - Maps ORGANIZATION STRUCTURE
ANALYSIS OVERVIEW & DESIGN 1. Executive Summary 2. Study Design Key Definitions 3. Study Design Methodology 4. Study Design Flow Chart
20. Competitive Base Industries 21. Establishing Capture Rates 22. Net Absorption Capture Rates 23. Denny Triangle Capture Rates 24. Denny Triangle Net Absorption Forecast 25. Demand Risk Analysis
MARKET OVERVIEW SUPPLY 5. Market Context & Productivity 6. Market Productivity Strengths & Weaknesses 26. Supply Overview 27. Land Availability 7. Productivity Attributes 28. Key Competitive Projects 8. Key Market Attributes 29. Amazon’s Place and Influence MARKET DELINEATION 30. Construction Activity 9. Market Delineation Overview 31. Historic Trends Comparison 10. Competitive Markets 32. Completions Forecast 11. Market Characteristics 33. Supply Risk Analysis 12. MSA Economic Profile 13. Market Snapshot RENT FORECAST 34. Equilibrium Rate DEMAND 35. Short Term Rent Forecast - 2 Tier Model 14. Competitive Market Employment 36. Long Term Qualitative Forecast 15. Class A Competitive Market Subset 37. Rent Forecast Risk Analysis 16. Full Service Asking Rent History 17. Vacancy History CONCLUSIONS Belltown/ Denny Regrade Location 18. Employment Growth Forecast 38. Recommendations and Next Steps Within Seattle MSA 19. MSA Projected New Office Space Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page iii
EXECUTIVE SUMMARY
Competitive Market Rent Forecast Rent Growth % Rents (Asking) Concessions Multiplier Full-Service Effective Rents Belltown/ Denny Regrade Rent Forecast Rent Growth % (from CoStar Class A) Rents (Asking) Concessions Multiplier Full-Service Effective Rents
2007 $ $
0 36.31 $ 95% 34.49 $ 2007
$ $
0 37.37 $ 95% 35.50 $
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0.4% -15.5% -0.1% -3.1% 5.0% 7.0% 8.0% 8.0% 8.0% 0.5% -3.0% -3.0% 1.0% -2.0% 36.46 $ 30.81 $ 30.78 $ 29.82 $ 31.31 $ 33.50 $ 36.18 $ 39.08 $ 42.20 $ 42.41 $ 41.14 $ 39.91 $ 40.31 $ 39.50 95% 85% 85% 85% 90% 90% 95% 95% 90% 85% 85% 85% 85% 85% 34.64 $ 26.19 $ 26.16 $ 25.35 $ 28.18 $ 30.15 $ 34.37 $ 37.12 $ 37.98 $ 36.05 $ 34.97 $ 33.92 $ 34.26 $ 33.58 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 9.5% -19.4% 12.0% 2.5% 5.0% 7.0% 8.0% 8.0% 8.0% 0.5% -3.0% -3.0% 1.0% -2.0% 40.93 $ 32.99 $ 36.95 $ 37.89 $ 39.78 $ 42.57 $ 45.97 $ 49.65 $ 53.63 $ 53.89 $ 52.28 $ 50.71 $ 51.22 $ 50.19 95% 90% 90% 90% 90% 95% 95% 95% 95% 90% 90% 85% 85% 85% 38.88 $ 29.69 $ 33.26 $ 34.10 $ 35.81 $ 40.44 $ 43.68 $ 47.17 $ 50.94 $ 48.50 $ 47.05 $ 43.10 $ 43.53 $ 42.66
RENT GROWTH - MAIN POINTS Increasing Rents: Rents are predicted to increase at a much higher rate in Belltown/ Denny Regrade than in the other downtown submarkets, potentially making the area an ideal place for development in the very near future. Submarket rents are expected to increase to the point of potentially creating a bubble. The forecast predicts rent leveling off in the long term as Amazon vacates its old properties and developers slow their delivery of a large new building inventory. Higher Status Hub Location for Class A Office Properties: The Denny Triangle Area is expected to serve as a continuation of the South Lake Union premium office space district and an expansion of the Downtown CBD. The bullish forecast assumes premium office space with key attributes
FORECAST RISKS required to attract creative employees will be concentrated in this area. Geographic constraints, development uncertainties along the central waterfront, Pioneer Square and the SODO neighborhoods, and development trends in the Seattle market all support the continued evolution of this new business district marketed by distinct premium attributes. Competition Between High Level Building Attributes: The market analysis is based on South Lake Union’s recent net absorption history as well as buildings that have attributes that match those of the most recent new development in the Denny Triangle area. Rent growth prospects hinge on the ability to match building attributes to the tenant-specific demand in this area.
Watch Market Movers: Recommend careful monitoring of key single tenants like Amazon and developers with large holdings. A few key market participants may have great impact on future development prospects. Risks: Analysis findings hinge on development market movers and the growth of key Seattle employers. Market analysis should be revisited periodically over new development planning phases.
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 1
STUDY DESIGN
CLARIFICATION OF TERMS Competitive Market: This area consisted of the South Lake Union, Downtown CBD, Belltown/Denny Regrade, and Pioneer Square submarkets as they are geographically defined by CoStar; data collected for the Competitive Market includes all Class A office properties as defined by CoStar. Belltown-Denny Regrade (Submarket): We used CoStar’s geographic definition of the Belltown/Denny Regrade submarket as our subject area and forecasted for that entire area, although we feel most growth will occur in the Denny Regrade component and that the submarket itself is bifurcated in terms of character and product types offered. Further, we see the Denny Regrade area becoming more and more like South Lake Union and the CBD, perhaps being absorbed into one of those or a new, unique submarket as the area evolves and CoStar’s submarket definitions are updated. Class A+ Properties: Class A+ office properties are those that are most productive and are driving demand in the Competitive Market going forward. Class A+ properties include the property subsets
as well as other towers in the CBD that are differentiated by their character and the type of primary tenants they attract. Class A (and below) Properties: Class A office properties as defined by CoStar, of any age and size, appealing to any tenant. Many of these are commodity-type office properties that are not as competitive in the market based on their ability to attract the most desirable tenants and yield high rents. While such properties are influential in the supply and demand forecasts, they are not considered directly competitive with the identified subset that only includes Class A+ properties. Demand Subset: 20 properties that appeal to creative class tenants, located throughout the Market Area but primarily in South Lake Union. In addition to suggestions from our broker, the criteria used to identify the Demand Subset include: • Located within competitive market • Existing Office • Class “A” • 12,000 minimum floor plate
• Built after 1990 • Multi- and Single-tenant • Creative class tenants including medical research and other related industries Supply Subset: 7 Class A+ properties located in or very near to Belltown/ Denny Regrade, analyzed to determine an effective base/present rent for the area going forward Rents: Forecasts were made based on full-service, gross asking rents, since that is the form that all of CoStar’s historical data exprorts take. A “concessions multiplier” was then applied to identify full-service, gross effective rents (see below). Concessions Multiplier: The multiplier applied to asking rents to produce an effective rent achieved by a landlord after accounting for concessions given in the least agreement. The multiplier changes over time based on whether it is a landlord or tenant market. See the Current Rents and Lease Terms section for more information.
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STUDY DESIGN: KEY METHODOLOGY ASSUMPTIONS
METHODOLOGY ASSUMPTIONS Rent Required to Justify Cost of Construction: $40/sf break even cost of construction rent is based on full service, gross effective rents(defined earlier). Tenant allowances are not included in this target break even rent and need to be considered part of the capital budget. 190 SF Per Employee: This study deviates from the normal assumed 200 sf required per employee based on knowledge of layouts in Amazon, Path, Gates Foundation and other employers who have a more dense interior office dense. We compromised by not lowering this number to reflect Amazon’s reported 150 sf per employee ratio, internal employee vacancies, common work areas and hoteling stations for visitors makes us believe the 190 sf number is a more realistic number in the short term. Our short term forecast begins with an estimate of 200 sf/employee and works down to the 190 sf number by the end of five years, accounting for current shadow space in the market. Competitive Market: For clarity’s sake, the competitive market shown on the map to the right includes Belltown/ Denny Regrade (yellow), South Lake Union (blue), Central Business District (Red), Pioneer Square (green). These submarket areas are geographically defined by CoStar.
MARKET RESEARCH METHODOLOGY Market Tour: The team visited the market area numerous times and benefited from members who have experience living in the area. Broker Visits: The team met with commercial real estate broker Dane Murphy for over an over at the Ballard Windermere office. Dane pulled information from other brokers including the following market reports: Seattle Office Market Quarterly Update, 4th Q 2011, Office Space.com Real Estate Market Review, Seattle Office, 4th Q 2011, Kidder Mathews Current News: The team researched local news for the area. Planning Review: Reviewed current planning regulations and relevant white papers on the BDR submarket’s planning vision. Relevant Submarkets: Pioneer Square, Belltown/Denny, CBD, South Lake Union. Map Courtesy of ESRI (Custom Polygons). Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 3
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MEMO - FORECAST METHODOLOGY FLOWCHART Capture Rate
MSA Employment Forecast (Puget Sound Forecasters)
MSA Net Absorption Forecast
Office SF/Employee Forecast MSA
Competitive Market Office Employment Sectors
Office Employment Sectors (Non Goods-Producing)
Belltown/DRG Net Absorption Forecast
C. Market Net Absorption Forecast
Class A+ (Belltown/ DRG) Subset History and Base from CoStar Market Area Completions Forecast
Building Permits/Under Construction Data from City/ CoStar
SLU Recent Share of Market Area Net Absorption
Market Area Class A Asking Rent Growth Forecast
Class A+ (Belltown/DRG) Subset Rent History and Base from CoStar Ite
Belltown Denny Regrade Completions Forecast
12.5% Equilibrium Vacancy, $40SF/ Effective Rent to Justify New
ra tiv eP ro ce s
s
Belltown/DRG Class A+ Asking Rent Growth Forecast
KEY Demand Forecast Supply Forecast Givens/ Costar
Class A+ Concessions Multiplier Base Consultation with Market Participants
Local Knowledge
David Knight, James Mayton, Mary Fialko & Jeff Bernard
Class A+ Concessions Multiplier Forecast Class A+ Concessions Forecast (Short Term)
NEW CLASS A+ EFFECTIVE RENTS FORECAST FOR BELLTOWN/DRG Page 4
MARKET CONTEXT AND PRODUCTIVITY MARKET PRODUCTIVITY STRENGTHS Few Class A Office Growth Opportunities in Belltown: While there are some infill opportunities in the lower Belltown area that will influence the Denny Triangle, this study focused on a specific class of buildings expected to be built in the Denny Triangle area. While this class of buildings have the highest rent potential and line up with future demand, these types of buildings have more capital cost risk. Careful consideration of construction costs must be balanced out when determining future profitability. Higher Status Office Location: The Denny Triangle Area is expected to be a continuation of the South Lake Union premium office space that also serves directly as a transition to the CBD. The bullish forecast assumes premium office space, with key attributes required to attract creative or highly productive employees, will be concentrated in this area. Geographic constraints in Seattle and development trends support the continued evolution of the Denny Triangle.
Importance of Developing Competitive Subset Building Criteria: While this report does take into consideration less productive Class A office space, Class B-C office space, and the impacts of the residential/ retail focus of areas outside of the Denny Triangle, most market participants seem to feel that the real growth potential for the Denny Triangle is premium class A office space. Further, these buildings are assumed to have retail, dining and services on the bottom floors to continue creating an attractive urban environment for employees. This study builds on the current market direction by focusing on existing or planned buildings that fit into the future urban landscape. This provides a more true forecast, but also assumes development is focused on buildings with similar attributes to the competitive subset.
Linkages: While the Mercer tunnel work is causing traffic issues, the eventual transportation linkages to the area will be excellent. Nearby residential development will provide opportunities for urban living and a short walk to work.
POTENTIAL WEAKNESS Traffic: Current congestion is challenging and large influx of employees may further compound traffic issues. Competing Areas: Bellevue, Pioneer Square, Everett and other areas may not have the “cache� that South Lake Union has, but these others do offer similar services and office space opportunities. Employees who live outside of metro Seattle may influence office location decisions along with lower rent costs.
Synergy of Area: The building attributes and urban environment stretching from Control of Available Land: Few owners South Lake Union into the Denny Triangle controlling availabile land may not plan area has a similar feel to a well designed their developments to match rising rents lifestyle center. Assuming development growth or have the ability to overdevelop at continues to improve and expand in lower costs compared to other developers the area, the Denny Triangle will be without land assets. incorporated into a desirable place for employers to place their business offices. Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 5
BROADER SEATTLE MSA MARKET PROFILE
KEY MSA INDUSTRIES - BLS DATA Industry All Misc. Stores Information: Data Processing/ Computers Grantmaking, Biotech, Research & Dev. Financial Institutions Ambulatory Health Care Services
Primary Businesses Total Amazon Microsoft/ ADP PATH, ISB KPMG/Parametric Group Health
MSA Emps. 1,363,645 9,199 57,104 125,805 57,041 69,968
TECH INDUSTRY GROWTH & EMPLOYER FOCUS
LQ 1.2 4.5 1.1 0.8 0.9 Source: BLS
6
th
HIGHEST MSA FOR INVESTMENT
INVESTOR’S OUTLOOK ᐅRanked ᐅ 6th/7th Highest MSA for investment/development prospects, respectively, by ULI’s Emerging Trends 2012 forecast ᐅHigh ᐅ investment appetite may lead to bubbles
INDUSTRY MAKEUP ᐅComparatively ᐅ good unemployment rate and job growth ᐅModerately ᐅ Diversified Economy (Hachman Index of .84)
COMPETITIVE MARKET AREA’S ROLE WITHIN MSA ᐅDominated ᐅ by FIRE, Professional Services, Tech (Medicine, Software, Internet, etc.) ᐅHighest ᐅ Land Prices, Productivity, Density
ᐅTech ᐅ firms driving economic development in Seattle ᐅForbes ᐅ rated Seattle #1in tech growth potential ᐅSupply ᐅ of educated workforce. Tech industry supported by UW and other university research and education ᐅA ᐅ growing demand for urban living, especially within the “creative class” ᐅTech ᐅ industries moving to urban areas to compete for employees ᐅTech ᐅ investment “cluster” in Seattle MSA COMPETITION FOR BELLTOWN/ DENNY REGRADE ᐅBellevue ᐅ and the larger Eastside remain attractive locations for tech firms, particularly for office campuses ᐅPioneer ᐅ Square and SoDo in general have more historic properties but development potential nonetheless, as well as comparable livability features and proximity to the CBD
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BELLTOWN/DENNY REGRADE OVERVIEW - PRODUCTIVITY ATTRIBUTES
BUILT ENVIRONMENT ATTRIBUTES ᐅMajority ᐅ of existing office buildings are older buildings with lower rents. Few class A office buildings with attributes that compete with Demand Subset’s quality buildings. ᐅLarge ᐅ tracks of underdeveloped land in Denny Triangle ᐅFew ᐅ infill development opportunities exist West of 5th-these lots are limited by lower height restrictions and residential zoning REASONS TO BE BULLISH ᐅPlanning ᐅ Vision for Neighborhood ᐅAvailable ᐅ land in geographically constrained city ᐅCBD ᐅ to Southlake: “Lifestyle Center” attracts office tenants seeking the creative class ᐅUrban ᐅ Lifestyle = live in Belltown and walk to work in Denny Triangle ᐅMore ᐅ predictable near-term development environment when compared to SODO, Central Waterfront, and Pioneer Square
HIGH DEMAND / HIGH STATUS AREA The Denny Triangle Area is expected to be a continuation of the South Lake Union premium office space in addition to providing a transitional zone between the CBD. The bullish forecast assumes premium office space, with key attributes required to attract creative employees, will be concentrated in this area. Geographic constraints in Seattle and development trends support the continued evolution of the Denny Triangle. “Belltown Denny Regrade is a bifurcated market. Everything East of 5th is assumed to be prime for Class-A Office Space.”
PHOTO COURTESY OF COSTAR
--Dane Murphy from Windermere
“South Lake Union is the hottest neighborhood for retail in Seattle,” said Jeremy Moller, a broker at JSH Properties Inc. ... no neighborhood has more buzz or interest from retailers at this time.” --Bloomberg Business Week, “Paul Allen’s Vulcan Urges Seattle to Raise Building Heights” February 21, 2012
PHOTO COURTESY OF LIGHT RAIL NOW.ORG
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MARKET OVERVIEW - KEY MARKET ATTRIBUTES
GROWTH POTENTIAL ᐅDepending ᐅ on FAR and height restrictions, Denny Regrade area may support ~24M SF in new office space with Retail on ground floor ᐅAmazon ᐅ only plans to develop 3M of the 24M, leaving large tracks of potential development. (See more analysis regarding Amazon’s impacts to the market in in Supply Section).
KEY ATTRIBUTES ᐅCompetitive ᐅ Cluster: Amazon, Microsoft, Path and other similar industries ᐅProximity ᐅ to Amenities: Density, lifestyle center, proximity to condos ᐅSLU ᐅ Sense of Place similar to an immature SOMA, Pearl District and Yale Street
WHAT’S AVAILABLE ᐅSpaces ᐅ available from 600sf to 40,000sf ᐅFloor ᐅ plates from 20k to 40k ᐅFlexible ᐅ spaces with many allowing tenants as small as 100sf ᐅRents ᐅ are $25/sf to $44/sf
BELLTOWN/ DENNY REGRADE ZONING MAP “Being designated as a planned-community development would give the online retailer greater flexibility in how it obtains permission to build that much office space on those properties, located between downtown and South Lake Union.” ᐅ“Flexible” ᐅ planning Vision for Denny Triangle bridges the gap between South Lake Union and the CBD.
Downtown office core “transition” zone 600’ Height Potential Downtown Mixed Commercial: 240’-340’ West of 5th = Medium Rise Residential Zoning Focus Pikes Place Market Zoning Waterfront Areas open to mixed use, but each project reviewed by city and subject to shoreline plans
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MARKET DELINEATION METHODOLOGY
DEMAND ANALYSIS Competitive Market and Subset: Through our market analysis and conversations with market participants, it was determined that future high-rise development in the Belltown/Denny Regrade (submarket/ BDR) will be driven by newly developed high-end class “A+” buildings. Most significantly, this assumption comes from the continued development and expansion of South Lake Union and the success of tenants located there. Therefore, the competitive market area that was identified consisted of the core downtown Seattle neighborhoods that have similar high-rise zoning and/or productivity characteristics (as described in the previous sections) with the ability to attract similar tenants as seen in SLU. In addition to Belltown/ Denny Regrade, the neighborhoods identified include Pioneer Square, the Central Business District, and of course South Lake Union.
Key Subset Criteria: Within the competitive market area, the demand subset was identified by searching Class “A” building with specific criteria. Based on discussions with a broker and market research, the key criteria we used included: • Located within competitive market • Existing Office
The demand subset identified includes 19 highly productive properties that we believe will compete with future development in the submarket. By analyzing the historic rents and vacancy rates along with developing an understanding of the tenants in those buildings, conclusions were drawn on the demand for competitive class A+ in the subject area. Those conclusions are discussed further in the next section.
• Class “A” + • 12,000 minimum floor plate • Built after 1990 • Multi- and Single-tenant • Creative class tenants including medical research and other related industries
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MARKET DELINEATION METHODOLOGY CONTINUED
DEMAND ANALYSIS Steps and Assumptions in Identifying the Competitive Market and Demand Subset: 1. Identified Class “A” stock in BDR area using general CoStar search (These were considered as relevant, but not competitive for our study after our broker feedback disqualified many of those properties) 2. Eliminated properties that were determined not comparable to majority of others 3. Used building characteristics to define broader Demand Subset search criteria in the Competitive Market 4. Identified additional competitive submarkets for the Competitive Market based on similarities identified in productivity analysis, zoning and inventory of comparable uses within adjacent submarkets a. Belltown/Denny Regrade (BDR)
b. Pioneer Square c. CBD d. Lake Union e. Key competitive market attributes . Proximity to BDR and CBD . Mid to high rise zoning . Ability to attract creative class tenants .
.
Access to cultural resources (parks, art, food, drinks, music, recreation, etc.) (CoStar includes all of Lake Union, which was used for historic rents, vacancy, and absorption. However, the focus of our study and numbers used with ESRI is shown to include South Lake Union only based on focus of market activity and character.)
5. Searched for additional competitive buildings based on characteristics of BDR subset 6. Spoke with broker to determine opinion of which buildings are “True Class A” and will be most relevant for future development in the area 7. Determined competitive subset to consist of “True Class A” that attract primarily creative class (Amazon) and other professional industries including medical research (Path) 8. Applied refined criteria (described above) to CoStar search 9. Further refined subset by removing buildings not considered “True Class A” or did not have the attributes required to attract creative class tenants
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MARKET DELINEATION LAKE UNION BELLTOWN/ DENNY REGRADE CBD PIONEER SQUARE STADIUM DISTRICT
Competitive Market Characteristics
20
PROPERTIES
ᐅProximity ᐅ to Subject Area ᐅCurrent ᐅ Mid to High Rise Zoning ᐅAbility ᐅ to Attract Creative Class Tenants »» Urban character »» Similar adjacent office tenants
4
NEIGHBORHOODS
»» Proximity to cultural resources (parks, art, food, drinks, music, recreation)
Belltown-Denny Regrade Submarket ᐅArea ᐅ Near Denny Triangle Beginning to Feed off of SLU/ Driving Market ᐅHigh ᐅ Tech, Biotech, Medical, Creative Class ᐅOlder, ᐅ Second Tier Class ‘A’ Removed ᐅCurrent ᐅ Competitive “True Class ‘A’ Limited
Demand Subset Criteria ᐅWithin ᐅ Competitive Market ᐅClass ᐅ ‘A+’ Office ᐅBuilt ᐅ Between 1990-2012 ᐅ12,000 ᐅ - 50,000 sf Typical Floor Size
ᐅ6-60 ᐅ Stories (+ a Few 4 Story Buildings in SLU) ᐅCurrent ᐅ Tenant Characteristics ᐅSingleᐅ and Multi-tenant
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DEMAND SUBSET The properties shown here are the class A+ properties included in our demand subset. Some of these properties have been broken out for inclusion into a separate “Supply Subset,” as indicated next to each property.
The main criterion for inclusion
in the Supply Subset is proximity to the Denny Regrade area that is the subject of our market analysis, allowign a more
1918 8TH AVENUE: RBA: 668,333 SF Total Available: 11,326 SF Typical Floor: 20,000 SF Stories: 36 Year Built: 2009 % Leased: 98.3% Rent: Withheld Parking: 1.20 Ratio
818 STEWART: RBA: 668,333 SF Total Available: 11,326 SF Typical Floor: 20,000 SF Stories: 36 Year Built: 2009 % Leased: 98.3% Rent: Withheld Parking: 1.20 Ratio
*Included in Supply Subset
*Included in Supply Subset
2301 5TH AVENUE: RBA: 197,136 SF Total Available: 122,704 SF Typical Floor: 32,328 SF Stories: 6 Year Built: 2002 % Leased: 98.6% Rent: Withheld Parking: 1.10 Ratio
209 YALE AVENUE: RBA: 668,333 SF Total Available: 11,326 SF Typical Floor: 20,000 SF Stories: 36 Year Built: 2009 % Leased: 98.3% Rent: Withheld Parking: 1.20 Ratio
*Included in Supply Subset
*Included in Supply Subset
2001 6TH AVENUE: RBA: 400,369 SF Total Available: 38,899 SF Typical Floor: 11,763 SF Stories: 34 Year [renovated]: 2007 % Leased: 92% Rent: $24.94 Parking: 4.0 Ratio
551 BOREN AVE N: RBA: 150,039 SF Total Available: 25,828 SF Typical Floor: 34,713SF Stories: 5 Year Built: 2011 % Leased: 82% Rent: Witheld Parking: -
realistic picture of what types of rents are being achieved by Class “A+” properties in that specific area (this second Supply Subset allows us to exclude rent data on competitive buildings in further away submarkets such as Pioneer Square that would otherwise be present in the Demand Subset). In this section, rents are shown as listed individually by CoStar.
Rents were later
converted through CoStar property analytics and adjusted per the concessions multiplier to define full service, gross effective rents.
*Included in Supply Subset
David Knight, James Mayton, Mary Fialko & Jeff Bernard
*Included in Supply Subset
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SUBSET 2201 WESTLAKE AVE RBA: 318,880 SF Total Available: 5,209 SF Typical Floor 22,072SF Stories: 12 Year Built: 2009 % Leased: 98.4% Rent: Withheld Parking: 1.0 Ratio
501-505 1ST AVENUE RBA: 287,851 SF Total Available: 103,215SF Typical Floor:45,455 SF Stories: 7 Year Built: 2010 % Leased: 64.1% Rent: $20.00-$22.0(nnn) Parking: 1.40 Ratio
333-345 BOREN AVE N RBA: 569,726 SF Total Available: 0 SF Typical Floor: 43,688 SF Stories: 12 Year Built: 2011 % Leased: 100% Rent: Withheld Parking: 784 covered spcs.
500 BOREN AVE N: RBA: 172,245 SF Total Available: 0 SF Typical Floor: 37,047 SF Stories: 4 Year Built: 2010 % Leased: 100% Rent: Withheld Parking: 258 covered spcs.
605 5TH AVENUE RBA: 254,995 SF Total Available: 72,292 SF Typical Floor: 28,333 SF Stories: 9 Year Built: 2000 % Leased: 71.7% Rent:$18-$22.00 (nnn) Parking: 2.0 Ratio
320 WESTLAKE AVE N: RBA: 169,065 SF Total Available: 3,391 SF Typical Floor: 34,555 SF Stories: 6 Year Built: 2007 % Leased: 98% Rent: Withheld Parking: 180 covered spcs.
2001 8TH AVENUE: RBA: 497,798 SF Total Available: 22,560 SF Typical Floor: 20,000 SF Stories: 28 Year Built: 2009 % Leased: 95.5% Rent: $38.85 Parking: 1.0 Ratio
705 UNION STATION RBA: 253, 769 SF Total Available: 249,555 SF Typical Floor: 23,070 SF Stories: 11 Year Built: 2001 % Leased: 1.7% Rent: $23.08 (nnn) Parking: 1.0 Ratio
1220 HOWEL ST: RBA: 185,939 SF Total Available: 51,776 SF Typical Floor: 226,563 SF Stories: 11 Year Built: 2000 % Leased: 72.2% Rent: Withheld Parking: 1.20 Ratio
*Included in Supply Subset
David Knight, James Mayton, Mary Fialko & Jeff Bernard
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SUBSET
DELINEATION
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321 TERRY AVE N: RBA: 148,300 SF Total Available: 0 SF Typical Floor: 237,084 SF Stories: 4 Year Built: 2007 % Leased: 100% Rent: Withheld Parking: 120 covered spc.
535 TERRY AVE N: RBA: 115,484 SF Total Available: 0 SF Typical Floor: 25,400 SF Stories: 4 Year Built: 2010 % Leased: 100% Rent:WItheld Parking: 1.5 Ratio
401-425 TERRY AVE N: RBA: 140,605 SF Total Available: 0 SF Typical Floor: 35,151 SF Stories: 4 Year Built: 2004 % Leased: 100% Rent: Witheld Parking: -
500-550 TERRY AVE N RBA: 126,443 SF Total Available: 13,657 SF Typical Floor: 21,235 SF Stories: 5 Year Built: 2011 % Leased: 89.2% Rent: Witheld Parking: 363 covered spcs.
410 TERRY AVE N: RBA: 325,762 SF Total Available: 103,215SF Typical Floor: 81,440 SF Stories: 4 Year Built: 2010 % Leased: 100% Rent: Withheld Parking: 415 covered spcs.
David Knight, James Mayton, Mary Fialko & Jeff Bernard
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CURRENT SNAPSHOT: CLASS ‘A+’ SUPPLY SUBSET ᐅAVERAGE ᐅ ASKING RENT IN BELLTOWN/DRG:
ᐅEFFECTIVE ᐅ RENTS IN BELLTOWN/DRG:
»» Asking $33.05 / SF, Full-Service
»» $29.75/SF, Full-Service
»» Based on today’s average full-service asking rent for 7 true Class A properties selected for the “Supply Subset.”
»» This effective rent rate for the Belltown/Denny Regrade submarket is based on the Average Asking Rent multiplied by the 90% Concessions Multiplier appropriate for
ᐅCONCESSIONS ᐅ MULTIPLIER: »» Market participants have informed us that Class Aand Class B buildings need to give concessions worth approximately 10-15% of their lease value (including TIs and free rent). True Class “A+” buildings give substantially less free rent and, if they are new, moderately more in TIs. »» We assume that a “Concessions Multiplier” of .9 is fair for new true Class A properties in today’s market, and that this multiplier will increase along with rent rates, thereby decreasing the value of concessions given.
ᐅCOMPETITIVE ᐅ MARKET EFFECTIVE RENTS: »» Similarly, effective rents in the competitive market have been established by applying a 85% Concessions Multiplier to the average asking rents for that group of Class A properties as defined by CoStar (many of which we feel do not deserve the high status).
»» In contrast, we believe Class A- and lower buildings deserve a “Concessions Multiplier” of .85 in today’s market. $29.75 $25.35
Effective Rents COMPARISON
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 15
FULL-SERVICE ASKING RENT HISTORY Historical data from CoStar was collected and charted to give us insight into the individual asking rent performance of the four submarkets that make up our competitive market (BDR, Lake Union, Pioneer Square, and the Seattle CBD), the competitive market as a whole, the entire Seattle MSA, and the specific properties selected for our demand subset.
Key observations include: 1. Trends from 2001 to 2008 show Lake Union and competitive subset properties headed into the mid $40/sf range. (Class A+ properties, mostly) 2. Belltown proper performs significantly worse than nearly all other competitive area submarkets. We attribute
this to the large number of subpar commodity-type spaces that CoStar categorizes as Class A. 3. Lake Union properties proved immune to the tech bubble recession of 2002-2005. A key factor here appears to be the building anticipation for redevelopment and investment plans by major stakeholders.
Average Full-Service Asking Rent/SF (Source: CoStar) 45.00 40.00 35.00 30.00 25.00 20.00 15.00 2011
2010
C. Market Seattle MSA
2009
2008
2007
Pioneer Square Seattle CBD
2006
2005
2004
2003
2002
2001
Belltown Lake Union
Demand Subset
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 16
TOTAL VACANT AVAILABLE PERCENTAGE HISTORY Similarly, historical data from CoStar was collected and charted to give us insight into the total available vacant space performance of the four submarkets that make up our competitive market (BDR, Lake Union, Pioneer Square, and the Seattle CBD), the competitive market as a whole, the entire Seattle MSA, and the specific properties selected for our demand subset.
Key observations include: 1. Both Lake Union and our Demand Subset properties were able to demand higher rents (as shown on the previous page) than other data groups from 20092011, despite a spike in vacancies caused by the Great Recession and large numbers of completions.
2. Belltown experienced very low vacancy rates from 2009-2011. Digging through the CoStar historical data leads us to conclude that this is because of few new completions and “Legacy Tenants� who refuse to move out of the cheap commoditytype space abundant in the neighborhood that CoStar classfied as Class-A (we disagree with this classification).
Total Vacant Available Percentage (Source: CoStar) 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2011
2010
C. Market Seattle MSA
2009
2008
Pioneer Square Seattle CBD
2007
2006
2005
2004
2003
2002
2001
Belltown Lake Union
Demand Subset
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 17
DEMAND FORECAST, STEP 1 - MSA OFFICE EMPLOYMENT GROWTH FORECAST
MSA Employment (Thousands.)* *Wholesale and retail trade *Information *Financial activities *Professional and business services *Other services Government
2012
1,777.07 267.1 93.1 90.8 250.7 460.1 286.0
2013
1,805.04 270.2 94.5 90.7 262.7 469.2 287.0
2014
1,843.27 275.7 96.0 90.7 275.2 480.1 290.1
2015
1,886.09 281.2 97.6 91.3 288.8 491.7 293.7
2016
1,915.79 282.3 99.1 91.2 301.1 502.3 297.6
% of Office Workers Per Industry* Wholesale and retail trade Information Financial activities Professional and business services Other services Government
40% 69% 82% 61% 40% 44%
40% 69% 82% 61% 40% 44%
40% 69% 82% 61% 40% 44%
40% 69% 82% 61% 40% 44%
40% 69% 82% 61% 40% 44%
Total MSA Office Employees* Wholesale and retail trade Information Financial activities Professional and business services Other services Government
772.3 82.8 64.3 74.5 152.9 184.1 125.8
785.7 83.8 65.2 74.4 160.2 187.7 126.3
802.6 85.5 66.2 74.4 167.8 192.0 127.7
821.7 87.2 67.3 74.9 176.2 196.7 129.2
836.5 87.5 68.4 74.8 183.7 200.9 130.9
Projected MSA Office Employment Growth
12,877
13,329
16,946
19,127
14,740
*Based on PSREF Forecast Data, some sectors hidden
MSA Office Employment Growth Forecast. MSA employment forecast information was gathered from the PSREF forecaset for the next five years to indicate the expected growth in office employment for each of the industries. A. % Office Workers Per Industry. The employment growth forecast for each industry was kept separate to determine the percentage of office employees each industry supports. Using Burns and MacDonald office worker ratios, a more accurate number of forecasted office employees were determined for each industry for the coming years. B. Projected MSA Office Employment Growth. For each year, the total forecasted employment from the previous year was subtracted to provide the projected total MSA Office Employment Growth.
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 18
DEMAND FORECAST, STEP 2 - MSA PROJECTED NEW OFFICE SPACE
1. Projected MSA New Office Space. The quantity of new office space was determined by multiplying the employment growth by a square foot factor per new employee in the MSA. We began with an assumption of the “industry standard” of 200 sf/employee; however, we have adjusted this number down slowly over the duration of the five year forecast to 190 SF based on the following assumptions:
A. Market participants have stated numbers as low as 150 sf/ Amazon employee, and while we feel this may be an exaggeration, we feel that many tenants (and particularly tech tenants that are driving new office space demand) are slowly reducing their office space usage per employee (“Office Space Per Worker Shrinks to 151 SF By 2017”: http://newsmanager.commpartners.com/naiops/ issues/2012-03-06/10.html).
Competitive Market Net Absorption Projected MSA Office Employment Growth Office Space/ Employee MSA Projected New Office Space
2012
12,877 200 2,575,406
2013
13,329 195 2,599,096
B. In our opinion the office space market currently has some “shadow space” which is inflating today’s sf/employee figures. Since our forecast assumes an improving economy and declining vacancy rates, we expect that number will deflate as tenants move towards a “space banking” mode.
2014
16,946 195 3,304,434
2015
19,127 190 3,634,192
2016
14,740 190 2,800,618
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 19
DEMAND FORECAST, STEP 3 - ESTABLISHMENT OF “COMPETITIVE MARKET BASE INDUSTRIES.”
Establishment of “Competitive Market Base Industries.” ESRI’s BAO platform was used to collect employment data for both the competitive market and the entire Seattle MSA. After analyzing the data, we established that the Competitive Market’s overall share of the MSA’s employment was 6%. That number was compared to other industry sectors employment shares, with larger office-space using industries highlighted, and certain industry sectors combined with others as deemed relevant
Industries by NAICS Codes (Source: ESRI BAO) Finance & Insurance Professional, Scientific & Tech Services Public Administration Information Real Estate, Rental & Leasing Retail Trade (Amazon) Health Care & Social Assistance Base Employment Capture Rate
(Amazon’s retail sector was combined with the information sector). Those industries with disproportionately high office employment capture rates were identified and qualitatively translated to match the industry labeling of the Puget Sound Regional Economic Forecaster (PSREF )forecast we received. The highlighted industries include: Retail Trade (Amazon), Information, Real Estate Rental & Leasing, Finance and Insurance, and Professional, Scientific and Tech
TENANTS ARE MAJOR ECONOMIC FORCES
Competitive MSA Current Market Employees Employment Employees Ratio 18,628 67,305 28% 31,805 115,181 28% 16,554 95,218 17% 10,080 75,836 13% 5,851 50,656 12% 11,858 207,674 6% 9,183 194,494 5%
97,121
1,538,491
6%
*Numbers Derived From ESRI BAO
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 20
DEMAND FORECAST, STEP 4 - FORECASTING COMPETITIVE MARKET NET ABSORPTION WITH CAPTURE RATES
4A - Establishing Competitive Market/MSA Net Absorption Capture Rates. Historic CoStar data was used to establish an average “Recent Share Capture Rate” base of 48% for the Competitive Market/MSA total net absorption figures based on quarterly numbers from 1Q2002 through 4Q2011.
This NA capture rate base was a starting point for projecting forward and was later adjusted based on the performance of the “Competitive
Market Base Industries” established in the previous step.
The adjustments can be seen in the table below, and are directly linked to the comparative
performance of each “Competitive Market Base Industry” in that specific year.
Competitive Market Net Absorption
Competitive Market/MSA Projected Capture Rate MSA Employment Growth Percentage *Wholesale and retail trade *Information *Financial activities *Professional and business services *Other services Government Average Rate of Base Employment Change:
2012
2013
2014
2015
Average:
2016
44.00%
44.00%
50.00%
56.00%
44.00%
1.5447% 2.5063% 0.5293% 4.6687% 1.2369% -1.0275% 1.5764%
1.1468% 1.4772% -0.1633% 4.7620% 1.9733% 0.3685% 1.5941%
2.0575% 1.5567% 0.0004% 4.7607% 2.3110% 1.0812% 1.9612%
1.9955% 1.6659% 0.7042% 4.9608% 2.4331% 1.2177% 2.1629%
0.3602% 1.5870% -0.1618% 4.2538% 2.1547% 1.3329% 1.5878%
48%
4B - Calculate Competitive Market Net Absorption. The Competitive Market/MSA NA Capture Rate Projections are applied to the Projected New MSA Office Space projections to provide forecasted competitive market net absorption figures.
Competitive Market Net Absorption Projected MSA Office Employment Growth Office Space/ Employee MSA Projected New Office Space Competitive Market/MSA Projected Capture Rate Competitive Market Net Absorption
2012
12,877 200 2,575,406 44.00% 1,133,179
2013
13,329 195 2,599,096 44.00% 1,143,602
2014
16,946 195 3,304,434 50.00% 1,652,217
2015
19,127 190 3,634,192 56.00% 2,035,147
2016
14,740 190 2,800,618 44.00% 1,232,272
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 21
DEMAND FORECAST, STEP 5 - CALCULATE BDR/COMPETITIVE MARKET NA CAPTURE RATES
Year
SLU Annual Submarket NA Annual N.A.
CR
Modified CR
Historical Notes
2011 1,170,775 1,087,931 108% 108% *22 Class A Office Buildings Present in SLU 2010 940,321 1,250,641 75% 75% *Amazon begins SLU Occupancy 2009 23,335 (813,181) -3% 103% 2008 271,817 (34,112) -797% 897% 2007 229,768 630,456 36% 36% *Amazon Announces Move to SLU, SLUT Begins Service 2006 338,269 1,669,314 20% 20% 2005 (8,436) 176,578 -5% -5% *SLUT Project Approved 2004 309,546 277,656 111% 111% *500,000 SF of RBA Delivered, High Capture Rate 2003 12,192 592,993 2% 2% 2002 36,278 76,368 48% 48% *Paul Allen and Vulcan Propose SLUT Project 2001 3,752 (247,176) -2% 102% 2000 77,382 641,585 12% 12% *Only 3 Class A Office Buildings Exist in SLU 2002-2011 SLU Capture Rate of Competitive Market NA: 68%
SLU History
BDR Forecast
2008 2007 2006 2005 2004
Extreme Numbers
2016 2015 2014 2013 2012
Recession Adjustments for BDR Capture Rate 897% 80% 36% 40% 20% 20% -5% 10% 111% 5%
A Submarket/Competitive Market “capture rate� should be applied to BDR based on the historical performance of SLU
Calculate BDR/Competitive Market NA Capture Rates. To arrive at net absorption forecasts for the Belltown/Denny Regrade area, historic CoStar data on South Lake Union was gathered and analyzed in comparison to CoStar data for the Competitive Market.
This allowed us to determine
a historic SLU/Competitive Market Net Absorption capture rate.
Importantly, the two recessions present in the historical
data produced extreme capture rate numbers (including false negatives) that needed to be adjusted.
Once adjusted, these
numbers represent a reasonable BDR/Competitive Market Forecast for reasons described on the following page.
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 22
DEMAND FORECAST, STEP 7 - APPLY ALL INPUTS AND DERIVE BELLTOWN/DENNY REGRADE NET ABSORPTION FORECAST
Bringing It All Together - A Rationale for the Use of SLU as an Analog. Once all inputs from the previous steps are inserted into the model here, an optimistic net absorption forecast for the Belltown/Denny Regrade area is produced, as represented by the table below. We feel that basing our BDR net absorption figures on SLU’s historical NA figures produces a more accurate forecast than simply looking at historical data for BDR. Our rationale is provided: 1. This study argues that Belltown/ Denny Regrade is on the cusp of achieving a higher status as a target for new
high-quality office development projects. Therefore, a backward-looking analysis of the submarket’s historical performance is not a good indicator of its expected future performance 2. Although we do not project the exact same trends or capture rates to occur, with the announcement of Amazon’s planned development in the Denny Regrade and the conclusion that it represents the most ideal expansion zone for CBD type high-rise office space, it is projected that the area will experience absorption rates more similar to those seen in SLU starting in 2004. Using SLU’s capture rates from that period and an understanding of Amazon’s
Competitive Market Net Absorption Projected MSA Office Employment Growth Office Space/ Employee MSA Projected New Office Space Competitive Market/MSA Projected Capture Rate Competitive Market Net Absorption Forecast BDR/Competitive Market Projected NA Capture Rate BDR Net Absorption Forecast
2012
12,877 200 2,575,406 44.00% 1,133,179 5% 56,658.93
2013
13,329 195 2,599,096 44.00% 1,143,602 10% 114,360.24
new development plans as a point of reference, we applied adjusted capture rates to the Competitive Market Net Absorption forecast shown below. A key assumption in the numbers shown is that we project most all of the office development that will occur in the submarket area will be in the Denny Triangle Area. 3. This was done because of the strong relationship of the type of tenants (including Amazon and Path) that are already influencing the Denny triangle area and the similarities current market activities show with the recent redevelopment of the SLU neighborhood.
2014
16,946 195 3,304,434 50.00% 1,652,217 20% 330,443.37
2015
19,127 190 3,634,192 56.00% 2,035,147 40% 814,058.96
2016
14,740 190 2,800,618 44.00% 1,232,272 80% 985,817.50
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 23
DEMAND FORECAST RISK - AMAZON’S PLANS Our demand forecast is influenced in many ways by Amazon’s recent acquisition of property in the Denny Regrade area and their expressed intent to build 3 million SF in office towers there. The following assumptions based on that activity have substantial impacts on our demand forecast: 1. Amazon will complete 2 million square feet of office space in the BDR area in 2016, based on their aggressive pursuit of permits, rapidly increasing employment, and their desire to avoid renewing leases of other office space. 2. Companies eager to lock in today’s relatively cheap office rent rates will seek to
Amazon Stock (Source: Google Finance)
sign long-term leases of vacant office space in the BDR area, knowing that it is up-and-coming and that rents will rise. This phenomenon shoudl result in enhanced levels of net absorption in advance of new speculative office completions forecasted for later years. 3. Last, Amazon’s ability to develop and other tenants’ desire to follow them hinges on the company’s future economic performance. Continued macroeconomic recovery and strong revenue growth for Amazon are critical to our forecast.
?
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 24
Print - Maps SUBJECT AREA SUPPLY OVERVIEW BDR Current State: Demand is for Class A+ office properties is high and the city, developers , and investors are paying close attention to this area. Thousands of new employees are expected in the area in the coming years, capture rates are skyrocketing, and net absorption is projected to increase for the next 4 years. Competition: From the wider Class A office space supply, buildings that are felt to be driving demand in the area were separated. These are the multi-tenant highrise Class ‘A+’ structures that will directly compete with new deliveries in the neighborhood. 7 buildings in the direct area comprise the highestlevel competition and make up this study’s “Supply Subset”.
Building Name 5th & Bell Bldg Westin Bldg 1918 8th Bldg West 8th 2201 Westlake Ave 818 Stewart Street Office Tower Alley 24 - East Block TOTAL
Importance of Competitive Subset Building Types: The market analysis is based on South Lake Union recent rent growth and buildings that have attributes that match with the direction of the land holdings in the overlap between the Denny Regrade & Denny Triangle areas. Rent growth prospects hinge on the ability to match building attributes with specific demand in this area. Key Supply Attributes: Seven ‘Class A’ office space buildings in the Belltown/ Denny Regrade and South Lake Union Neighborhoods All have been built since 2000 High-end rents Good management High-end tenants High occupancy rates
Year Built 2002 2007 2009 2009 2009 2008 2006
RBA 197,136 400,369 668,333 497,798 318,880 238,200 198,000 2,333,613
NA 2011 -2703 -23340 240148 73049 -7438 5,534 0 285,250
Direct Vacant SF 2,703 32,249 31,854 343,264 7,438 15,457 2,929 435,894
Direct Vacant % 1% 8% 5% 69% 1.6% 6% 1% 18.68%
Direct Available 122,704 33,048 11,326 22,560 5,209 15,457 2,929 224,095
Rents Withheld 24.94 Withheld 38.85 Withheld Withheld 29.17 $ 30.99
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard
Page 25 http://www.bing.com/maps/print.aspx?mkt=en-us&z=14&s=r&cp=47.608
SUBJECT AREA SUPPLY OVERVIEW Land: This land will soon be in high demand as the CBD has less and less developable land available. Pioneer Square to the south has a preservation ordinance that makes development more difficult and sometimes more expensive. The Denny Triangle is in a key location of connecting the Central Business District with South Lake Union, a prime neighborhood in current downtown development. The Denny Triangle has an abundance of large undeveloped lots as seen at right; many of them are surface parking. These are desirable for Class ‘A’ office buildings, as they are large enough to handle high-rise structures with large and flexible floorplates. Density is clearly low in the neighborhood with many opportunities after seeing a clear high demand.
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 26
SUBJECT AREA SUPPLY
1918 8TH AVE PROFILE
Existing Tenant
WEST 8TH PROFILE
Existing Tenant
Available
1918 8th Avenue - 32nd Floor
Two buildings have recently been completed in the neighborhood, 1918 8th Avenue, and West 8th, that are driving the market for supple in the area. Both are high rises with large flexible floorplates and high quality finishes. The buildings are meant to be prestigious, with the motto of the 36-floor 1918 8th as ‘Elevate your Status’.
Due to increased zoning heights in the Denny Triangle, the development of more of these Class ‘A’ Skyscrapers are possible. The rapid occupancy of these buildings, even in a poor economic climate, is a sign that the neighborhood is highly desired and demand should be driving development.
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 27
SUBJECT AREA SUPPLY AMAZON Influence: Amazon has 1.8M SF of office space rented out of 11 buildings owned by Paul Allen’s Vulcan Development and located within South Lake Union. These high-end, recently completed buildings are a sign that the area is changing rapidly. While this magnet company is a huge factor in driving demand, it might negatively impact supply if it makes sudden moves. It owns three blocks in the Denny Triangle, and is pressuring the city to streamline the design review, which would put construction on the fast track. If Amazon moves to its self-developed buildings in the Denny Triangle, an influx of open real estate would flood the market just blocks away in South Lake Union, negatively affecting any new development that could go live around the same time. This forces potential developments to be constructed more quickly than the Amazon developments, and/or tie into specific locational assets in the Denny Triangle.
From South Lake Union....
...to the Denny Triangle
A rendering of the zoning envelope afforded by the Clise purchase in the Denny Triangle. Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 28
CLASS A CONSTRUCTION ACTIVITY PERMIT APPLICATION:
PERMITS ISSUED:
Permit #: 6308627 1201 MERCER ST Commercial/Mixed/Other Open: Application Accepted Applied for Wed Jan 25, 2012
Permit #: 6217572 207 BOREN AVE N New Commercial/Mixed/Other Open: Permit Issued Issued on Thu Jan 06, 2011
Permit #: 6308594 120 6TH AVE N Commercial/Mixed/Other Open: Application Accepted Applied for Tue Jan 24, 2012 Permit #: 6309483 1519 MINOR AVE Commercial/Mixed/Other Open: Application Accepted Applied for Wed Feb 01, 2012
Permit #: 6265061 1620 MELROSE AVE New Commercial/Mixed/Other Open: Permit Issued Issued on Tue Apr 05, 2011
New Construction Application
Permits Issued
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 29
SUPPLY HISTORY
2,333,613sf 18.68%
NET ABSORPTION HISTORY
CLASS A OFFICE SPACE
1000000
CURRENTLY VACANT
500000
Comparative Markets
Belltown/ Denny Regrade
RENT HISTORY $50.00 $45.00 $40.00 $35.00 $30.00 $25.00
Belltown/ Denny Regrade
Comparative Markets
VACANCY HISTORY 50% 40% 30% 20% 10% 0%
Belltown/ Denny Regrade
Comparative Markets
QTD
2011 3Q
2011 1Q
2010 3Q
2010 1Q
2009 3Q
2009 1Q
2008 3Q
2008 1Q
2007 3Q
2007 1Q
2006 3Q
2006 1Q
2005 3Q
2005 1Q
2004 3Q
2004 1Q
2003 3Q
2003 1Q
2002 3Q
2002 1Q
2001 3Q
2001 1Q
2000 3Q
-500000
2000 1Q
0
METHODOLOGY: Here you see the Supply Subset compared to the Competitive Market general Class A spaces in terms of histories of net absorption, rent, and vacancy. This is done to understand any trend variances in the two data groups. The Supply Subset has been separated from the wider Competitive Market to understand the differences between the four neighborhoods in the competitive market, and the specific supply parameters of the Denny Triangle. Forecasts will be done to compare and contrast both the Competitive Market Class A inventory and the smaller Supply Subset in the Denny Triangle. HISTORIC TRENDS: The historic net absorption for both data groups follow the general economy and the greater MSA. Both show rising net absorption, but more drastically in the Denny Regrade area in the most recent quarter. Rents are mostly parallel between the two groups, rising and falling at similar rates. The new buildings in the Denny Regrade area have higher rents overall. Vacancy rates is where the Denny Regrade area differs significantly from the Competitive Market. Vacancies rose drastically in the last part of the last decade as deliveries came to market, but have fallen rapidly as the new buildings have quickly been leased up--an indicator of high demand, especially given macroeconomic contexts. Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 30
SUPPLY FORECAST - COMPLETIONS FORECASTING THROUGH NET ABSORPTION AND VACANCY: The two completed forecasts are for the Competitive Market and an outtake completions expected only in the Belltown/Denny Regrade area. No new Class ‘A’ multi-tenant office buildings are currently under construction in the Denny Regrade Area (only a single-tenant data center project slated for 2012), althought the area is prime for absorbing leakage from the CBD. Projected Amazon completions are potentially skewing the Competitive Market. Importantly, there are relatively few projects in today’s pipeline, meaning that demand could build up through 2014. As projected Amazon completions are delivered, vacancy rates drop quickly although the buildings aren’t affecting demand or supply. Amazon is currently projected to complete 2M square feet in 2016, and an additional 1M in 2017. However, the presence of a company like Amazon will likely drive up demand in the market, requiring a steep increase of supply. This completions forecast will be used to inform the iterative rent forecasting process.
8x
NET ABSORPTION RATE OF COMPETITIVE MARKET
Vacancy Forecast 0.6 0.5 0.4 0.3 0.2 0.1 0 2007
2008
Denny Triangle
2009
2010
2011
2012
Competitive Market
2013
2014
2015
2016
Denny Triangle with Completions
Forecast of Completions: Denny Regrade Inventory Completions Vacancy Vacancy Rate Net Absorption NA Rates
2007 929282 0.00 34048 8% 13820 0.135
2008 1167482 238200 124950 11% 129114 -0.081
2009 2333613 1,166,131 1208408 53% 19716 0.045
Forecast of Completions: Competitive Market Inventory Completions Vacancy Vacancy Rate Net Absorption NA Rates
2007 25,504,276 613,365 1,884,709 9% -35,565 0.075
2008 25,919,476 415,200 2,616,491 11% -62,778 0.075
2009 27,684,851 1,765,375 5,038,179 19% 25,450 0.094
2010 2333613 0.00 949501 44% 85182 0.481
2011 2,333,613 435,894 0 13,349 0.401
2012 2,333,613 70,000 261,031 0 174,863 0.408
2013 2,333,613 154,530 0 106,501 0.400
2014 2,333,613 500,000 92,718 0 61,812 0.400
2015 3,233,613 900,000 55,631 0 37,087 0.400
2016 6,233,613 3,000,000 33,379 0 22,252 0.400
2010 28,701,277 1,016,426 4,567,850 18% 368,722 0.163
2011 29,547,485 846,208 3,769,812 16% 80,448 0.152
2012 30,393,693 376,082 3,197,287 10.5% 572,525 0.105
2013 30,769,775 350,000 2,860,946 9.3% 336,341 0.093
2014 31,119,775 1,100,000 2,594,938 8.3% 266,008 0.083
2015 32,219,775 2,000,000 2,378,558 7.4% 216,380 0.074
2016 34,219,775 3,500,000 5,702,966 16.7% 175,592 0.064
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 31
SUPPLY FORECAST RISK
* WITH HIGH PROJECTED DEMAND IN THE AREA, SUPPLY WILL HAVE TO BALANCE BETWEEN MEETING DEMAND AND GOING OVERBOARD. • • • • •
Poor Quality Existing Supply How Quickly Developers Deliver to Market The potential for construction delays Amazon leaving leased space sooner than expected Limited supply of land controlled by few major participants • Next economic downturn sooner than forecasted • Financing may be hard to obtain because the neighborhood is an unknown • Competitition from Class B (and Class A-) space
Class A vs. B Vacancy Comparison, Competitive Market 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
Class B Total Vacant Available %
Class A Total Vacant Available %
2000 2Q 2000 4Q 2001 2Q 2001 4Q 2002 2Q 2002 4Q 2003 2Q 2003 4Q 2004 2Q 2004 4Q 2005 2Q 2005 4Q 2006 2Q 2006 4Q 2007 2Q 2007 4Q 2008 2Q 2008 4Q 2009 2Q 2009 4Q 2010 2Q 2010 4Q 2011 2Q 2011 4Q
Supply risk is driven by the multiple and deep unknowns of the neighborhood. Underdeveloped, neglected, and untried, the neighborhood has many positive attributes yet no existing proof that it can live up to its potential. Major market movers like Amazon and PATH could release an over abundance of supply on the nearby area if they initiate built-to-suit projects that they later decide to vacate and sublet. Finally, existing supply of Class B buildings will exurt downward rent pressures on any new office construction, so Class B office rents and vacancies within the Competitive Market should be monitored and considered (see CoStar historical data to the right.)
Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 32
ESTABLISHING AN EQUILIBRIUM RATE Prior to forecasting rents, an equilibrium rate was identified. By plotting both the asking rents and vacancy rates for all Class A (as defined by Costar) in the Competitive Market, a 12.5% vacancy was identified as the point where supply and demand meet. When vacancies rise above 12.5%, rents tend to fall.
When vacancies fall below 12.5%, rents tend to rise. This, along with the $40/ sf that was provided as the price that justifies construction, heavily influences the rent forecasts shown in the next section.
ᐅFirst ᐅ we plotted asking rents and vacancy rates for the Competitive Market ᐅAfter ᐅ drawing an Equilibrium Rate Trend Line, it appears to end at about 12.5% $45.00
20.0%
$40.00
18.0%
$35.00 $30.00 $25.00
16.0% 14.0% 12.0% 10.0%
$20.00 $15.00 $10.00
8.0%
C. Market Rent
C. Market Vacancy
6.0% 4.0%
$5.00
2.0%
$-
0.0%
2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q
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5 YEAR RENT FORECAST: TWO TIER MODEL Rent forecasts were made through a fundamental analysis of the historic trends and relationships of vacancy rates and asking rents. As discussed in previous sections, the equilibrium rate of 12.5% vacancy along with the rent rate of $40/ sf (full service, effective rents), known completions, and the absorption forecasts are the primary factors that influence the rent forecast. Most significantly, as the vacancy drops,
rents are projected to rise. As inventory increases, vacancies rise to adjust rents back down. The concessions multiplier (which adjusts over time as well, generally increasing with rent rates) is then applied to the asking rents to identify the full-service effective rent.
COMPETITIVE MARKET To account for our prediction of a fundamental shift in the level of desirability in the Denny Regrade submarket, a two tier model was used. This process began with forecasts for the Competitive Market. To better reflect current and future supply and demand factors, the net absorption numbers that were generated from the economic forecast were adjusted based on market knowledge. Much of the absorption projected in the more recent years was transferred towards 2016 when Amazon and other projects are expected to be brought to market. It should be noted too, that because rents for class A in the competitive market are typically around 85% less than the supply subset for Denny Regrade (on account of CoStar including some low quality buildings in their Class A definition), completions of lesser class A buildings are
expected to still occur below the $40/ sf rent mark. Those completions will have a secondary influence on the supply and demand for our submarket and are therefore included in the forecasts. With those considerations, the forecast for the Competitive Market shows rents steadily increasing over the next 5 years to reach full-service, effective rent of $37.98 in 2016.
DENNY REGRADE (SUBJECT AREA) The second tier of our forecast projects rents for the Denny Regrade submarket through much the same process as done for the Competitive Market. The Denny Regrade net absorption capture rate of the Competitive Market (as generated from the economic forecast) is adjusted to better reflect current market conditions and considers the historic performance of South Lake Union as discussed in the demand section of this document. Again, Amazon’s recently announced plans are a significant driver in this forecast, as their first two million square feet will be delivered in 2016. In addition to demand projected by economic forecasts, it is expected that market participants will begin stockpiling shadow space in the submarket now in anticipation of future productivity expected in the area. For this
reason, vacancies will start falling immediately in the area and begin driving up rents. Moreover, it is expected that a number of smaller projects will be brought into the pipeline sooner than later to capitalize on Amazon’s recent news. That news, along with uncertainties surrounding the tunnel project, central waterfront, and stadium district will keep interest in Denny Regrade strong. As a result, this bullish forecast shows rents reaching $50.94 full-service effective rents in 2016 when Amazon begins delivering approximately two million square feet of office space.
*Here we reach cost to justify new construction (this only needs to occur in one area of the competitive market), driving most of the completions coming on line in 2015 and beyond
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5 YEAR RENT FORECAST: TWO TIER MODEL
12.5% $40/SF
EQUILIBRIUM VACANCY RATE JUSTIFIES CONSTRUCTION
COMPETITIVE MARKET
CoStar Class A Properties Inventory Completions* Vacancy Rate Net Absorption (Economic Forecast) Net Absorption (Adjusted) Rent Growth % Rents (Asking) Concessions Multiplier Full-Service Effective Rents
2011 2012 2013 2014 2015 2016 29,547,485 29,923,567 30,273,567 31,373,567 33,373,567 36,373,567 846,208 376,082 350,000 1,100,000 2,000,000 3,000,000 16% 11% 8.9% 7.6% 7.5% 6.2% 1,087,931 1,133,179 1,143,602 1,652,217 2,035,147 1,232,272 800,000 1,000,000 1,400,000 1,900,000 3,232,272 -3.1% 5.0% 7.0% 8.0% 8.0% 8.0% $ 29.82 $ 31.31 $ 33.50 $ 36.18 $ 39.08 $ 42.20 85% 90% 90% 95% 95% 90% $ 25.35 $ 28.18 $ 30.15 $ 34.37 $ 37.12 $ 37.98
*Completions in 2012 and 2013 are based on projects in the pipeline (under construction, permitted), while further years are projected based on market knowledge
DENNY REGRADE (SUBJECT AREA)
BDR New True Class A+ Properties Inventory Completions* Vacancy Rate Net Absorption Capture Rate Net Absorption (Economic Forecast) Net Absorption (Adjusted) Rent Growth % Rents (Asking) Concession Multiplier Full-Service Effective Rents
Amazon deliveries 2011 2012 2013 2014 2015 2016 2,333,613 2,403,613 2,403,613 2,903,613 3,803,613 6,403,613 0 70,000 0 500,000 900,000 2,600,000 19% 18% 10% 9% 9% 5% 100% 5% 10% 20% 40% 80% 13,349 56,659 114,360 330,443 814,059 985,817 13,349 84,988 171,540 495,665 820,000 2,600,000 2.5% 5.0% 7.0% 8.0% 8.0% 8.0% $ 37.89 $ 39.78 $ 42.57 $ 45.97 $ 49.65 $ 53.63 90% 90% 95% 95% 95% 95% $ 34.10 $ 35.81 $ 40.44 $ 43.68 $ 47.17 $ 50.94
*Here we reach cost to justify new construction (this only needs to occur in one area of the competitive market), driving most of the completions coming on line in 2015 and beyond
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LONG TERM RENT FORECAST: QUALITATIVE In the long-term, rents are expected to fall off from the peak rents of 2016-2017 when Amazon’s new inventory (and others) enter the market. Vacancies and rents will continue to fluctuate slightly in a downward trend as vacancy increases due to other speculative completions that will follow Amazon in the neighborhood as well as the increased draw of Pioneer Square, Stadium District and the central waterfront. Even as rents adjust downward, Denny Regrade will remain above the competitive market class A average for the foreseeable future with effective rents leveling off in the lower to mid- $40/ sf mark.
COMPETITIVE MARKET Inventory Completions* Vacancy Rate Net Absorption (Adjusted) Rent Growth % Rents (Asking) Concessions Multiplier Full-Service Effective Rents
2017 2018 2019 2020 2021 39,605,839 41,605,839 43,105,839 43,855,839 44,605,839 2,600,000 2,000,000 1,500,000 750,000 750,000 6.0% 5.2% 6.2% 6.0% 5.9% 2,500,000 2,200,000 1,000,000 800,000 750,000 0.5% -3.0% -3.0% 1.0% -2.0% $ 42.41 $ 41.14 $ 39.91 $ 40.31 $ 39.50 85% 85% 85% 85% 85% $ 36.05 $ 34.97 $ 33.92 $ 34.26 $ 33.58
DENNY REGRADE (SUBJECT AREA) Inventory Completions* Vacancy Rate Net Absorption (Adjusted) Rent Growth % Rents (Asking) Concession Multiplier Full-Service Effective Rents
Amazon deliveries
2017 2018 2019 2020 2021 8,203,613 9,403,613 10,403,613 10,903,613 11,403,613 1,800,000 1,200,000 1,000,000 500,000 500,000 7% 11% 14% 12% 13% 1,600,000 700,000 600,000 600,000 300,000 0.5% -3.0% -3.0% 1.0% -2.0% $ 53.89 $ 52.28 $ 50.71 $ 51.22 $ 50.19 90% 90% 85% 85% 85% $ 48.50 $ 47.05 $ 43.10 $ 43.53 $ 42.66
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ASSESSMENT OF KEY RISKS TO FORECAST Throughout this document we have attempted to identify various risks to the validity of our supply and demand forecasts, and as you’d expect those same risks apply to our overall rent forecast. The following key sources of rent forecast risk are summarized here, followed by a sensitivity analysis chart that considers theses risks. Amazon’s Performance - Amazon’s ability to develop and occupy the space that we are forecasting is contingent on the company’s performance, as well as our assumption of the company as a catalyst for additional development by other actors. SLU Data from Downturn - The period that we used SLU’s data as an analog comparison featured two recessions and our compensation technique was based on market knowledge rather than hard numbers. Big Dig West - Infrastructure mega-projects are infamous for delays and our forecast
projects a scheduled completion for the viaduct replacement tunnel. Furthermore, while we forecast a positive impact on the BDR area’s desirability, it’s possible that the project will have unintended negative consequences. Few Historical Data Points - While using CoStar’s historical data for analysis allowed more customization of our competitive market area and subject submarket, the data range was quite limited, preventing us from applying rigorous statistical measures for our forecast. Few Key Market Participants - Our forecast assumes that the Clise family’s decision to sell off portions of its Denny Regrade assemblage is an indication that it will sell off the remaining portions to other developers. However, if Clise holds on to its remaining assemblage property, perhaps as a speculation move with the intent to benefit from increased land values due to Amazon’s improvement of its newly acquired land, then our completions
forecast will become seriously off-base. Competition from SLU - Now that Amazon has begun to shift its considerable weight away from SLU and into the Denny Regrade area, it will theoretically vacate space in SLU as its leases expire, creating downward rent unless other substitute tenants are quickly found. In either case, the new vacancies and/or net absorption in SLU caused by Amazon’s void will serve as a strong competitive element for the neighboring Belltown/Denny Regrade area. Moreover, there is talk of a potential upzone in SLU which would further increase competition wiht BDR. Class B Office Space - New Class A office properties will continue to face competition from older, lower-quality properties. If rents for those lesser properties do not rise commensurately with Class A+ properties, it will be difficult to convince tenants of higher-quality buildings’ comparative value.
DENNY REGRADE (SUBJECT AREA) RENT FORECAST SENSITIVITY
Low Forecast High Window
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $34.73 $39.03 $41.93 $44.58 $47.38 $44.38 $42.11 $37.71 $37.00 $35.20 $35.81 $40.44 $43.68 $47.17 $50.94 $48.50 $47.05 $43.10 $43.53 $42.66 $36.88 $41.86 $45.42 $49.76 $54.51 $52.63 $51.99 $48.49 $50.06 $50.13 6% 7% 8% 11% 14% 17% 21% 25% 30% 35% Prepared By: David Knight, James Mayton, Mary Fialko & Jeff Bernard Page 37
CONCLUSIONS AND NEXT STEPS
KEY RECOMMENDATIONS Rent Growth Forecast Supports Development: There is strong support for future rents growing above the cost of construction for KBFM. Carefully Monitor Market: We recommend pursuing class A office space development while cautioning KBFM to carefully consider and monitor risks to this unique submarket. While strong rent growth provides motivation to fast track development plans, future development may be influenced by a few key market participants as well as other macro and micro economic factors.
NEXT STEPS Consider Single Tenant Partners: Finding a single tenant willing to sing a long term lease and collaborate in the development process may be possible, or at least not be overlooked as a strategy considering the potential for other large companies to want their headquarters to be located in the Denny Regrade Area.
Establish Market Analysis Update Milestones: Due to the influence of a few key developers and employers, we recommend KBFM commission a second phase of the marketing analysis before final go, no-go decision are made.
Develop Conceptual Design and Budget: In order to evaluate the viability of providing Watch Market Movers: Recommend careful premium class A office space in the Denny monitoring of key single tenants like Amazon Triangle, careful study of construction costs and developers with large holdings. A few should be developed to further confirm $40/ key market participants may have great sf is the break even rent. impact on future development prospects.
Collaborate With Market Participants: Coordinating development of the Denny Regrade area will help create an extension of the South Lake Union submarket. Rent growth is based on the creation of a high end office core that will attract tenants in the competitive submarket. Capturing premium rents assumes a synergy in the development to create an area that will attract future tenants.
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