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Saturday, November 2, 2002 - Page updated at 12:00 AM

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Vulcan, Children's Hospital near deal

Seattle Times business reporter

Vulcan is close to adding another high-profile name to its growing South Lake Union biotech hub: Children's Hospital & Regional Medical Center.

Sources familiar with the deal say a research arm of the hospital plans to move into the proposed 307 Westlake Building, which also would be home to the Seattle Biomedical Research Institute.

A spokesman for the company said Vulcan had nothing to announce at this time, but it would welcome a tenant such as Children's Hospital. Hospital representatives did not return a call.

A lease with Children's could clear the way for billionaire Paul Allen's company to start construction of its second state-of-the-art laboratory and research building in South Lake Union this year.

Word of the deal comes two weeks after another developer, Touchstone, said it planned to start construction of an 11-story biotech development in the Denny Triangle early next year that will be home to Seattle-based biotech company Corixa.

Such deals have made biotech development the shining exception in the region's dismal commercial real-estate market. But that distinction may be coming to an end for a while.

As investment in the once red-hot biotech industry has cooled, so has the ability of many local companies to move into the bigger and better laboratory and research space that had been difficult to find.

"For the first time in five years, supply exceeds demand," said Hans Kemp, a real-estate broker who specializes in biotech companies at the Staubach Co. "It is a somewhat uncertain future."

Most of the biggest real-estate deals of the year have involved biotech companies, which has boosted the profile of what is considered a small but significant slice of the office market.

Last month, ZymoGenetics said it would lease its historic Eastlake Avenue headquarters after selling it to a California real-estate company for $52 million.

In August, Vulcan started construction of its first new building in South Lake Union, which will house a subsidiary of pharmaceutical giant Merck. Vulcan also is said to have landed a deal with the University of Washington to transform the nearby former Washington Natural Gas building into a biotech-research center.

Meanwhile, Sabey paid $37 million to buy a large chunk of Swedish Medical Center's Providence campus and turn it into laboratory and research space.

Despite the flurry of activity, real-estate brokers and some developers figure that the boom is heading for the doldrums as the industry struggles through a cash crunch.

The economic downturn has made financing increasingly harder to find, and many companies are focusing on saving their cash for research instead of spending it on real estate, said Steve Koon, a broker with Colliers International.

"I don't think anyone anticipated that it would hit biotech so hard," he said. "I've been working with companies that were close to leasing a lot of space — a lot — and the bottom fell out."

The crunch has forced companies large and small to reassess their real-estate plans.

Jim Johnson, ZymoGenetics chief financial officer, said his company's plans to build a $50 million manufacturing plant in South Lake Union remain on hold, "waiting for better days" in the financial markets.

Many of Seattle's bigger biotech companies are in a similar holding pattern.

"The only ones in expansion mode are the small companies who are going from 20 to 30 people or from 30 to 40," Johnson said.

Inologic is one small company with plans to grow. President Ed Field said the company is pursuing permits for an 8,000-square-foot expansion of its space on Elliott Bay, giving it room to grow from 10 people to 25 or 30. To do that, Field said, the company will have to raise more money.

Room to grow had been one of the biggest problems facing the region's biotech companies. But with several large companies moving into new buildings, the squeeze is quickly turning into a surplus.

Corixa will be leaving its First Hill space in 2004 when it moves into Touchstone's 9th & Stewart Building. Amgen will be leaving 11 buildings in downtown Seattle in 2004 for the new Helix project on Elliott Bay. At least 250,000 square feet of lab space will be coming on the market then, Johnson said.

On the Eastside, lab space is available. Icos spokeswoman Lacy Fitzpatrick said 100,000 square feet of lab space is available in Bothell's Canyon Park. Even Icos, which raised $300 million a year ago, isn't spending cash on space. In Seattle, Washington Holdings' five-story building at 1616 Eastlake is available for biotech companies.

Some see opportunity in the amount of lab space coming on the market. In cash-tight times, many companies can't afford the $200 to $250 a square foot it costs to complete a modern research center, which requires high ceilings for beefed-up heating and air-conditioning systems and heavy floors to reduce vibration.

That makes existing lab space more attractive, said Craig Kinzer of Kinzer Real Estate.

"Supply and demand for previously built lab space will be somewhat balanced," he said.

Sometimes too much space can be a good thing for an industry, said John Teutsch, a Seattle developer who has built biotech projects. Affordable laboratory and research space makes it easier for small companies to get started.

"When more space actually becomes available, it sort of primes the pump for more biotech," Teutsch said.

Seattle Times business reporter Luke Timmerman contributed to this story.

J. Martin McOmber: 206-464-2022.

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