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Sunday, November 10, 2002 - Page updated at 12:00 AM

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Tech companies' pullback leaves a glut of office space

Seattle Times business reporter

In tough economic times, the last thing struggling companies like Onyx Software want to do is waste money. But during the first six months of this year, the Bellevue company spent $6.3 million on office space it didn't need.

Locked into long-term leases signed at the height of the real-estate boom, it has enough room for 1,000 employees on the empty floors of two downtown Bellevue buildings. With office vacancy rates at a 10-year high, the company has been hard-pressed to find anyone to take the space off its hands.

"We got crunched along with a lot of companies," said spokeswoman Robin Rees. "We are trying to get this to a point where it isn't a drain on our finances."

Onyx is hardly alone. The region's real-estate market is awash in empty office space that is draining the bottom lines of Amazon, RealNetworks, Onvia and other once-high-flying tech companies. Established names such as Boeing and Microsoft are trying to unload excess space. Even biotech giant Amgen has added to the glut, putting 395,000 square feet of office and lab space on the market as it consolidates business at the Helix Project, near Terminal 90.

Northwest companies have slashed payrolls because of shrinking profit margins, but many have found it more difficult and costly to get rid of real estate.

"Now that they've done the layoffs, the real estate is something they can't do anything about," said John Black, a principal at Bellevue real-estate firm The Broderick Group. "They are all trying to sublease their space, but there is so much out there, it is impossible unload."

More than one-third of the vacant office space in Seattle is listed for sublease. On the Eastside, which felt the brunt of the dot-com bust, sublease space is nearly 40 percent of the total. The Puget Sound region trails only San Francisco and New York in the percentage of sublease space on the market, according to commercial real-estate analysts CoStar Group.

While the amount of sublease space hasn't immediately hurt building owners, who collect rent even if space is vacant, it has dragged down dozens of companies, squeezing tight profits more and creating millions in losses.

• RealNetworks, the digital media company, lost $39.2 million on empty office space last year.

• Onvia, an online government-contracting service, lost $5.2 million at its two Seattle buildings.

• Amazon expects to lose as much as $68 million over the life of its leases for unnecessary office and warehouse space.

Tech phenomenon

"The high-growth companies got hit the most that way — they got caught with a lot of space they didn't need," said Dean Schwanke, vice president of trends for the Urban Land Institute. "It really is more of a tech company phenomenon rather than steady-growth companies like a Procter & Gamble. They didn't go out there during the boom and sign up for a lot of new space."

But RealNetworks did.

In 2000, the Seattle digital-media company signed a 10-year lease for the World Trade Center North on Elliott Avenue, a few blocks south of its headquarters. The plan was to expand into the five-story waterfront building during the next few years, but within months, the entire place was up for sublease.

The $22 million charge the company took last year for the vacant space accounted for nearly one-third of its losses.

At the time RealNetworks signed its lease for the World Trade Center North, vacancy rates in Seattle and the Eastside were at record lows. The space crunch was more worrisome for many fast-growing companies than the skyrocketing rents.

On a recent tour, real-estate broker Doug Hanafin stepped over neat coils of cables dotting the mostly vacant floors of the Trade Center building. He points out the high ceilings, open floor plan and small offices that were selling points two years ago.

"The high-tech company that would have said, 'Great, this is perfect,' that segment of the market is ... virtually dead," Hanafin said.

Onvia has shrunk so much over the past few years that the company needs only about a quarter of the 100,000 or so square feet of office space it leases in its two Seattle locations — on Mercer Street and on Dexter Avenue. Recent talks with a perspective tenant for the headquarters building didn't pan out, said Cameron Way, the company's director of finance.

"We do have a number of people coming through the office, and we know of a few larger companies looking for space," he said.

But no one is biting.

Amazon.com thought it had found the perfect tenant — the U.S. government — to take a big chunk of the excess office space it leases at 705 Union Station. The General Services Administration had agreed to take 120,000 square feet in the building, but it pulled out of the deal before it was finalized, saying it needed less space than it had anticipated.

It's not just the paucity of potential tenants and the surplus of space on the market that makes filling the space so difficult. A host of other problems are involved, subleasing experts say.

Companies often are unwilling to offer subtenants long-term agreements because they hope to take the space back in a few years. And potential tenants worry about what happens if the landlord goes out of business.

"Sometimes that blows a deal," said Tom Bohman, director of Cushman & Wakefield's Bellevue office. "There is space that I was trying to sublease for a company that went into Chapter 11, and that became an issue."

Breaking the lease

Rather than sublease, some companies have abandoned their excess office space altogether, often at huge cost. Internap Network Services, after laying off more than 300 people last year, spent $53 million to break its lease at One Convention Center in Seattle and other nearby properties.

The high cost of breaking a lease may help explain why many companies are sticking out the bad market. But pressure to get what they can for idle real estate is growing for many of them, even if that means renting it at a loss.

Avenue A, an online advertising agency, gave Mobliss a great deal to rent some of its excess office space in Smith Tower, lease documents filed with the SEC said. Mobliss, which makes games and programs for mobile phones, is paying $18 a square foot for space that costs Avenue A about $25.

"If you look at an Onyx or any other company they has excess space, doing real estate, being the de facto landlord is a departure from their regular business," Bohman said. "But they have a lease obligation they have to live up to, so they deal with it."

That makes building owners uneasy. Having so many companies willing to make cut-rate deals can help make a bad market worse. It drives down rents, and owners sometimes find themselves competing against their tenants to lease space.

"It becomes a very multifaceted market, which direct landlords don't like because some tenants just want to give away their space," said Greg Johnson, executive president of developer Wright Runstad & Co. "It just kind of drags the whole market down."

J. Martin McOmber: 206-464-2022 or mmcomber@seattletimes.com

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