Tuesday, November 1, 2005 - Page updated at 12:00 AM

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Patience pays off for big landlord

Seattle Times business reporter

Nobody's happier to see Seattle's economy booming than the region's biggest office landlord, Chicago-based Equity Office Properties.

The giant investment trust bought heavily here in the 1990s, acquiring such trophy properties as the 76-story Bank of America Tower, then had to endure the tech wreck, which turned whole sections of office towers into ghost towns.

Equity held on, renovated and waited, and now is reaping its reward as office vacancies fall and rents rise.

Equity's top Northwest executive, Pat Callahan, talked recently about the office market. The conversation has been edited for length and clarity.

Q: So, what's the story?

A: What's driving all this is job growth. Job growth in the Seattle market is outpacing the rest of the country. Seattle comes up in the top five cities to be in [for investors].

Q: Do you look at monthly job reports?

A: We focus more on what people think is going to happen the next three to four years. I think we're in a second tech revolution. You're seeing the technology companies that survived grow again, and grow in a profitable way.

Q: Has this growth taken place a little bit beneath the surface, because it tends to be smaller companies?

A: Our average deal size in Seattle is about 6,000 square feet. While the headlines occur around multiple-floor tenants like Symetra, there's enormous amounts of activity in that lower size range.

Q: Some people in the industry say Equity was really smart during the downturn. You had people with suicidal leases they had signed, and rather than being the tough guy, Equity worked with companies as much as possible to get them through that period. Do you see the payoff now?

A: In that tech collapse, we had to make judgment calls about businesses that had legitimate business plans and those that didn't. Certainly there were situations where we agreed to concessions because we believed in the future of the company.

Q: You haven't been buying or selling here. What's going on? Everybody else is buying and selling.

A: There are a couple of things going on. One is that Seattle, Bellevue and Portland are core markets for Equity Office. We very much like the assets that we own here. We're in the right submarkets. There might be a few buildings that we sell here and there, but we like the portfolio that we have. On the buying side, we are bidding on the assets that make sense for us, and at this point the pricing has been higher than we think is worth it.

Q: Large blocks of office space in Bellevue are pretty well gone, and new towers are a couple of years off, so what does that mean in terms of companies looking to downtown Seattle because there's more vacant space?

A: There's two facts that really stand out about the Eastside. One is the Bellevue CBD [downtown] vacancy rate at 8 percent and the other is the I-90 corridor vacancy rate at 5 percent. That's really astonishing relative to where we were three years ago.

Over the short term, the largest blocks of space are going to be available in downtown Seattle, but those even aren't going to last that long. The vacancy rate in Seattle has gone down to 12.5 percent, there's been healthy absorption, and most of that vacancy is in the low-rise. The high-rise Seattle market is very tight.

Q: How's the job growth comparing to the late '90s? More broad-based?

A: It's broad-based, it's more sectors and it's not speculative. In the late '90s, you had many technology companies speculating on growth, and that led to such a dramatic collapse. Now, companies are trying to account for growth, but they're not speculating.

Q: How many office towers are going up in Bellevue this cycle? Two, three?

A: I don't know. We just hope that we're going to be one of them. Another factor on the Eastside is the barriers to entry.

Along I-90, there's very little that can still be developed. There's almost nothing along 520, nothing along 405. So over the next five years, downtown Bellevue will be a greater portion of the overall Eastside market because that's where the sites are.

Also, to the extent there are development sites, residential is the preferred option for many of those sites now. Conversion of land sites from office to residential is a very real phenomenon.

Q: In the Equity report on the Seattle office market, there was the line, "Quality of life will soon be a deciding factor." What do you mean by that?

A: There are some very crucial public-policy decisions that need to be made around transportation. We feel like getting light rail from the airport to Northgate is a critical priority. In fact, getting light rail from downtown Seattle to downtown Bellevue is a critical priority for the long-term health of the market.

Q: Are there large companies weighing Seattle against other possible locations?

A: It's less that than it is every company has a choice about where they locate their jobs, and they don't have to locate them all in downtown Seattle or downtown Bellevue. That's the positive part of the WaMu decision to build a headquarters. They're keeping a lot of jobs in downtown Seattle. They didn't have to.

We don't really need for jobs to come from other places here. We have a lot of pent-up demand from both small and large companies. We need to manage that job growth effectively.

Tom Boyer: 206-464-2923 or

Copyright © 2005 The Seattle Times Company


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