Towering Vacancies -- Competition For Tenants Is Fierce As Building Owners Try To Fill Downtown High-Rises

A city's high-rise office buildings evoke images of power: granite walls, marble lobbies, mahogany-paneled elevators and plush offices high above the street.

Step into one of those elevators in Seattle, though, and start pushing buttons. At the city's newest high-rise, AT&T Gateway Tower, the elevators won't stop at many floors. At another tower, Two Union Square, the doors often open onto unfinished shells with bare concrete floors, exposed metal air ducts and wires hanging from empty beams.

At other buildings, entire suites stand empty.

Gateway and AT&T, each only about half full, are in worse shape than the other downtown high-rises. But other owners, too, are caught in a fierce competition for tenants, the result of an oversupply of office space that will take years to fill. Four new buildings opened between 1988 and 1990. With each opening came a million square feet of office space - and a smaller chance that the developer could find enough tenants to fill his building.

Faced with mounting debt and a slow economy, several developers have sought new loans or sold part-ownership of their buildings. They've also stolen tenants from each other by offering low rents, free parking and other inducements.

The accounting firm of Deloitte & Touche has been negotiating to leave 1111 Third Ave. and lease about 65,000 square feet, or three floors, in Gateway. The new building's developers have offered Deloitte annual rates of $17 a square foot - significantly below the building's $20 to $29 advertised rate. Many insiders who consider the deal done are declaring defeat for the firm's current landlord, Wright Runstad & Co.

Stanley Kravitz, a vice president with CB Commercial Real Estate Group (formerly Coldwell Banker), said the market's too unpredictable to pronounce an early victory for Gateway.

"The market is so competitive right now," he says, "I just wouldn't underestimate what anyone can do."

Or what they will do.

Kravitz recalled the competition between Gateway and Two Union for Sea-Land Service Inc. last year.

"At several points in time, both buildings felt they had the deal, only to find they didn't."

Developers of the two buildings have a history of trying to undercut each other during negotiations. A battle in 1987-88 for the Bogle & Gates law firm is legend by now. The firm had signed a tentative agreement for space in Gateway when Two Union won the firm's seven-floor lease by giving away a huge "signing bonus" and 15 years of free parking. The lease could total $75 million for Two Union if Bogle & Gates exercises 20 years of renewal options.

Craig Kinzer of The Norman Co. real estate consultants/brokers, said giveaways aren't as large or as common now as they have been the past few years. But a survey by Kinzer's company shows that "effective" lease rates, which include overall rents minus discounts, average less than $19 in new high-rises - even less than in 1989.

Those rates, several dollars lower than the rates developers advertise, are called "cocktail rates" because they are the ones insiders talk about at parties.

This year, Gateway tried luring the Federal Home Loan Bank away from Century Square by offering to buy out the three years remaining on the bank's lease. Instead, Century Square's developers, Prescott Co., fought off Gateway and extended the bank's lease by agreeing to cut the rent and shrink the space from 60,000 to 40,000 square feet, says Prescott partner Dick Clotfelter. The bank needed less space because of government reorganization.

Despite that deal, Clotfelter says: "We're not going to get into the battle between Two Union and Gateway. They're just making uneconomic deals."

The problem for landlords is that there are so few new companies - or even existing companies with expansion plans - looking for space. There's just a lot of "churning" of tenants between buildings.

"There aren't a lot of plums," says Steve Trainer, senior vice president of Wright Runstad & Co. "They all have leases that go two or three more years.

"To me that's not a plum. It's a prune."

The merger announced this week between Seafirst Bank and Security Pacific Bank, two of downtown Seattle's major tenants, is expected to result in office consolidations that will add even more space to the already overbuilt market, commercial real estate experts say.

There is only one new office building under construction downtown: the Second and Seneca Building developed by Wright Runstad. The 22-story building, scheduled to open in September, will be home to some of Washington Mutual Bank's operations.

Trainer said his company hasn't aggressively "pushed" the building to prospective tenants because it wants to wait until the competition dies down. Wright Runstad and others believe the lack of construction now means much of downtown's vacant space will be taken in a year or two, allowing rents to rise again.

"We see a window of opportunity, where we'll be the only new building on the market," Trainer said of the Second & Seneca Building.

The project has the luxury of waiting, he said, unlike Two Union and Gateway, which have been opened awhile.

"They're stuck with having to fire-sale their space a little bit more."

In truth, the other developers seem torn about how far to go in cutting rents or offering things like free space, free parking and luxurious office decor to tenants.

On one hand, there isn't as much empty space as there was a couple of years ago, at the time of the Bogle & Gates deal. Vacancy rates downtown have dropped from 16.25 percent in September in mid-1989 to 14.77 percent last spring, according to The Norman Co.

On the other hand, the developers who do have a lot of empty space have been forced to "carry" their buildings - covering debts with extra cash - much longer by now. There are fewer tenants available to sign, and the pressure of mounting debt adds urgency to every lease negotiation.

Tenants are aware of developers' financial problems:

-- Developer Martin Selig was forced to sell the 76-story Columbia Seafirst Center back to his lender, Seafirst Bank, in December 1989. He sold the building for $350 million. Selig, who opened the tower in 1985 before the latest construction rush, initiated some of the competitive tactics developers still use to lure tenants.

-- Last year, Seafirst Bank took the title of Pacific First Centre in lieu of foreclosure. The developer had not obtained long-term financing to pay off Seafirst's short-term construction loan. The developers, Prescott Co., recovered the title after selling some of their share of the building to an investor and finding a long-term lender.

-- Also last year, Two Union Square's developers refinanced that building together with its sister, One Union Square. In the deal, the State Investment Board, which manages state employee pension money, increased the developer's mortgage from $177 million to $199 million and approved a separate, $20 million emergency loan. Unico Properties, Two Union's developer, expects to begin drawing on the $20 million this month to cover debt and other expenses, president Don Covey said. Two Union, with 56 stories and a million square feet, is 58 percent full.

-- The million-square-foot Gateway is just 43 percent occupied, less than any other high-rise. The status of the 62-story building has stirred speculation that developer Herman Sarkowsky and his partners are losing nearly $1 million a month. Sarkowsky denies the amount but concedes his building, like others, is not making enough rental income to cover expenses.

Seafirst Bank is trying to sell part-ownership in Columbia Seafirst Center, and Prescott is considering selling its share of Pacific First Centre.

Meanwhile, the leasing game goes on.

There are few tenants in the market whom developers covet.

Aldus Corp., which rents three buildings in Pioneer Square, is looking to lease 300,000 square feet - the equivalent of 15 floors in a high-rise. The search so far includes everything from downtown high-rises to Eastside corporate campuses. Office buildings on the Eastside and in other suburbs are competing more and more with the downtown Seattle market.

Continental Bank, which is looking for 60,000 square feet, is big enough that its executives can tell developers they want a building named after the bank. Of course, that narrows the bank's search. A key prospect, reportedly, is Selig's Key Bank Tower, which won't keep that name after Key Bank moves to Gateway at the end of the year.

U.S. Bank was shopping casually with the idea it could move from the U.S. Bank Building, which it owns, on Fifth Avenue and lease 250,000 square feet somewhere else. Supposedly, the bank decided earlier this year to stay put, in part because it wasn't sure what to do with the U.S. Bank Building. But insiders say the bank might negotiate an anchor spot in one of several unbuilt - and so far unfinanced - buildings. A deal would help a developer get the financing needed to begin construction.

Given that there are so few "plums" available, landlords are said to be lowering the standards by which they judge prospective tenants.

Developers are laughing behind Selig's back because the maverick developer took the U.S. Customs Service as a tenant in the Key Bank Tower.

Conventional wisdom goes against accepting government tenants. They don't spend a lot to make their offices look fancy; they crowd many employees into small spaces; they get heavy foot traffic; and, according to some brokers, they attract "undesirables" who don't blend in with the Brooks Brothers crowd.

Since Selig leased to the Customs Service last spring, rumors have circulated that Customs agents would be shuffling handcuffed prisoners up the Key Tower's elevators. Selig and Customs officials deny the rumor, but the bad image alone could make Selig's leasing job a bit tougher.

Selig insists he got a premium tenant who took 60,000 square feet for 10 years and will pay its bills on time.

He has a point.

His competitors may be laughing, but most of them tried to get the Customs Service for themselves.

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COMPETING FOR TENANTS

An oversupply of office space in downtown high-rises manes developers are scrambling for tenants. They are reportedly discounting rental rates as much as several dollars from the rates they quoted below.

AT&T GATEWAY TOWER.

43% full.

700 Fifth Ave.

First occupied: 1990.

Developer: Herman Sarkowsky.

Size: 62 stories; 990,000 square feet.

Leasing rates: $20 to $29 per square foot.

WASHINGTON MUTUAL TOWER.

95% full.

1201 Third Ave.

First occupied: 1988.

Developer: Wright Runstad & Co.

Size: 55 stories; 1.05 million square feet.

Leasing rates: $18 to $30 per square foot.

COLUMBIA SEAFIRST CENTER.

(Columbia Seafirst Center, an older building, is included because it triggered aggressive competition for office tenants.)

88% full.

701 Fifth Ave.

First occupied: 1985.

Developer: Martin Selig; the building is now owned by Seafirst Bank.

Size: 76 stories; 1.4 million square feet.

Leasing rates: $21 to $27 per square foot.

SECOND AND SENECA BUILDING.

35% full, unfinished.

Second Ave. and Seneca St.

To be occupied: September, 1991.

Developer: Wright Runstad.

Size: 22 stories; 400,000 square feet.

Leasing rates: $18 to $30 per square foot.

TWO UNION SQUARE.

58% full.

600 Union St.

First occupied: 1989.

Developer: Unico Properties.

Size: 56 stories; 1.054 million square feet.

Leasing rates: $18 to $26 per square foot.

PACIFIC FIRST CENTRE.

80% full.

1420 Fifth Ave.

First occupied: 1989.

Developer: Prescott Development.

Size: 44 stories; 916,000 square feet.

Leasing rates: $20 to $30 per square foot.