WEIGHING SEATTLE’S FUTURE WITH FEWER OFFICES

The pandemic prompted us to rethink how and where we conduct our 9-to-5s, sending the commercial real estate sector into near panic. Office buildings across downtown Seattle are a worrisome example, where vacancy rates have jumped from about 10% in late 2019 to 28% after Q1 of this year. Respected commercial brokerage Colliers said downtown office vacancy could reach 31% by year’s end.

Let that sink in: About one in every three office buildings potentially sitting empty, an outcome of the health crisis that started in 2020. Many businesses are shrinking their office footprint or simply moving out of pricy areas upon lease renewal. The shock is felt across city leadership, office landlords and bankers who lend millions to property owners.

The fallout could be dire for landlords facing mounting debt amid sagging revenue. Martin Selig Real Estate, one of the biggest holders of Seattle property, is at a point in which it cannot make interest-only payments on seven addresses and is reportedly (paywall) negotiating with loan servicers – a sign of potential default on Selig’s more than $230M in loans. Occupancy rates in those buildings are a combined 69%, down from 92% seven years ago.

Seattle, including King County’s Eastside, is a haven for some of the world’s biggest technology companies which have significantly altered our real estate landscape for more than a decade. A slowdown in regional hiring and persistent – yet generally small – layoffs among some tech firms have sent Seattle unemployment to 4.1% (March) from 3.1% a year ago, contributing to downtown pedestrian traffic being only 53% of what it was five years ago.

There are no signs suggesting a return to fully operational offices. America has spent the last two years with about 30% of people working from home (chart below), or roughly 4.5 times more than in 2019. Another assessment, conducted by an urban studies expert and issued last October, puts Seattle at No. 63 among 66 North American cities for successful post-pandemic recoveries.

You would think that the concept of shrinking office space would be contrary to the vitality of a successful city. Louis Sullivan, the so-called father of high-rise construction design, once said: "The skyscraper establishes the block, the block creates the street, and the street offers itself as a riverbed to the stream of life that flows through the city."

Are we watching riverbeds of urban enterprise dry before our eyes? Is Seattle in a downtown decline or are we witnessing the beginnings of an urban revival with high-rises at the center of change?

We are undoubtedly experiencing a reshaping of the commercial/office landscape. City leaders appear to understand that, as offices become obsolete, a rare generational opportunity is presented, potentially generating more housing where people can enjoy social districts that prioritize equity, inclusion and safety.

Many signs point toward an improving Emerald City, conducive to residential living:

• Downtown population is 106,000 people and continues to grow;
• Housing units, including backyard dwellings, climbed by 12,500 across the city in 2023;
• The crime rate in downtown is 14% lower than a year ago;
• Seattle Convention Center expansion has led to a 27% annual increase in events.

“We should never underestimate the significance of downtown Seattle to our city. It’s not just about buildings and businesses, it’s about making the heart of our city accessible and welcoming for everyone,” said City Council President Sara Nelson, as quoted by The Seattle Times.

Many recognize that these monolith towers of businesses past are underutilized, therefore underserving this fine city. Calls are getting louder for converting these buildings to residential destinations.

“The idea of ‘the office district’ is now obsolete,” said Karen Chapple, director of the School of Cities at the University of Toronto. “We need something else … and we want to think about it as an inclusive place, as an affordable place, as a place where you can do all kinds of activities.”

Easier said than done, unfortunately. For example, changing the use of a building is prohibitively expensive when it has windows that don’t open, no balconies and a structural core with multiple elevators. Developing interest from real estate movers and shakers for a high-risk facelift will be a great challenge amid rising financing and construction costs.

At least our city isn’t heavily leveraged with vacant offices. The Downtown Seattle Association noted that 70% of land in San Francisco is office space, compared with only half in our city. The business group describes our area’s varied development mix, which also includes stadiums, music venues and restaurants, as akin to having a “diverse stock portfolio.”

So, where could the money come from? The Biden administration recently unlocked $45B in stimulus funds to help kickstart office-to-residential conversions – with stipulations, of course. Additionally, state and local governments are examining tax breaks and other incentives to help produce results.

Mayor Bruce Harrell has submitted legislation to City Council to ease the conversion process, exempting developers from Seattle’s affordable housing requirements to either include lower-cost homes or pay toward a fund for such housing. (The council’s Land Use Committee is weighing the proposal.) In addition, the city has identified buildings that may make good candidates for conversion.

A report this year from Moody's commercial real estate division believes 70 Seattle buildings would be suitable for conversion. Atop the list: Olympic Tower, an apparently vacant 13-story, terracotta-fronted office building from the 1920s with an assessed value of $20M. (An aside: Initially known as the United Shopping Tower, the building was one of Seattle’s first vertical retail establishments. It opened at one of the worst times – Saturday, Oct. 26, 1929 – three days before Black Tuesday, the height of the stock market crash that sparked the Great Depression.)

The thought of conversions all sounds promising. But, in addition to removing the affordable housing mandate, as proposed, the city estimates only about a dozen projects could be redeveloped over the first seven years, amounting to about 1500 housing units. True, that’s better than nothing but the county estimates Seattle needs 112,000 homes over the next 20 years.

Attracting more residents, particularly those with significant means, will help bolster the tax base and likely deter crime through increased activity on the streets. We all want a vibrant city to live in or at least visit – and are eager to effect change.

“For all of human history, humankind has been tied into work where it lives. We were farming the farms and we lived on our farms. We were working in factories and we were living closer to factories,” noted Columbia University Professor Stijn Van Nieuwerburgh, speaking in January to “60 Minutes”. “We no longer have to live where we work. That’s a very transformational idea, and I believe society is only at the beginning of realizing the full potential of that idea.”

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