Many Seattle, Bellevue office buildings being sold for second time in 2007
Many of the area's most prestigious office buildings are about to be sold for the second time this year, and the chain of transactions likely...
Seattle Times business reporter
Many of the area's most prestigious office buildings are about to be sold for the second time this year, and the chain of transactions likely won't end there. As a result, commercial real-estate brokers are warning businesses to brace for higher rental rates.
Beacon Capital Partners, a Boston real-estate investment company, will become the area's largest office landlord when it buys a portfolio once owned by Equity Office Properties Trust in Chicago. Equity Office was sold last month for $39 billion to New York's Blackstone Group. Blackstone now is selling the Seattle-area portfolio for an undisclosed amount to Beacon Capital, which in turn plans to sell 15 of the 29 properties to the Archon Group of Irving, Texas, say people familiar with the negotiations.
Blackstone's sale to Beacon, and Beacon's subsequent sale to Archon, are expected next month.
That would leave Beacon, which already owns two office buildings in the Seattle area, with nearly 8 million square feet, including about 32 percent of downtown Bellevue's office space and 12 percent of downtown Seattle's, according to an analysis by brokerage firm Grubb & Ellis.
If the flurry of quick resale transactions plays out as planned, 15 properties totaling 3.3 million square feet would get their third new owner this year.
Wende Sauvage, a broker at Cushman & Wakefield in Seattle, says Beacon Capital will hold on to properties where it can raise rents quickly. These include the 76-story Columbia Center in downtown Seattle and the 27-story City Center Bellevue.
"Beacon's M.O. is to take a property that has vacancies or turnover and increase the rental rates to unbelievable levels," Sauvage said. "Once they secure tenants, they flip the assets, so they're not long-term holders," meaning Beacon Capital tends to sell properties within three to five years of buying them.
Beacon Capital declined to discuss its plans for the Seattle area, as did Archon and Blackstone.
Real-estate companies are turning their attention to the area's office market as vacancy rates decline and rents rise.
Lease rates for premium office space rose 9 percent last year in downtown Seattle and 16 percent in downtown Bellevue, according to Cushman & Wakefield.
Investors bet the market will stay strong for at least several years, thanks to a diversified economy, trade ties to Asia and reputation as a place where workers want to live.
Last year, sales of area office buildings totaled $2.2 billion, making it the biggest year for commercial real-estate transactions in at least a decade, according to Cushman & Wakefield.
The whirl of transactions set off by the Equity Office sale ensures 2007 will be another big year.
"Previously, we had Equity Office, which pretty much owned the whole shooting match," said Dale Sperling, president and chief executive of Unico Properties in Seattle.
"Now, Beacon Capital will own part of it, someone else will own part of it, and they may take a piece and sell it off," he said.
Sperling agreed Beacon Capital likely will raise rents. "They prefer to have the best assets. That way, they can lead the market" in lease rates.
Until now, Beacon Capital has been a fairly small player in the Seattle area.
In 2004, it paid $100.7 million, or $187.84 a square foot, for Seattle's former Union Bank of California building.
About a year ago, Beacon bought the Skyline Tower in Bellevue from Unico for $129.8 million, or $317.73 a square foot.
One of the first things it did was raise rents, said Dan Foster, a broker who represents tenants in lease negotiations.
"They buy high and sell even higher," said Gary Carpenter, executive vice president at Bentall Capital, a real-estate adviser based in Vancouver, B.C. "They're good at timing the market."
Beacon seems to have timed it right again, said Greg Smith, chief executive of Urban Visions, who worked with Beacon on the Millennium Tower office-and-condo project in Seattle. "There's been no new office product, it's very expensive to create and there's substantial demand."
Smith said Beacon, after paying top dollar for the properties, will be under pressure to raise rents faster than Equity Office likely would have done. "I don't think Equity Office was very aggressive in pushing rents up in Seattle," he said.
Rents can be raised as leases come up for renewal or as new tenants move in. Since most leases are five years, 20 percent tend to be renegotiated each year.
Foster, the tenant broker, said the construction of more than 1.7 million square feet of office space in downtown Bellevue is "the light at the end of the tunnel." In downtown Seattle, two office buildings under construction would add nearly 800,000 square feet. The added space will give tenants some leverage against Beacon in lease negotiations, he said.
Beacon Capital, formed in 1998, buys real estate on behalf of large institutional investors — among them the University of Washington, which invested $15 million with Beacon in three funds between 2002 and 2006.
Beacon says it focuses on places with educated work forces and large clusters of colleges, universities and teaching hospitals, because it considers them less vulnerable to the ups and downs of real estate. It also owns properties in Boston, New York, Los Angeles, San Francisco, Denver, Chicago, London, Paris, and Washington, D.C.
Real-estate observers say Beacon brings a different attitude to managing its properties than Equity had.
Equity Office was publicly held, making it more likely to drop rents during economic downturns to keep buildings full — and shareholders happy — in the belief some revenue was better than no revenue.
Privately held Beacon is more inclined to "sit on vacant space and wait for the right deal to come along," said Thomas Bohman, a broker with Cushman & Wakefield in Bellevue.
Archon Group, the Texas company buying a portion of the Equity Office portfolio from Beacon, manages investments totaling more than $22 billion in North America, Asia and Europe.
An affiliate of Goldman Sachs, Archon already owns the First & Stewart Building in downtown Seattle and CenterPoint Corporate Park in Kent.
Archon's new tenants are likely to face higher rent, too.
"Even if they were the nicest, most reasonable building owners in the world, rents would go up," Foster said. "They're buying these buildings at more than what it would cost to build them, so that puts upward pressure on rents."
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