"Island office demand is dot.goneSeattle high-tech slowdown cuts into local rent-level edge, broker says."
June 9, 2008 · Updated 6:48 PM
"The slowdown in the Seattle dot.com world is showing up on Bainbridge Island in the form of office vacancies.And with more space in the pipeline, commercial real estate broker Jerry Knipe says that the days of 10 to 15 percent annual rent increases are gone for now.The slowdown in the market is more dramatic than any thing I have seen in the seven years I have been here, he said.Knipe, a principal in the Sunrse Group real estate brokerage firm, estimates that there are now between 25,000 and 30,000 square feet of vacant commercial space on Bainbridge Island, about 10 percent of the total. For the last few years, he said, the vacancy rate has hovered at about 2 percent.It's a simple matter of economics, Knipe said.For the past few years, office space on the island - which averages around $24 per square foot per year base rent - has been much less expensive than downtown Seattle space. But he said that imbalance is now disappearing, and in fact, some Seattle deals are better than island opportunities.There was a company recently talking about coming here and taking about 5,000 square feet of space, Knipe said. But they bailed out for a sublet in a Seattle high-rise, which was actually cheaper.What is impacting the Bainbridge market, Knipe said, are the subleases being negotiated by high-tech firms whose space requirements are diminishing as they cut staff.A developer needs a certain rental rate to cover his costs, Knipe said. But when a company that has signed a lease needs less space, it's willing to sublet the extra space for less than it is paying simply to recover some of its costs.According to Knipe, there are 1 million square feet of office space in downtown Seattle available for sublease at rental rates competitive with Bainbridge Island rates.And when costs are competitive, it's difficult for the island to compete with Seattle as an office location.The principals may live on the island, he said, but an established company also looks at its employees and asks whether it can get its employees to come here, or whether it can hire replacement personnel here.While Knipe said companies frequently have a mind-set that it is harder to hire qualified personnel on Bainbridge and in Kitsap County, the reality doesn't support that.He cites the case of Airbiquity, formerly IDC, a software firm that located on Bainbridge in 1997.They weren't sure they would be able to hire the people they needed, Knipe said. But they found out that executives wanted to move here, and they were able to hire most of the 100 people that work for them from Kitsap County.Airbiquity's success on Bainbridge accounts for a significant portion of the current office oversupply, Knipe said.When city hall opened, a number of city offices scattered through the upper Ericksen Avenue and Hildebrand Lane area moved into the new building. As they did, the rapidly growing Airbiquity took the space. But earlier this year, Airbiquity moved into its own 20,000-square-foot office building on Hildebrand, and that space has generally not yet been absorbed.The new projects coming on line could add to the vacancies, he said, specifically mentioning the new Seaborn buildings on Ericksen and the project being proposed for the old Doogal's location as examples.The Meridian complex on Ericksen - a proposed mixed-use development consisting of medical offices and luxury condominiums - will not be a significant factor, he said, because medical offices are a separate market.You need a lot of specialized plumbing for medical offices, he said. It's very expensive to retrofit that into existing buildings, so it's hard to convert offices to medical.While there is plenty of office space available on the island, retail space is still in short supply, he said.There is a waiting list for space on Winslow Way and in the Safeway complex, in the sense that people call and inquire about space, and we have nothing to show them, he said. Especially on Winslow Way, anything that becomes vacant is either gone immediately or is leased before it hits the market.The only significant unleased retail space on the market is the former brew-pub site in the Pavilion.One fallout from the high-tech shakeout has been a surge in buying office buildings, Knipe said.The big players in Seattle used to have nothing to buy, but now they do, he said, so it's possible for the smaller players to find something in the Bainbridge market. We've had three or four sales this year.Somewhat paradoxically, the falling stock market has actually boosted sales of commercial real estate.The dropoff has helped pull money out of the stock market, he said. I had a client recently who said he was cashing out of the stock market completely, and wanted to buy real estate. "