Drive around Thurston County and the scattered remains of a slow economy are clearly evident.
Some of it is retail space, some industrial space and some office space, a sector of the Olympia-area commercial real estate market that finds itself with hundreds of thousands of square feet available because of the slow economy and the shrinking needs of state government.
Despite the number of vacancies — and some are quite visible, such as the former Kmart in Olympia, the former Albertsons in Lacey and some of the 15 office buildings that make up the Woodland Square Loop area of Lacey — the Thurston County commercial real estate market is showing signs of incremental improvement.
But there’s still a long way to go.
“It’s better than last year, but not a lot better,” said Pat Rants, president of The Rants Group, a 40-year-old commercial real estate company in Olympia.
Rants has seen recessions come and go before, but nothing quite like the Great Recession and the almost-hard-to-see growth that followed.
“We had some idea about what was going to happen, but I’m still surprised by the depth and length of the recovery,” he said.
The commercial real estate market fell into recession after the slowdown in residential housing in about 2008.
The residential market here continues to show improvement — three straight months of improved sales and median prices since January — and the commercial real estate market likely will follow it out of recession, Rants said, although he’s given up making predictions.
It could be another two years before there is a better balance between tenants and landlords in the market, he said. Another Thurston County commercial real estate expert, Prime Locations President Zach Kosturos, said it might take a decade before all the space is absorbed by new tenants in the Woodland Square Loop area.
Rants, Kosturos and Coldwell Banker Evergreen Olympic Realty President Ken Anderson — three major players in the county’s commercial real estate market — said their internal vacancy rates for office space is about 15 percent, about double since before the recession.
The good news is the private office market has bottomed out, Rants said, and the outlook for retail space has improved, although it might not feel like it.
“It might feel worse because it is so visible, but overall it’s not so bad,” he said.
Some of those visible retail vacancies include the former Top Food and Drug in Lacey and a west Olympia shopping center called Cooper Point Marketplace — which has seen Old Navy, Linens ’n Things, a post office branch, Party City and Famous Footwear all leave — as well as the former Kmart in Olympia and the former Albertsons in Lacey. In Meridian Campus, a light industrial area of Hawks Prairie, a building once fully occupied by Univera now has 52,000 square feet available after a portion of the business moved to Seattle.
But there are pockets of activity, too, such as a new Buffalo Wild Wings restaurant in west Olympia and a new Red Robin hamburger restaurant in Lacey. Hawks Prairie, north of Interstate 5, has welcomed a new Providence Medical Group medical office building.
HOW DID WE GET HERE?
The recession didn’t help, but in the Olympia area, the slower commercial real estate market was exacerbated by a state government in retreat as it dealt with budget shortfalls.
Nowhere was that more acute than in Lacey and the Woodland Square Loop area where the state slashed its leased space needs 40 percent to about 370,000 square feet in 2012 from more than 600,000 square feet in 2009, according to state Office of Financial Management data.
The Rants Group is managing and leasing space in four Woodland Square Loop buildings, with 230,000 square feet of space available, including two buildings that are vacant. It was appointed receiver of those buildings in 2011 after Tacoma-based state-agency landlord Prium fell into default. Rants no longer is the receiver for the property, but continues to manage and lease it for the lender that owns the buildings.
Rants put it mildly in an email, saying, “Woodland Square has been a very interesting assignment.”
Another factor contributing to the slower commercial real estate market is the amount of lending banks can do on commercial property, a kind of “soft cap,” said Anderson of Coldwell Banker Evergreen Olympic.
The Federal Deposit Insurance Corp. has suggested a maximum amount that banks can lend on commercial real estate in hopes of avoiding the excesses that characterized commercial lending before 2008, said Brian Vance, president and chief executive of the parent company to Heritage Bank.
If banks exceed that amount, then they draw even greater scrutiny from regulators, Vance said.
A third factor, which might explain some of the retail vacancies, is the changing nature of retail business itself, Prime Locations’ Kosturos said.
Brick-and-mortar retailers face growing competition from online retailers like Amazon, he said, and major retailers are eschewing large storefronts for smaller stores served by large warehouses.
Outdoor retailer Cabela’s, for example, which built a 182,000-square-foot store in Lacey, has since abandoned that format in favor of a much smaller store size. Its store near Yakima, for example, measures 40,000 square feet.
Some stores that have closed in the area, too, such as Albertsons and Top Food, likely were less about the state of the economy, but more about competitive pressures, Rants said.
Albertsons and Top Food in Lacey were both near Walmart, WinCo Foods and Safeway.
The upside to a slower commercial real estate market is that prices have fallen, and some businesses have taken advantage of those softer prices.
Tanning salon CopperZone expanded to a second location at Southgate Shopping Center in Tumwater late last year, signing a five-year lease for $1,000 less in monthly rent, owner Debra Haynie said. She looked at the same spot a year ago, then took a second look a year later and the lease was “quite a bit cheaper,” Haynie said.
Not only was it cheaper, but the space was twice the size of her original location in west Olympia, including space for a fitness center.
She chose Tumwater because she considered it an under-served market and for its nearby access to Interstate 5.
“Business is fantastic,” she said.
Olympia Press Building co-owner Scott Shapiro of Seattle, who bought the 24,000-square-foot downtown Olympia building with business partner Jim Potter in 2005, is taking a new approach with the space. He has renovated it and wants to divide the space into “stalls,” giving it an open, marketplace feel in hopes of attracting a variety of users, he said.
Rents start at as little as $69 a month, he said.
Still, he called the downtown commercial real estate market “slow,” and somewhat unusual, because leasing rates are so low and yet there still is no demand.
Job growth will help, he said, but downtown still needs to address parking, public safety and measures to protect property.
His building, which is home to Volcano Vapor Cafe, has, in the past, been tagged with graffiti and tenants have experienced broken windows.
Shapiro, too, said the city could do a better job of creating jobs, such as developing a “city code that is focused on bringing companies down here, and supporting businesses to get through the public process in an easier, more productive way.”
“People will live downtown if there are jobs for them,” he said.
Olympia City Councilman Nathaniel Jones agreed that there is a need for more businesses downtown, but he also cited the city’s continuing efforts to improve downtown. The walking patrol, a change in the parking system and improvements to the artesian well are forthcoming. The Washington Center for the Performing Arts also is undergoing renovation, and the city recently hired a consultant to identify underperforming properties that might benefit from a public/private partnership to aid in renewal, Jones said.
“I’m hopeful we’re going to turn the corner,” he said about downtown.
Downtown has its share of vacancies.
The Schoenfeld building at Fourth Avenue and Capitol Way has been vacant for about two years and Kitzel’s Jewish deli recently vacated its spot on Capitol Way.
First Citizens Bank also announced this month that it will close its downtown branch in July, and the Griswold’s building on Fourth Avenue, which burned in 2004, has since remained largely unchanged.
A GOOD SIGN
Meanwhile, a new, 12,000-square-foot office building is under construction in north Tumwater at 3003 Sunset Way, just off Capitol Boulevard.
The Rants Group is handling the leasing and there is interest in the building, Rants said.
A project like that is a good sign for the commercial real estate market because a veteran builder and developer like Kaufman Construction of Olympia sees potential in the market, Anderson said.
“That’s meaningful to me,” he said.
A challenge for the commercial real estate market remains uncertainty about state government and how budget decisions might affect office space needs.
The county will continue to benefit from growth — attorneys and accountants, for example, still need office space — but the local market will have to “make smart choices about what and where to build,” Anderson said. Rolf Boone: 360-754-5403 firstname.lastname@example.org theolympian.com/bizblog Source: The Olympian