Wall Street Journal
July 5, 2000
Booming Seattle Tracks Microsoft Tribulations
Possibility of Firm Shifting Workers or Cutting Need for Space Grips Market
East of Seattle, in Issaquah, Washington, a hillside lined with Caterpillar tractors Is being readied for a three million square-foot office campus, large enough for 12,000 employees. A ten minute drive from Microsoft Corp.'s wooded, turquoise-windowed campus at Redmond, it is the site where, according to speculation in the local real-estate community, part of the software giant will strike camp If the company is ever ordered to break up.
Microsoft, of course, tries to squelch such assumptions—"We're confident of winning our case," says a spokesman, Dan Leach, But in developers' and brokers' offices and dining holes, "We talk about Microsoft all the time," says Roger Qualman, executive vice president of Norris Beggs & Simpson Realtors in Bellevue, on a recent visit to check out the hillside along Interstate 90.
The reason is, Microsoft - with seven million square feet of offices for Its 20,000 Seattle-area employees, and hundreds of thousands more square feet under construction is a big fish in a small pond, the first call of anyone with space to lease. Whatever the outcome of the antitrust case, Microsoft can jolt the area's commercial real-estate market just by shifting employees around.
That's especially germane now, amid signs that the red-hot Seattle area office market may be cooling. "It could be chaotic for a while," says Julie Benezet, facilities director for Seattle-based Amazon.com Inc., which has its own problems. She adds, "I wouldn't want to be in their real estate department for all the tea in China."
For local developer such as Martin Selig, the worst nightmare is that Microsoft would accept the recent offer by British Columbia, Canada, of "asylum, " dumping its vast campus on the market at a time when builders' cranes are preparing millions of new square feet. Microsoft officials chuckle at that - "We never consider it," Mr. Leach says.
But the Microsoft spokesman concedes that if the company eventually moves employees to Issaquah, opening up space at Redmond, the company might give up some of the two million square feet it currently leases in Seattle, Bellevue and elsewhere.
Microsoft bought an option on the 150-acre hillside In the city of Issaquah in early 1998, paying a few percentage points of the property's estimated $130 million in value. Architects are preparing a preliminary master plan for the campus, part of a $1.3 billion work-village project called Issaquah Highlands, where a few retail stores and 350 of 3.250 planned houses are already built. But "we haven't exercised our option to buy the land yet," insists Mr. Leach.
The developer, Judd Kirk, president of Port Blakely Communities Inc" says, "We'll go ahead even without Microsoft." That's a big bet on the boom continuing.
Currently, work and living space are scarce In the Seattle area, thanks to Microsoft's huge growth in recent years and the burgeoning of telecommunications and dot-com firms. Office vacancies are less than 2%. Lease rates are rising to $30 or even $40 a square foot, and new buildings are fully leased before they're even completed.
"It's been crazy," says Amazon's Ms. Benezet. After the online bookseller outgrew its headquarters last year-a converted hospital on a green hill, visible throughout downtown Seattle-it put up a letter of credit to secure 400,000 square feet in two sought-after office buildings going up at Union Station in downtown Seattle. Like many dot-coms, Amazon favors an urban lifestyle over Microsoft's suburban village campus.
But the scramble for space has eased in recent months, says John Solberg, president of Minneapolis-based Opus Northwest LLC, developer of three Union Station buildings; "Instead of having five tenants bidding on our space, we're down to one or two." Opus recently contracted with investors to take the buildings off its hands.
The shakeout among dot-coms is responsible. As in other Internet communities, they'd been taking most of Seattle's new space—8O% of Opus's Union Station buildings and an estimated half or more in other new developments. But in a sign of the times, Amazon's Ms. Benezet was recently offered space downtown that "was freed up by some dot-coms," she says.
Even Amazon, the biggest dot-com in town, is reining in to pursue profit. It has decided to forgo an additional 750,000 square feet it was seeking, and to sublease 80,000 square feet of the Opus buildings.
Microsoft became a boon to developers in recent years as it outgrew its campus. When multibillionaire developer and Microsoft co-founder Paul Allen decided in 1998 to build a 600,000 square foot office park near the Issaquah Highlands site, his real estate people called on Microsoft. They liked the plan so much-a concrete and colored glass look-a-like of its own campus buildings, with recreational facilities-they leased the whole thing and have started moving in.
The Redmond real estate team, which has seen some turnover lately, is considered quite hard to get to know. But one big Seattle landlord, Chicago-based Equity Office Properties Trust, got a foot in the door earlier this year after Microsoft acquired Visio, a tenant in an Equity Office building. Recently, "we met with Microsoft's team to see if we could help with future requirements," says John Gallander, Equity Office's head of leasing in the northwest.
In the past 12 months, brokers estimate, Microsoft gobbled one million-plus new square feet in the Seattle area to accommodate about 5,000 new employees.
But its space needs may be easing. For the coming 12 months, right now it has only 3,000 job openings, requiring perhaps 150,000 square feet-which may partly be supplied by jutting cranes on its campus. Microsoft won't discuss its real estate needs except to say it expects to keep growing.
Like many places, the Seattle area tends to see overbuilding in boom times. In the 1988, developer Mr. Selig sold Seattle's tallest building, now called Bank of America Tower, "to pay some bills," he says; it's now owned by Equity Office and the state of New York. But he's back in the game with several prospective buildings. "In a hot market, it doesn't bother me" to build before securing tenants, he says.
Currently, 2.8 million square feet of offices are rising in Seattle; another 4.6 million are proposed according to Cushman & Wakefleld data. If all are built, existing space would swell by 25%. In booming Bellevue's business district, Cushman 's count of new space being built and proposed represents an 80% increase in office space.