Back in 2006, 2009 seemed like the ideal time to bring a new Class A office tower into the Seattle market. This $185 million Touchstone development would be the premier new office tower in Seattle. But by the time the West 8th Tower received a certificate of occupancy on September 9, 2009, the economy was in the tank, real estate values were down 20 to 40 percent, lease rates were down 30 percent and the tenant improvement dollars were up by 100 percent.
The short-lived landlord’s market was gone, turning into a tenant’s market virtually overnight. Low rates, concessions and lots of tenant improvement dollars were the name of the game if you wanted to do any deals. One other thing worth noting -- this was a 500,000-square-foot speculative office building. In 2009 there wasn’t any talk of recovery, only, “Have we hit the bottom of the market yet?” Optimism in the development world bordered on the nearly pathetic outlook of “Is this the worst it can get?”
Most of us have had our share of complex and difficult projects. The development of West 8th had challenges but really nothing out of the “ordinary,” (although, that could be relative in my opinion). When could it ever be a problem to develop a half-a-million-square-foot speculative office building?
Here Today, Gone Tomorrow
So let’s rewind to the beginning. The first parcel was acquired in April of 2003. After completing the land transactions with two different property owners, Touchstone had an approximately 35,000-square-foot downtown lot. The property is bordered by Westlake Avenue, 8th Avenue, Virginia Street and the alley. The zoning for the property was Downtown Office Core 2-300 (height) with a base FAR of five and a maximum of 10. In Seattle you can buy your way to a maximum FAR.
Touchstone submitted for a MUP (Master Use Permit) in December of 2003. The MUP is the Seattle discretionary permit process that includes Design Review Board approvals and public comment. Also in December of 2003, significant negotiations were started with a tenant for a pre-lease of 148,000 square feet. In September of 2004 a MUP was issued for a 20-story building, comprising 359,000 square feet of office space, 32,000 square feet of retail and above and below grade parking for 442 cars. So far so good: discretionary entitlements completed and a pre-lease of nearly 50 percent in the works.
About six months into the lease negotiations the deal began to fade away, and then it was gone. The lack of a pre-lease was a big setback for the project. It was time to regroup and decide on a new course of action. Through the end of 2004 and into 2005 the project moved to a back burner, now without a tenant.
Bike storage, floor-by -floor individually metered HVAC controls and outdoor air delivery monitoring support West 8th’s sustainability.
Around the same time, the City of Seattle was in the midst of upzoning the North CBD known as the “Denny Triangle” area where our building was located. The city was working through an Environmental Impact Statement process, including public hearings. This up-zone would add height and FAR to the project. The problem was this could take up to two years of time and an extensive City EIS process. Touchstone wanted to take advantage of the new zoning the city contemplated, but was concerned with the amount of time it would take to get approved. (If the up-zone was approved, the master use permit process would start all over again.)
Creative Rezoning Leads to Increased FAR
Working with a land use attorney, Touchstone came up with the idea of a “spot re-zone.” A spot re-zone requires City Council approval, but it does allow you to proceed through the discretionary approval process -- assuming you are successful with the spot re-zone. So the plan was to request a spot re-zone for the property based on the city’s up-zone currently underway. When the City approved the up-zone, we would already have proceeded through the entitlement process and would be the first building ready with the additional height and FAR in the new DOC II - 600 zone. The new zoning plan increased the FAR maximum from 10 to 14.
In early May 2006 Touchstone submitted for the second MUP, assuming the maximum up-zone would happen. This time everything worked out. We made it through entitlements, the city approved their own up-zone and we then withdrew the spot re-zone. Touchstone was nearly a year ahead of the competition and the building grew by eight levels. The new MUP issued in November of 2006 allowed 497,000 square feet of office and another level of parking, along with the 32,000 square feet of retail.
Remember, some of the best times for commercial real estate were back in 2006. Lease rates were on a steady rise up, CAP rates in the fives were more the norm than the exception and the economy was in hyper-drive. Things were booming!
Resubmittal of the Master Use Permit resulted in another level of parking at West 8th, which has seven parking levels, five of which are below grade.
Another significant milestone in 2006 was the meeting with Touchstone’s financial partners. With commercial real estate values only going up along with tenant lease rates, pre-lease requirements were discussed intensely since the past pre-lease deal went by the wayside. The construction schedule was approximately 28 months depending on tenant improvements. The question was, “Does a pre-lease today, nearly three years in advance, minimize the real potential values for this development?” After considerable debate, Touchstone moved forward to build on spec, launching Touchstone into full design and permitting through 2006. Everything was going great — building permits were getting closer to being pulled and the nation’s economic engine was running at full capacity.
Digging, Drilling and Other Pitfalls
In January 2007 construction began on the new West 8th Tower, 28 stories of Class A office space. Construction started off with digging a deep hole in a downtown location. The hole took several additional months to complete to get to the bottom of the excavation. Touchstone faced the usual issues: underground granite boulders sometimes taking a few days to drill the soldier piles through; a 2,000-gallon underground fuel oil tank that was full until the excavator found it by ripping it open; an unknown underground foundation with walls greater than three feet thick (we needed to drill through this); a lens of solid glass in the soil that varied from 12 inches to more than 36 inches thick — a normal excavation in Seattle. Needless to say, the bottom was reached several months behind schedule.
In 2008, the foundation was poured. The mat foundation covered nearly two-thirds of the site and was 12 feet thick, an astonishing 6,000 cubic feet of concrete. This was poured all in one day, working for 28 hours straight. Touchstone had plenty of time to figure out sequencing of the concrete core since the excavation took so much extra time. The extra time allowed for cycling the core every three days – quite the accomplishment from the crews. Lastly, Touchstone added some structural steel, a chilled water plant and a granite and curtain wall enclosure, resulting in a new 100 percent vacant high-rise in Seattle.
In retrospect, West 8th turned out just as planned with one small exception – opening without tenants in 2009. The building, recipient of the NAIOP Washington State Chapter Office Development of the Year in 2009, is extremely efficient with operating costs below $9.50 per square foot, floor plates at 95 percent efficiency and a LEED Gold certification. In 2011, the building is over 35 percent leased with high-quality credit tenants, a 15,000-square-foot Bright Horizons child care facility, a 5,000-square-foot chef-driven restaurant and a national coffee vendor. In the end, the question of when to build speculative space comes to mind. You can never be sure whether it will be a rousing success or a dismal failure! As long as there are developers willing to take risks and cycles in the economy, the question may never be answered.