Seattle’s Boom Powers Retail-to-Office Conversions

By Dennis Kaiser

Seattle is booming, that’s not a secret. People are flocking to the Emerald City to live, and to work. Lenders and investors are responding with creative financing solutions to fulfill space requirements in a market with low vacancy rates – particularly where housing is concerned. However, in the robust Seattle economy, office space is the second hottest commodity, with a vacancy rate hovering around 6.1%, and even lower for Class A office.

Eric Jordan, Vice President of Originations at Calmwater Capital, a Los Angeles-based direct real estate lender, with a new Seattle location, shares insights into the intersection between shortages in the Seattle office and multifamily sectors. Check out his thoughts about how retail space is being converted into office space to help meet the growing tech presence, and an influx of Californians drawn to a lower cost of living in our latest 3 CRE Q&A.

Q: How can retail-to-office conversions drive development?
A: As many retailers continue to shut their doors and vacate once prominent retail centers and malls, real estate owners and developers are looking for ways to reinvigorate these so-called “dead retail spaces.” Vacant multi-story big box retail spaces provide an opportunity for creative office development by meeting office demand needs and generating foot traffic to any remaining retail stores and restaurants at the center. Investors see office tenants as a more reliable rent generator, as they typically stay longer than many retail tenants, especially those with uncertain futures. The built-in amenity base is also appealing to office workers who can now walk to the gym or restaurants at the converted retail center.

Q: What are some creative financing solutions to address the undersupply of Class A office space in Seattle?
A: As construction costs increase for brand new, Class A office (and across real estate in general), adaptive reuse or major conversions can be appealing to developers. However, unless there is a high level of pre-leasing to credit tenants, capital providers willing to take on conversion exposure on a negatively trending retail center can be few. Many developers will turn to short-term bridge lenders who are able to provide highly structured capital, allowing developers to proceed with speculative conversions throughout the Seattle MSA. These bridge options are generally more flexible than traditional banks and focused on last dollar basis, demand trends in the applicable market and ability to lease or create value within the two-to-three-year term of the credit facility.

Q: What areas of Seattle are most appropriate for retail conversions?
A: The areas of Seattle that are most appropriate for retail conversions are center and demand specific. Retail centers with new, large vacancies should consider alternate uses, especially as the ability to backfill big-box space becomes more difficult due to a lack of tenant demand and expansion. Northgate Mall is a prime example, as the owner, Simon Property Group, has already discussed plans to reimagine the center with a combination of offices and housing while retaining some retail presence. However, there is also opportunity in Seattle’s downtown core, as Macy’s announced in September that it plans to completely shutter its Third and Pine location in early 2020.

For comments, questions or concerns, please contact Dennis Kaiser