Sale of Seattle Office Building Suggests Market Pickup

Northwestern Mutual
This Seattle office building recently sold for more than four times what it fetched in 2009. 

Investors priced out of trophy office properties in New York and Washington, D.C. are now often looking for top-tier buildings in cities like Seattle and Houston.

One recent deal that drove home that point: the sale of the Russell Investments Center in Seattle by Northwestern Mutual Life Insurance Co. for $480 million. That’s more than four times the $115 million that the 42-story property fetched in 2009. The yield was under 5%, according to people familiar with the deal.

“If we continue to get good news on the economic front and the commercial mortgage-backed securities keep coming back you could see us going to the next notch (of cities) as well,” says Dan Fasulo, managing director of Real Capital Analytics, a real-estate research firm. The return of liquidity to cities is important for a broader recovery of the commercial real-estate market.

To be sure, Seattle has long been on the top of many investors’ shopping list as its tech industry and West Coast cachet emboldens investors who might steer clear of other like-sized cities as too volatile. Other harder-hit cities like Detroit are not likely to get much relief until their economies stabilize.

But average returns for office properties have come down in a number of cities over the last year. This means investors see them as less risky and are willing to accept lower returns in exchange for stability.

The Seattle area’s average yields on office properties dipped to about 6.5% in the first quarter, down from about 7.5% a year-earlier, according to Real Capital. Other cities such as Houston saw area average returns fall to the mid-7% range from the mid-8% range a year earlier. By contrast, Manhattan office properties recovered earlier and have been routinely yielding returns in the 5% range or below since 2010.

Few sellers can hope to match Northwestern’s gains but the buildings rise from the ashes of the financial crisis does reflect the city’s rising fortunes.

When the tower last traded in 2009 it was a symbol of the city’s financial crisis-era woes. Northwestern picked it up after the collapse of Seattle thrift Washington Mutual Inc. left it largely vacant. Northwestern then pumped $40 million into the property to bring in more tenants—including its Russell Investments subsidiary that the building was renamed after—and then this month sold the property for a hefty profit. The buyer was CommonWealth Partners, a privately held real estate investment, development and management firm based in Los Angeles. Kevin Shannon of CBRE Group Inc. led the group that brokered the deal.

The property offers up a hat-trick of features that investors now prize. It’s a downtown property 95% leased to high-credit tenants and it’s in Seattle—where tech companies like Amazon are gobbling up space. The office vacancy rate is coming down after jumping to 17.3% in 2009 from 10.6% in 2008. It fell to 15.1% in the fourth quarter, according to Reis Inc., a real estate research firm.

The pace of recovery even took Northwestern by surprise. “The (building) stabilized in about the time we forecast. What we didn’t expect was for the overall Seattle market to recover as quickly it did,” says Tom Zale, managing director of real-estate equities with Northwestern.

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