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Marc Stiles
Real Estate Editor

April 15, 2010

Real Estate Buzz: Mercer Island landmark is up for sale

By MARC STILES
Real Estate Editor

Shorewood Heights — a 645-unit Mercer Island apartment complex that has been owned by some of the region's better-known commercial real estate players — is for sale again.

Shorewood Heights traded for $141.3 million five years ago, and likely will sell for less than that, according to Kenny Dudunakis of Hendricks & Partners, who began marketing the high-end housing on 44.5 acres about a week ago.

So why are Security Properties and Principal Global Financial selling? Dudunakis is unsure of their motive, but said the Principal fund, like all funds, has a sunset date for liquidation. “I think we are coming to that point right now.”

Current rents average $1.37 per square foot, and Dudunakis said the property is 97 percent occupied. The buyer can develop another 124 units, which are entitled, said Dudunakis. The permitting process took two or three years. There's another plus: what Dudunakis calls “the magic of Mercer Island.” The city has 99 acres available for multi-family development, and all but a fraction of that has been built out.

Naturally, interest is high. Dudunakis said he has signed 70 confidentiality agreements with prospective buyers and given 20 property tours. He expects a call for offers will be issued in two or three weeks.

Shorewood Heights was developed in 1949 by real estate legend Charles Clise, who also had a key role in putting together what today is one of the largest metropolitan assemblages in the nation in Seattle's Denny Triangle.

Shorewood Heights is on the north side of the island and offers views of Lake Washington, the Cascades and Olympics, and Seattle's skyline.

It became a regional landmark, according to Dana Behar of HAL Real Estate, a previous owner of Shorewood Heights. He said many longtime residents in the greater Seattle area either have lived there or know someone who has.

HAL bought the property a dozen years ago for about $56 million and spent $23 million renovating the units and $12.5 million building 78 apartments and an activity center. It tends to attract older, more affluent tenants, not “pierced, tattooed 20-somethings...” Behar said in 2005, when HAL sold the property to Security Properties of Seattle and Iowa-based Principal.

We're No. 10!

Further evidence that the region's weak-as-a-sick-kitten office market may be getting a wee bit better comes from Marcus & Millichap's 2010 report. Here are some highlights for Seattle:

• Office-using companies will hire 8,500 people, a 2 percent gain, this year.

• The vacancy rate is forecast to go up 30 basis points to 17.5 percent, compared to last year when it rose 600 basis points. While demand for space is expected to remain flat, only 400,000 square feet of new space will be added. That's an 87 percent drop in construction activity.

• Landlords will cut asking rates by nearly 6 percent to $27 a foot, and effective rental rates will drop by almost 7 percent to $21.92 a foot. Leasing activity is expected to be healthy as tenants move to better space that costs less.

• Investors will see more properties come up for sale, especially those bought at the height of the market. But buyers will be cautious because tenant demand is not expected to recover until 2011 at the soonest. Small-space buyers, including owner-users, will leverage the less competitive market to buy.

Summing up: Seattle is the nation's 10th healthiest office market, according to the company's rankings. That's up one spot from 2009.

Swedish project site sold for $3.5M

Image courtesy of Mahlum Architects [enlarge]
Hammes Co. is developing a $23 million ambulatory care center and freestanding emergency room for Swedish.

Three years after first putting 6.5 acres in Redmond under contract, brokers from the Broderick Group and GVA Kidder Mathews got the job done last week when the $3.5 million sale was recorded.

Located next to Microsoft at 18100 Union Hill Road, the site is where Swedish Health Service's third-party development partner, Wisconsin-based Hammes Co., is developing a $23 million ambulatory care center and freestanding ER. Mahlum Architects designed it and Panattoni Construction is the GC.

In calculating the per-square-foot price, you should know that the usable land is about four acres due to the stream setback, says Brian Adams of GVA Kidder Mathews. He represented the seller, Fred Keller, with colleague Dave Bernard. Chris Langer of Broderick and Stu Ford of GVA repped Hammes.

The deal took so long because the economy is only starting to recover, Adams said. “Everybody's just cautious.”

Washington Holdings does resort deal

If you don't read the Wall Street Journal's Property Report, it may be news to you that Seattle investor Washington Real Estate Holdings LLC purchased Citigroup's equity control of the St. Regis Monarch Beach resort in California. The resort was in the news after public outrage prompted American International Group to spike a conference there around the time AIG got its $80 billion government bailout.

The Journal reported last week that Washington Holdings was chosen over other suitors after it offered $5 million for the equity position of Citigroup. Seems like a heckuva deal. Citigroup had provided a $70 million mezzanine loan on the Orange County resort. The Seattle company was helped by including in its bid the value of its $55 million portion of the underlying $230 million mortgage. Washington Holdings also agreed to pay $10 million of Prudential Financial's portion of the mortgage, people familiar with the deal told the Journal.

Washington Holdings' Ric Anderson did not return calls for comment.

Got a Buzz tip? Send it to marc@djc.com or call (206) 219-6517.


Got a tip? Contact DJC real estate editor Brian Miller at brian.miller@djc.com or call him at (206) 219-6517.


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