Photo by Holly Smith Peterson
The new State Farm headquarters, in the former Russell Investments building in Tacoma, is where hundreds of workers are currently undergoing training through December, when business officially opens.
The future seems to be bright for Tacoma and State Farm is the guiding light. The insurance company's move is paving a path for others to bring their business downtown.
Since State Farm announced its plans mid-April, rental rates have increased, several new tenants have signed leases for office space downtown and existing tenants have started renewing their contracts earlier.
“What I am sensing is a sense of energy,” said Herb Simon, member of Simon Johnson, LLC, which owns the Commerce and Key Tower buildings, at 950 Pacific Ave. and 1119 Pacific Ave., respectively. “The fact that a major, major tenant and a prestigious tenant is coming to Tacoma has created a sense of interest in the downtown corridor. Energy just brings other interest.”
In the last several months, three new tenants have taken spaces in the 2,000- to 3,000-square-foot range in the Commerce building. Opus Bank moved into a 3,500-square-foot space over the summer.
Simon has seen interest in the Key Tower building as well, but nothing has been formalized. Those who are already there, though, have expressed interest to stay, and some have renewed early.
Ricardo Noguera, director of community and economic development for the City of Tacoma, said he could see anyone who does business with an insurance company taking these or other available office space downtown.
“What we are expecting is that more businesses involved in the financial and real estate and insurance arena will be drawn to downtown Tacoma. Those are the types of companies we want to continue attracting here,” he said. “The buzz on the street with developers and investors, especially those who historically have shied away from Tacoma, (is) 'Now is the time to invest in downtown Tacoma, and State Farm represents a game changer.'”
Brad Hilliard, public affairs specialist for State Farm, couldn't say what influence his company's move could have on downtown, however.
“That's just one of those things that we're not in a position to speculate on,” he said, noting employees were very excited to be in the area. Several hundred employees started training on Sept. 30. The company will be operational downtown sometime in December.
For Simon, however, uncovering the real reason for the real estate activity in Tacoma isn't as important.
“Whether they're related to State Farm is immaterial. It's the energy it brings,” he said. “We're pretty enthusiastic that this will bring other tenants that sense the energy downtown.”
Like Simon, Bill Frame, senior vice president and managing partner at Kidder Mathews, can't say if State Farm is the main driving factor, but there definitely appears to be some correlation.
“As far as commercial tenants, they may not come here directly because of the insurance company,” Frame said, “but they may land here because of the energy that's going on with the insurance company.”
Frame added that the office space market filling up and becoming healthier, and State Farm couldn't have come to town at a better time.
“We were seeing this big tidal wave come at us basically in the beginning of '13 or halfway through '13, that we're going to get all this vacancy in the marketplace,” Frame said, speaking of the vacancy left by DaVita and Russell Investments. “So, that was started to become worrisome. But, the timing was great for the insurance company, because just when people really started to get nervous there was this talk of State Farm coming into the marketplace, and sure enough they did.”
The health of the office space sector downtown is “as good as it's been since Russell and DaVita were strong growing tenants downtown,” Frame said. “It's the best it's been in 5 or 6 years.”
State Farm's absorption of nearly 300,000 square feet of space in the Class A market space downtown, while improving the market's strength, has decreased the incentives and increased rental rates for new and existing tenants.
For example, 18 months ago, a five-year renewal lease at the Wells Fargo Plaza could run $25 or $26 per square foot for full-service, there might have been a $25 tenant improvement allowance, but there would be five months of free rent. Now though, it's $27 per square foot, the improvement allowance dropped to $10, or in some cases less, and there's just three months of free rent.
The increase, though, isn't significant enough to drive anyone out of the city, Frame said.
“It's not a huge or dramatic change or shift, but you can see by the occupancy of the big insurance company taking down the space that it's helped stabilize and slightly increase the rental rates and decrease the incentives, mainly being free rent and tenant improvement allowance,” Frame said. “There was a lot of incentive for the tenants that were in the building to renew, and in some cases renew early, and then new tenants coming into the market, there's fewer options.”
Frame has worked on several renewals in recent months that are one or two years away. Traditionally, these renewals would occur between four and nine months in advance.
“The reason they're doing it is because they can see what's going on in the marketplace, that the rents are going up,” Frame said. “They're going early to the landlord and saying, 'we'll renew now for next year.' And, the thought is, they're trying to take advantage of the current market rental rates today as best they can.”
Rates for Class A leases that begin in the first, second and third quarters of 2014 are approaching $28 per square foot for full-service space.
State Farm has helped boost the occupancy rate for this market, which includes the Wells Fargo, Commerce and Key Tower buildings.
Those spaces are approaching a five percent vacancy rate. The rate is more than double, at 12 to 15 percent, for Class B and C markets, but it's coming down, too, as office hunters are forced to look outside the A market, Frame said.
“A few years ago, it was at 18 percent,” he said. “It's going to take a little bit longer for the B and C markets to get healthy. The B and C units will become more of a reality for some these tenants that can't find the right space in the Class A buildings because they've been leased or because tenants that are already in there have expanded into their spaces that were adjacent.”
The increase in office occupancy brought both directly and indirectly by State Farm will also have an effect on other sectors downtown, said both Frame and Simon.
Beyond the activity in his buildings, Simon said he sees the potential for new restaurants and retail opening downtown.
“You've got a lot of people coming back into downtown,” Frame said. “It's going to effect the parking, so those people or the city that owns those lots – where it's been a little tough because all those tenants were gone in DeVita and Russell – now those parking garages are actually starting to make sense again financially. The small retailer or deli or even Starbucks – there used to be a line out the door from Starbucks when Russell was here every morning – now it's not – but that will come back, because you're going to have that many people on the streets.
Then those people bring people downtown, because there are folks doing business with the insurance company. Even now, before they've even moved in, there's construction going on for tenant improvement, so you're bringing contractors downtown and they're using the parking. So, it just feeds off itself.”
Comparatively, Tacoma is doing much better than other cities with a similar population, said Noguera. Cities in states like California, Florida and New York are far behind Tacoma in terms of economic success.
For downtown Tacoma's office space market as a whole, the vacancy rate will drop from 13.1 percent to 8.3 percent as State Farm's lease commences, bringing it below that of downtown Seattle and Bellevue, according to Kidder Mathews' third quarter real estate market review.
In the third quarter of the year, rental rates, showing the positive effect of State Farm's decision to locate downtown, increased by 94 center per square foot of full-service space to an average of $20.66 per square foot full-service.
“We're taking small steps,” Noguera said. “The market is improving. Folks are realizing the opportunity that we have here, like State Farm coming and taking the entire Russell building and taking a portion of the Columbia Bank building. I say it's all about the timing being right and folks wanting to invest in this community. It's like the clouds shifted and they realized all these opportunities in downtown Tacoma.”