— By Jacob Pavlik, research manager, Colliers —
A 10-mile drive east of Seattle, Bellevue is the top destination for urban retail activity in the Puget Sound. High incomes, healthy daytime employment and the most active office leasing market in the Pacific Northwest means not much more is needed to make a retail space thrive. That is, except reasonable fit-out costs for new space.
The Bellevue CBD has seen significant new construction for office buildings (with lots of ground-floor retail opportunities), delivering 3.3 million square feet over the past year alone. Unfortunately, sky-high construction pricing and office market financing challenges have made it difficult to get retail leases done in new buildings. Second-generation spaces in the submarket are the reasonable but diminishing alternative.
Second-generation spaces are filling up faster than they become available. The demand is partially from tenants whose buildings were torn down for redevelopment. Given the cost of fitting out a space in a brand-new building elsewhere in the Bellevue CBD, second-generation space is the most lucrative alternative.
First-generation space, which delivers as a cold shell without HVAC, plumbing or dry wall, can cost upward of $400 per square foot to build out. Landlords tend to offer $100 to $150 per square foot in tenant improvement allowances. This would leave the tenant responsible for the remaining $250 to $300 per foot, which is cost-prohibitive to many retailers. Since it has already been built out, second-generation space is half as expensive to build at about $200 to $250, and landlords offer about one-third of the tenant improvement allowance, or around $30 to $50 per square foot. However, it is not just construction costs that are challenging to retail tenants who want to take advantage of the Bellevue retail boom.
The City of Bellevue’s restrictive parking requirements — sometimes up to 10 spots per 1,000 square feet — means the most active retail and restaurant tenants can’t find compliant space. This provides an opening for the second most active tenants: spas, salons and other experience-based retail. These tenants have been displaced by redevelopments and need to find second-generation space. One of the newest retail leases signed in Bellevue CBD is Mirra, a new virtual reality (VR) immersive party experience. The concept leased almost 11,000 square feet for its first U.S. location in Lincoln Square South, a rare spot with sufficient parking to fulfill requirements.
The dynamics of Bellevue’s commercial real estate market have made it difficult for the most active retail tenants to take space in its new skyline buildings. From construction costs to parking requirements, there are many challenges retail tenants face as they try to prepare for the coming boom times. Thankfully, the Bellevue CBD has more office leasing activity than anywhere else in the region, giving it the daytime population necessary to support significant new retail activity.
This article was originally published in the September 2024 issue of Western Real Estate Business.