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Commerical real estate prospects looking up

If you have driven along 36th Street near City Hall lately, it may have felt a little bit like a ghost town. Along this quiet stretch at the bottom of Gallagher Hill, almost as many for-lease signs as buildings dot the roadway, a somber reminder of one of the worst downturns that the commercial real estate market on Mercer Island has ever seen.

Real estate agents said the 2008 financial meltdown hit commercial real estate in the area hard, but while many buildings still stand vacant and rates have gone down, there is reason to believe that things are starting to improve.

“There certainly is light at the end of the tunnel,” said Tim Conway, who works at the Mercer Island John L. Scott office. “But the question is, how long is the tunnel?”

Matt Schrek of the real estate company Broderick Group has commercial space for lease in two buildings along 36th Street. He said about 13 percent of the commercial space on Mercer Island is vacant, according to a report released by his company earlier this year.

Although this number compares favorably to the 19 percent vacancy rate along the rest of the I-90 corridor between Mercer Island and Issaquah, he said that it is much worse than it once was.

“I think we’ve been kind of dragging along the bottom for a while,” he said. He said, though, that the number of vacancies seem to have stabilized, pulling the market for commercial property out of free-fall.

Jay Azose, the vice president of Morris Piha Real Estate, said that of his 25 years in real estate, the 2008 financial crisis has been bad by any measure.

“I’ve been through several downturns, and this was definitely worse than others,” he said.

In the wake of this recession, Conway said rental rates are falling and real estate agents are having to find other lines of work.

“No question about it; it’s a lessor’s market,” he said. “It’s a good time to be locking in long-term rates.”

While this is a good thing for businesses looking to expand, he said it may hurt Mercer Island, situated as it is between the highly desirable commercial real estate markets of Bellevue and Seattle. With rates falling there, too, he said, businesses might be encouraged to rent in one of those places instead of Mercer Island.

Because financing is hard to come by in the wake of the 2008 economic crisis and many companies are scaling back their operations rather than looking to expand into new space, Conway said commercial real estate is particularly bound to the health of the rest of the economy.

Shreck said that, while it is true that the downturn has hurt commercial real estate everywhere, the experience has differed on different parts of the Island. He said downtown, where businesses tend to be drawn first, is beginning to do better than areas like 36th Street, which is farther off the beaten path.

According to the Web site Loopnet.com, rates for real estate on Mercer Island tend to be higher in downtown, hovering around $30 per square foot per month. In the 36th Street area, commercial property costs around $15 per square foot per month. However, Azose said, most of the cheaper property on the market is offered on a triple net lease, meaning that lessors have to pay all utilities and fees on top of the rental price. He said this tends to add about $8 per square foot per month to the cost.

Azose said that even in the 36th Street neighborhood, where it seems like everything is empty, businesses are starting to move in. He said the number of signs is deceptive because almost all the properties there have some space available, but many of those spaces are a small percentage of the entire building.

He said, for instance, that Mercer Island Pediatrics was planning on moving into one of the buildings in the area and taking up about 7,000 square feet.

Colleen Risk, the Mercer Island Pediatrics office manager, said part of what drew them to the 36th Street area was the low prices compared to downtown and the favorable terms that people leasing commercial property were willing to accept.

“We found that landlords were very willing to negotiate on the price and made very generous offers to help with tenant improvements,” she said.

This, combined with plenty of available parking and easy access to I-90, made the property a great fit, Risk said.

“We looked and looked, and we finally found this building at 9675 and it seemed perfect,” she said.

Risk said, though, that Mercer Island Pediatrics was in a different situation from many other businesses in that it has not been severely affected by the economic downturn.

She said one lesson that she took away from the search for a new location was the difference in prices for commercial space on different parts of the Island.

“On Mercer Island in general, there seems to be kind of a disparity,” she said of rental prices. “When you get a little farther away from downtown, they go down dramatically.”

With businesses out there like Mercer Island Pediatrics that have weathered the recession and are looking to move, Azose said he was optimistic that the commercial real estate market would recover.

“It’s better than it was even six months ago,” he said. “I think things will get better, and I don’t think there will be a big hangover from this.”

As far as what will need to happen before the commercial real estate market picks up and 36th Street comes alive again, the answer is simple: “People just need to start hiring again,” Shreck said.

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