SEATTLE — To see just how far the Seattle office market has fallen since the start of pandemic, consider the uneasy trajectory of Martin Selig, the 86-year-old Houdini of Seattle office recessions.
The veteran developer, who once boasted of owning 37% of Seattle’s office space, has endured recessions, market gluts, bankruptcies and repeated reports of his own professional demise with a mix of deal-making, relentless spin and the occasional tactical sacrifice.
During a market swoon in the late 1980s, Selig saved his office empire, and turned a profit, by selling his prized Columbia Center, Seattle’s tallest building, just four years after completing it.
But the economic aftershocks of COVID-19 have been harder for Selig to bargain his way out of.
Even as the broader Seattle economy rebounds, the lingering effects of the pandemic — notably, remote work, tech layoffs and downtown security concerns — have kept the office market mired in its own recession.
Across the Selig office portfolio, which includes some 30 office buildings between Ballard and the Chinatown International District, vacancy is now at an uncomfortable 19%, compared with low single digits in 2019, according to company figures. That’s roughly on par with industry estimates for vacancy across downtown Seattle.
But vacancies are considerably higher in some of Selig’s newer properties. His recently renovated 11-story Federal Reserve building on Second Avenue is still only around half leased. The 15-story 400 Westlake tower, completed this spring, has leased only the top floor.
Selig, the professional optimist, insists all setbacks are temporary.
Many downtown office workers are already back three days a week, he says — he can see as much on the streets below his 18th-floor corner office in his 40-story 1000 Second building. “By the end of next year, you’ll see five days a week,” he said during a recent interview.
And while Selig has paused new projects — including a planned 15-story office-and-apartment hybrid near the Colman Dock ferry terminal — he’s confident demand for new office space is coming back. “It’s just a matter of waiting for it to catch up to you.”
But whether it catches up soon enough, for Selig and other downtown office landlords, is a common question among office industry insiders these days.
Like many commercial landlords, Selig has substantial debt he might need to refinance. That includes $238 million in loans that mature next spring and another $379 million maturing in 2025.
There’s no indication Selig has missed payments or is otherwise in default. But there are signs of stress.
In March, Fitch, a national credit rating agency, dubbed a third Selig loan, for $135 million and maturing in 2028, as a “loan of concern” due to falling occupancy and income.
Selig is also delinquent on $2.2 million in first-half 2023 King County property taxes for five buildings, including 400 Westlake and the Federal Reserve building, records show.
Selig flatly denies rumors that he is considering selling buildings, including 400 Westlake, an ambitious eco-friendly project championed by his daughter and presumed successor, Jordan Selig, 36, executive vice president.
But industry insiders will be carefully watching in coming months as Selig, one of the most successful players in Seattle office history, navigates one of the most challenging markets in decades.
“My guess is he’s hustling,” says Stephen Buschbom, research director at Trepp, a commercial real estate data firm that tracks commercial real estate finance. “We’ll see some movement here, one way or another, over the next six months.”
Martin Selig is accustomed to the rubbernecking.
His building career, which began with shopping malls in the 1960s, has been marked by ambitious, often controversial, projects. “A flat-out symbol of greed and egoism” is how his 76-story Columbia Center was dismissed by a former chair of the architecture department at the University of Washington.
Selig’s hardball tactics have also drawn scrutiny, as have his politics.
In August 2016, Selig came under fire for nearly $2 million in unpaid Seattle City Light bills (later paid), and for co-hosting a Donald Trump fundraiser, which Selig later withdrew from.
But mostly, people still watch Selig because he still matters.
His office empire, though it now represents only around 8% of today’s much-larger Seattle market, is still big enough (5 million square feet) and varied enough to serve as an industry barometer. If Martin Selig can get through this mess, insiders say, it’s likely the rest of the Seattle office market can, too.
That said, Selig’s utility as a bellwether is complicated by his maverick tendencies.
Where many builders flip their completed office towers, usually to big institutional investors, Selig, with a few famous exceptions, keeps what he builds. That has left him with a portfolio of office income streams as well as a vast pile of collateral to finance more projects.
It’s left him with a pile of debt, currently around $1.2 billion, but also a net worth of $2 billion, as of 2019, according to publicly available documents.
As important, insiders say, Selig has always shown an appetite for risk.
The $205 million he borrowed to build the Columbia Center in 1981 wasn’t just “the largest private loan of its kind in state history,” according to a New York Times story; it was also signed before Selig had “a single tenant commitment.”
Speculative, or “spec,” office projects continue to be Selig’s forte.
Even in the Big Tech era, when mega-tenants such as Amazon were leasing entire office buildings preconstruction, Selig was still willing to break ground with just a few signed tenants, or no tenants, but always plenty of trademark bullishness.
“It will fill up in no time,” Selig assured the Puget Sound Business Journal, back in 2018, of the $50 million-plus Federal Reserve project then underway without any tenants. The 400 Westlake tower was also built on spec.
Selig’s aggressive strategies have paid big dividends. He has profited handsomely when office demand is rising: By the time his on-spec buildings open, going rents are often higher than he would’ve gotten if he’d preleased, brokers say.
But when demand falls, those strategies can leave Selig vulnerable. His Federal Reserve building and 400 Westlake were completed almost entirely tenantless, during a pandemic that not only slammed office demand but also raised doubts over how much would ever come back.
Existing Selig buildings, meanwhile, have lost tenants, based on data on 19 Selig office buildings connected to those three major loans.
Average vacancy in those 19 buildings jumped from 5% or less in 2019 to between 21% to 37% as of March, according to a Trepp analysis of the loans. In the same period, vacancy in downtown Seattle rose from 5.5% to 22%, according to Cushman & Wakefield, a commercial real estate firm.
Empty offices are costly. In 2019 and 2020, income before taxes or loan payments from Selig’s 19 buildings soared 20.6%, to nearly $71 million, according to Trepp. But in 2021 and 2022, income fell 11.5% and dropped another 6.6%, on an annualized basis, in the first quarter of 2023, according to Trepp.
Selig is hardly the only one feeling pain.
In the first six months of 2023, leasing volume across downtown Seattle was barely half the level of the first half of last year, according to Cushman.
As remote work persists, many tenants are taking smaller leases — average lease size downtown is 21% smaller than last year and just half the size in 2019, according to Cushman.
In fact, so many tenants are subleasing unwanted space that 28% of downtown’s office space is now available, according to Colliers, a commercial real estate brokerage.
That has left downtown Seattle with so-called see-through buildings.
Roughly 33% of Smith Tower is either vacant or available for sublease, according to CBRE, which is handling leasing. It’s 67% at Century Square, the 28-floor arch-topped tower across Fourth Avenue from Westlake Center, according to CoStar, a commercial real estate data firm.
With so much surplus space, advertised, or “asking,” office rents have fallen by 6% in downtown Seattle in the first half of 2023 versus 12 months prior, according to Cushman.
Many office landlords have responded by boosting incentives, such as months of free rent or credit toward the cost of building out the new office space. Those can boost occupancy, but at the cost of even lower rental income, says Trevor Youngren, who represents tenants for Cushman.
With incomes falling, many experts wonder how landlords will cover expenses such as loan payments — especially since many maturing office loans are about to get a lot more expensive due to higher interest rates.
Granted, with the office demand so low, lenders are highly motivated to help office landlords avoid foreclosure.
“No bank wants to try to operate or sell an office building now,” says Mark Mason, CEO of Seattle-based HomeStreet Bank. Instead, bankers will likely look for ways to keep borrowers afloat and making at least partial payments until interest rates fall or demand returns.
“If you were to ask anyone with a large [office] building here, they’d say ‘We just need more time for things to settle,’ “ Mason adds.
One problem, industry experts warn, is some cash-strapped landlords might decide refinancing isn’t economical and might turn their buildings over to the lender.
“There are a lot of [office] buildings out there that are underwater because … their [income-to-debt] ratios … are out of whack,” says Bob Wallace, a veteran Eastside office developer.
“If that gets too out of whack, it’s going to be kind of a bloodbath.”
Locally, no one seems to think Selig is ready to walk away from his loans.
He has vast amounts of equity in his portfolio, thanks in part to a rule of never borrowing more than 60% of a building’s value. “That leaves you a lot of room to maneuver,” Selig told Forbes in May.
If parts of that portfolio are suffering, others are doing well enough to balance it out, Selig says.
“You know, we’ve got a lot of office buildings,” Selig explains, wryly, when asked about possible challenges with refinancing. “We take the excess moneys that we get from the existing office buildings, we shift it over, and we are able to pay the bills.”
The company says it’s in “good standing” on the three large loans and on another $400 million in debt connected to 400 Westlake and other buildings.
It also said it is “actively working” with lenders to pay the delinquent property taxes “as part of a larger recapitalization and loan extension plan.”
Longer term, things are more complicated.
Not everyone shares Selig’s optimism about an office recovery. While office worker presence downtown has surged recently, thanks to mandates by Amazon and other large employers, it’s still not 60% of pre-COVID levels, according to data posted by Downtown Seattle Association.
And despite Selig’s faith in the five-day week, many in the industry think three days is the new normal, and that it could be two or more years before the market works through the current surplus, says Cushman’s Trevor. “It’s going to take a very long time to absorb,” he says.
In past downturns, Selig bargained his way back into the light, filling offices with offers of free parking and improvements; he was even known to assume a prospective tenant’s lease at a competitor’s building.
Selig is still just as tenacious, some brokers say. If he knows a tenant is looking for space, he’ll hound the tenant’s broker, throwing out price cuts and other concessions to close a deal on the spot, says a broker who asked not to be identified to protect their relationship with Selig. “He’s more flexible than any other owner,” the broker says. “He’ll take a loss right now and just survive.”
Selig the salesman doesn’t use words like survival or flexibility. He talks instead of timing.
Big Tech isn’t taking down half a million square feet at a time just now, but that’s creating opportunities for smaller tenants who until recently may have been priced out of downtown. Smaller firms may not get the headlines, Selig says, “but they fill up space.”
Likewise, if the office market is soft right now, housing is strong. So Selig is building housing.
His 36-story tower at Third Avenue and Lenora Street, completed in 2020, was originally leased to WeWork, the coworking startup, which planned to fill it with short-term offices and apartments.
After WeWork imploded in late 2019, Selig gradually re-imagined the building largely as apartments.
Jordan Selig says the company also is studying whether to convert the planned mixed-use project by the ferry terminal primarily into a residential development.
The Seligs are also planning an apartment on a parcel on Western Avenue, near the Olympic Sculpture Park.
That’s all somewhat new for Selig, who hadn’t built a major residential project before the Third & Lenora. “I’m not an apartment builder,” he admits.
Still, Selig isn’t giving up on offices. He insists the biggest holdup in moving ahead on new offices has less to do with demand than with interest rates.
Selig says he’ll probably get back to work on that next year, or “as soon as the money market says, ‘Let’s build.’ “
“It’s not saying that right now.”