SAM's Sudden Space Glut

Washington Mutual may be gone, its signage soon to disappear from local banks and, eventually, its shiny new 42-story tower on Second Avenue. But new owner JPMorgan Chase is being semi-generous with the Seattle Art Museum, which occupies the other side of that jointly developed block, the 16 stories facing First Avenue. In a Thursday press release from SAM, the museum announced a $10 million gift from JPMorgan, payable over five years. (Plus the commitment to honor the $2.65 million WaMu had promised for this year.) That's the good news.

The bad news, per SAM:

"JPMorgan Chase will not be assuming Washington Mutual's lease with the Seattle Art Museum for approximately 240,000 square feet of office space located at 1300 First Avenue in downtown Seattle. JPMorgan Chase and SAM will be working together to coordinate leasing activities and identify possible tenants for the space."

Ah, it's a consolation prize. How much was the old WaMu lease worth? About $5.8 million a year, according to SAM. Or, over five years, three times the amount of the JPMorgan gift.

Still, JPMorgan could've walked away for only the $2.65 million promised by WaMu. Or washed its hands of Seattle philanthropy entirely. (You can bet it makes bigger gifts to museums in New York, where the bank is based.) JPMorgan is under no obligations, since WaMu's seizure by the Federal Deposit Insurance Corporation (FDIC) forfeited the 25-year lease it signed when the two towers opened in 2007.

I asked the man behind the project, developer Matt Griffin what happens next for SAM, which expects to have eight stories of empty office space on its hands in two months. "The market's probably pretty good," he says of finding new tenants. "SAM gets the benefit of all the tenant improvements made by WaMu. JPMorgan is being really generous by giving us all the furniture." But, he concedes, this is happening in a hurry. "I've never been involved in a FDIC-type deal before."

On paper, the old WaMu lease gave SAM about $25 a square foot. Cushman & Wakefield projects an average Seattle commercial leasing rate of about $35 per square foot per year—but that's for empty, unimproved space without carpeting, desks, and chairs. Those costs add about another $10 buck a foot, adds Griffin, making SAM more competitive in a saturated market with a rental vacancy rate pushing into the teens (per Cushman & Wakefield).

Griffin continues, "At the moment, we're looking for someone who could take multiple floors." He describes the space as Class A, top-tier in real estate lingo. It faces west, though "it's not high enough to look over the Four Seasons." (That luxury hotel-condo was built on land originally owned by SAM, as part of the same Griffin-brokered deal.)

As for the current state of the market, says Griffin, "I think the weather's cloudy. The good news, though, is that people are trying to be more efficient, hunting for bargains."

Indeed, anyone who works downtown has seen Aeron chairs and computers lined up at the curb next to moving trucks, as downsizing firms leave their larger, expensive spaces for....well, who knows where they're going? Each floor above SAM is about 30,000 square feet, comparable to what a single mid-size law firm might lease. By contrast, the whole 240,000 is about the size of what Microsoft considered, but recently declined, near South Lake Union. In our current recession, all business are trying to cap or cut their overhead expenses.

Any new SAM tenant (or tenants) would also have to accommodate the museum's future expansion plans. Under the old WaMu lease, says SAM spokeswoman Nicole Griffin (no relation), "We had the option to expand into there after 10 years," which the museum needs to preserve—though perhaps on a different timeline.

So much for my idea for the vacant SAM space: Divide it into condos, and sell them to home buyers with poor credit via extremely profitable subprime mortgages; then securitize and bundle those debt obligations and sell them on the open market! What could possibly go wrong with that? Oh, wait...