To the casual observer, buying a defunct cold storage facility as an investment seems absurd, but then a casual observer doesn’t know much about real estate in Seattle.
David Zarett, a 36-year-old developer of Zarett Properties, knows plenty about real estate in the Puget Sound region. To him, the deal for Olympic Cold Storage’s former facility made perfect sense. So two years ago he bought the old brick building at 2200 First Ave. S., for nearly $1.2 million and sunk another $8 million into rehabbing it.
What was once an old cold storage facility now is a 92,000-square-foot office building that essentially is fully leased. Commercial real estate experts report Starbucks is taking the remainder of the building for office space.
The 2200 Building is the latest example of the trend that has taken Seattle by storm. More companies, especially high-tech firms and other creative businesses, such as architectural firms, are setting up shop in untraditional spaces on the fringes of the central business district.
The phenomenon also is at the root of a long-simmering political fight in the Duwamish industrial corridor. Longtime users of industrial space watch nervously as gentrification squeezes some of their colleagues out of the transforming neighborhood.
The Cobalt Group, an Internet company that provides Web services for auto dealers, last month took the bulk of the Zarett project when it leased the top three floors for a total of 75,000 square feet.
“They’re excited about the building because of the unique opportunity,” said Parker Ferguson, Cobalt’s broker with the commercial real estate services firm Flinn Ferguson. “They liked all the exposed brick and high ceilings.”
Officials of Cobalt, which currently occupies 22,000 square feet in the First and Lenora Building in downtown Seattle, also like their new Duwamish home’s transportation access, according to Ferguson. He negotiated the lease for Cobalt with Zarett’s representatives, brokers Tim Foster and Matt Christian of Colliers International.
Sound Transit’s planned $1.8 billion light rail service, Link, is to run through the neighborhood, and the state Department of Transportation intends to spend $150 million to improve Highway 519 to upgrade vehicle access between Interstate 90 and the waterfront.
“They (Cobalt officials) are pumped about the whole thing,” Ferguson said. The building is close to downtown but has parking. Then there’s the issue of price. Cobalt got its new space for an average annual rental rate of $24 a foot. That compares to the $40 a foot for downtown space.
Now Starbucks is taking nearly 17,000 square feet on the first floor, according to Colliers International.
Like their counterparts at Cobalt, Starbucks officials are smitten with having Class A office amenities in a brick building with old-growth timbers, said Colliers broker Tina Pappas. She represented Zarett in negotiations with Starbucks. “It’s a gorgeous space,” she said.
Starbucks’ broker Craig Kinzer declined to comment on the lease because he said it is not finalized, although Colliers’ weekly list of new leases includes the Starbucks deal in the Zarett project. Kinzer did say the coffee company needs space for its Northwest regional office.
Starbucks’ current regional office is in a Fisher Properties building that the state has condemned to make way for the Highway 519 improvements. As a matter of policy, the Starbucks regional office would not be located at the company’s world headquarters, Kinzer explained.
It was the cold storage’s proximity to the coffee company’s world headquarters, the 2-million-square-foot Starbucks Center just down street, that attracted Zarett to the property. Plus, the old cold storage building is basically next door to Safeco Field.
“I felt that everything in between” the baseball stadium and the Starbucks Center “was destined to come alive. I thought it was a diamond in the rough,” said Zarett.
“Everybody loves the bricks and the old beams. It was just a matter of bringing that out,” he added. To make it happen, Zarett hired Broderick Architects and general contractor The Sterling Group.
Zarett obtained financing for the project from Continental Income Property Finance. Tim Patrick, vice president and manager of construction lending for Continental, was certain his company was doing the right thing when it made the loan even though the building looked more like a war zone than office space.
“I don’t think there will be any issues to filling the building,” he said last spring when no leases had been signed.
Patrick is in awe of the overall transition occurring on the waterfront and other near-downtown neighborhoods. “I think it’s just a sign of the times.”
The gentrification is causing anxiety among industrial users who want to preserve the neighborhood for traditional uses. They are lobbying City Hall to preserve industrial zoning in the area.
Theirs, however, seems to be an evermore difficult proposition as the basic economic principle of highest and best use plays out. Land that recently sold for $12 to $16 a foot is going for $30 or more a foot.
“The First Avenue corridor seems like it’s screaming to be an extension of the downtown area or kind of a little annexation,” Zarett said.
One longtime neighborhood observer, Tom McQuaid Jr., isn’t sure the issue is black and white. Some 30 years ago, McQuaid was a laborer at the Olympic Cold Storage facility and now is a manager at Nordic Cold Storage near the Kingdome.
“The question everybody is asking in the Duwamish is: What are you trying to preserve?” he asked. To drive home his point, he asked other questions. How do you define industrial? Is cold storage more important than Amazon.com? He noted that Amazon, the Internet retailer, needs space to store books and other merchandise.
Amid the hubbub of the land-use debate, McQuaid said one thing is certain: Zarett is a visionary. “He’s taken a lemon and made lemonade,” he said. “I can’t say enough good about what he has done there.”
By MARC STILES, Journal Real Estate editor
Leave a comment