Feb. 13 (Bloomberg) -- A Seattle office tower that’s planned to be the city’s tallest new building in two decades will include a luxury SLS hotel, the boutique brand’s first location in the area, as property demand strengthens.
SBE Entertainment Group LLC, which owns the SLS brand, will run the 184-room hotel on the tower’s second through 15th floors, Chairman and Chief Executive Officer Sam Nazarian said. The Los Angeles-based company also operates Hyde nightclubs and the Katsuya and Cleo restaurant brands.
Construction will start on the $400 million downtown building by Oct. 1 and completion is scheduled for mid-2016, said Kevin Daniels, president of Seattle-based Daniels Real Estate, which is developing the 43-story tower with Stockbridge Capital Group of San Francisco. The partners and Nazarian are betting on continued growth in Seattle’s office and hospitality markets, which outperformed the rest of the U.S. last year.
“Certain U.S. cities are benefiting greatly from the economic superpower called China -- the money that is flowing into homes and businesses here through Chinese nationals is amazing,” Daniels said in a telephone interview. “Add to that the economic and job growth at all the major employers in this area, like Amazon, Nordstrom, Starbucks and Boeing, and you have a city that is firing on all cylinders.”
The average office vacancy rate was 14 percent in Seattle in the fourth quarter, compared with 17 percent nationally, according to data from Reis Inc. Rents averaged $23.94 a square foot, compared with $22.96 throughout the U.S., the New York-based real estate research firm said.
Sales of office buildings in Seattle reached $5.06 billion in 2012, up from $1.6 billion the previous year and the highest annual total since 2007, when the figure was almost $11.1 billion, according to data provider Real Capital Analytics Inc. Last year’s transactions included Amazon.com Inc.’s purchase of its headquarters campus for $1.16 billion.
The northwestern city ranked fourth nationwide in office sales last year, behind New York at $13.2 billion, San Francisco at $6.4 billion and Los Angeles at $5.2 billion, according to Real Capital.
“Even if you take out the Amazon sale, this would be the largest year for Seattle since 2007,” said Ben Thypin, director of market analysis at New York-based Real Capital. “It’s optimism about job growth. Seattle is one of the strongest secondary markets in the country. As investors get priced out of places like Manhattan and San Francisco and L.A., they look to markets like Seattle.”
Seattle’s hotel market has also outperformed the rest of the country. Occupancy last year climbed to 71 percent from 69 percent in 2011, and average nightly rates increased 5 percent to $120.39, according to Hendersonville, Tennessee-based industry research company STR. That compares with a 61 percent occupancy rate and average room rate of $106.10 nationally.
“Seattle’s business growth is generating demand in many business sectors, and hospitality is one category that hasn’t kept pace with new supply, largely given financing hasn’t been there,” Lisa Picard, Seattle-based executive vice president and regional manager for the U.S. development unit of Swedish construction company Skanska AB, said in an e-mail. “The revenue growth has been strong by operators here in Seattle. We’ve been approached by several flags wanting to expand.”
The size of the new office tower and its location at the southern end of the city’s downtown, an area dominated by smaller firms, may make it challenging for the developers to fill the space. The building may also face competition from the Columbia Center across the street, according to Bruce Vasseur, chief financial officer at Seattle-based O’Connor Consulting Group LLC. Columbia Center is the tallest building in Seattle at 76 stories.
“The sheer volume of this project and doing it without any committed tenants could be a challenge,” Vasseur said in a telephone interview. Large employers such as “Boeing and Microsoft are in other parts of town. Downtown Seattle is home to mostly smaller firms. To fill that space with those types of companies could be difficult.”
Daniels and Stockbridge obtained permits for the Seattle property in 2008, Daniels said. Upon completion, the new building would be the tallest since the 56-story Two Union Square was finished in 1989, said Alan Justad, head of community engagement for the Seattle Department of Planning and Development.
The companies purchased the land, which includes a neighboring church, in March 2008 for about $30 million. The church’s 12,000-square-foot main floor probably will house a ballroom, and a restaurant is likely to be built on a lower floor, according to Arash Azarbarzin, president of SBE’s hotel division.
The hotel-and-office project was put on hold five years ago when the financial crisis hit, Daniels said.
“It was clear that this wasn’t the time to be moving forward with such a large project,” he said.
The partners are in talks with six possible tenants, according to Daniels.
Daniels also is building Stadium Place, a mixed-use project that includes office, retail, residential and a hotel, in the city’s Pioneer Square, Daniels said.
SBE, whose first hotel was in Los Angeles, also is expanding to the East Coast. The company, which two years ago received a $35 million infusion for expansion from billionaire investor Thomas J. Barrack Jr.’s Colony Capital LLC, announced in July a planned $85 million SLS hotel in New York. The company is partnering with New York-based Moin Development Corp. on the 190-room project at 444 Park Ave. South, at 30th Street.
SBE has said it wants to build SLS into a chain of boutique hotels that would attract high-end leisure and business travelers.
“If you look at the 10 to 15 major cities in the U.S., Seattle -- based on its workforce, its relevancy with Asia and the fact that there’s this big white space between super-luxury and the rest -- is a great place for a hotel like ours,” Nazarian said in a telephone interview.
The Seattle hotel will be designed by Philippe Starck, who also will design the New York property and worked on the SLS Hotel South Beach in Florida.
The hotel will house a restaurant, 5,000 square feet of meeting space, a fourth-floor lounge and a spa. The property also will have 25 to 30 suites among its 184 rooms.
“The location of the property is a real plus as it sits in the high-density business district,” Azarbarzin said in a telephone interview. “With the demand that’s around us, we will have no problem filling this hotel.”
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