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SEATTLE-Locally based Unico Properties has hit a home run with its $35-million conversion of a 95-year-old Downtown office building here to luxury apartments. Set to open this weekend, all but a handful of the 91 units in the historic 12-story building have been preleased.
Unico, which controls the asset under a long-term ground lease from the University of Washington, originally expected it would take until the end of the year to lease up the units. Now, it appears the building will be 90% leased by the time it opens on July 15. The leasing office opened in April. Eight weeks later, the property was 60% preleased. As of Tuesday, more than 85% of the units were preleased. The conversion is expected to increase its return from the property by at least 15%.
The attraction is location, size and price. The building is located on the University of Washington's Metropolitan tract, which is located in the heart of Downtown, surrounded by the city's business, shopping and cultural offerings such as the Benaroya Hall, the Upper Fifth retail district, the Fairmont Olympic Hotel and the Financial District. As well, Unico's chief investment officer Quentin Kuhrau tells GlobeSt.com that despite the luxury finishes the rental rate is less than half what someone would pay for a fully levered comparable for-sale unit plus condo units, and the project has less than 25% of the typical number of units in other Downtown residential developments.
HSC Real Estate is directing the leasing efforts for the Cobb. The building holds a mix of studio, one- and two-bedrooms units ranging from 450 sf to 1,100 sf, plus two penthouses, one 1,600 sf and the other 2,400 sf, that open onto a rooftop deck overlooking the Puget Sound. The monthly rental rates range from $925 to $3,200 for everything but the penthouse units. The larger penthouse has been rented out for 20 years. Unico isn't commenting on the rental rate, but penthouse rents in Seattle range from $4- to $6 per sf per month. At $5 per sf, the rent on the larger unit would be $12,000 per month.
The Cobb Building was the first dedicated medical dental building west of the Mississippi when it opened in 1910. To retain the building's national landmark status, Unico is redeveloping the building in accordance with the Secretary of the Interiors Standards for Rehabilitation. In addition, it is expected to gain LEED (Leadership in Energy and Environmental Design) certification from the US Green Building Council.
The Cobb Building is one of several office and retail properties on the University of Washington's Metropolitan Tract, a 10-acre parcel between Union and Seneca streets and Third and Sixth avenues for Unico oversees development and operations under a 60-year ground lease that is set to expire in nine years. The other buildings, all much more modern than the Cobb, include Rainier Tower, Puget Sound Plaza, Financial Center, IBM Building and the Skinner Building.
In part because the Cobb Building was in desperate need of plumbing, electrical and structural upgrades, the University of Washington Board of Regents signed off on the conversion project in December 2003. As part of the agreement with the University, the board agreed to extend the ground lease term just on the Cobb Building by 45 years, which will allow Unico to achieve an appropriate return on its investment. The agreement also allows for the University to buy out Unico's interest in the building in 2014, which is when the original ground lease is set to expire, and at other points in the future.
"We considered a hotel, office and residential, both for sale and for lease," says Kuhrau. "Residential was the clear preference [because] our vision for the surrounding properties and area has always been as Seattle's 'five-star' location for office, retail, hotel, residential, and arts and culture [and] the missing ingredient was residential."
Given the cost of the conversion, Kuhrau says the expected return on investment is "at the low-end of what would be typical" for an apartment development, which would put the cap rate somewhere in the 6%-7% range. Kuhrau says that's acceptable to Unico because it believes the project "will have spill over benefits for our surrounding properties."
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