Issaquah Highlands developer lowers expectations for retail
February 9, 2010
By Warren Kagarise
Port Blakely outlines plan for stores, holds back on timeline
The sales pitch sounded almost too good to be true.
People migrated to the Issaquah Highlands in droves, many enticed by plans for restaurants, a grocery store, a cinema, a health club — enough amenities and stores to allow them to forgo trips to Bellevue and Seattle.
The leasing brochure for The High Streets — a chic retail center planned for the highlands — promised “a highly desirable mix of internationally recognized retailers as well as distinct local favorites and neighborhood retail services.”
The sales pitch lured residents with three small words: live, work, play.
Nowadays, the pitch resembles a relic from another era, the pre-recession boom.
The development deal to build The High Streets unraveled years ago. The blocks eyed for development wait, fallow. Highlands residents grumble about the slowdown in conversations with neighbors, city meetings and blog posts.
Planners envisioned the highlands as a shining city on a hill, but the recession and other factors sidelined elaborate plans to bring offices, stores and restaurants to the community. Officials from the developer, Port Blakely Communities, re-engaged residents last week in a discussion about the future of the highlands, and how the economy upended plans for additional stores and restaurants.
Although more than 7,000 people live in the highlands, the community hosts only a handful of businesses after about a dozen years of development. Rooted in the tenets of New Urbanism — with tree-lined streets and a strong focus on pedestrians — the highlands presents a challenge to retailers accustomed to strip mall suburbia.
Forget acre upon acre of asphalt for parking. Forget traditional store designs and layouts. Instead, planners designed the urban village with compact blocks to encourage residents and visitors to walk or use mass transit.
The urban village framework for the highlands will influence how Port Blakely proceeds in a tough economy for developers and retailers alike.
Back to basics
Judd Kirk — a Port Blakely senior vice president and the company’s chief real estate strategist — shaped the vision for the highlands in the early 1990s. Although the recession ended plans for The High Streets, billed as a lifestyle center, the developer still aims to build a retail complex.
“The difference now is we’ll probably tweak it a bit, which ironically will probably make it better than it was and we’ll probably phase it — with the lifestyle center you have to build it all at one time,” Kirk said.
The developer plans instead to focus only on essentials, at least during the early phase. Port Blakely seeks a new development partner to complete the task.
“We’ll probably start with the grocer, a bank, a drugstore, and do it in phases, hopefully faster,” Kirk continued. “But it’s not going to happen all at once.”
Experts question whether the development can happen at all, and if the population in the highlands and on the Sammamish Plateau can sustain the type of retail Port Blakely hopes to attract.
Economist Joseph Phillips, the dean of the Albers School of Business and Economics at Seattle University, said the economic downturn hobbled developers across the Puget Sound region. But the highlands presents a challenge unrelated to the health of the economy.
“I think the problem that the highlands have is that there aren’t enough households there to sustain that scale of development,” Phillips said.
“The problem is the density,” he added. “It’s just not there to make it work, unfortunately for the people in the highlands.”
Meanwhile, other circumstances complicate the effort to attract new businesses to the hillside neighborhood. Retailers over-expanded nationwide and in the region during the pre-recession boom, Phillips said, and opened too many stores. In the aftermath, chains downscaled as a way to save money and executives remain wary of renewed expansion.
“I think it’s pretty widely agreed that we had a lot more than we needed, and there has to be some kind of shakeout,” he said.
Another variable makes the future more difficult to forecast: Economists remain uncertain about how people will spend after the recession ends, and whether consumers will return to old habits or stick with frugality.
Mary Ann Odegaard, director of the retail management program at the University of Washington Foster School of Business, said geography could make the highlands a tough sell to tenants.
“It’s great for the people who live in the Issaquah Highlands, but is that area accessible enough for major retailers?” she said.
Kirk said the developer often faces issues related to the perceived distance of the highlands from retailers. Port Blakely executives often talk up the location of the proposed retail — about a mile north of the Interstate 90 Sunset Interchange.
The developer said the initial businesses in the highlands retail core will attract consumers and, in turn, additional businesses.
Port Blakely Vice President for Marketing & Leasing Genni Reilly said retailers seek critical mass — or the momentum to fuel growth.
“The theater brings critical mass, the grocery store helps bring that critical mass,” Reilly said. “It brings people to the site on a daily or a weekly basis.”
Empty blocks, divided into a waffle pattern by streets, also work against the developer.
“One of the biggest push-backs we get is, people drive up and say, ‘Hey, there’s nothing here. I don’t want to be up here by myself. It’s just all dirt,’” Kirk said. “That’s why anything we can do to get sticks in the air, to get development here, to give people a sense that this really is going to be an urban center, is important.”
Plans for the re-envisioned retail complex will be shaped by what highlands residents want, but also, more importantly, by what the market will support in the community.
“My gut feeling is that putting more residential and/or office in there is going to be important, to really mix it,” Kirk said.
Port Blakely partnered with developer Opus Northwest to build The High Streets. The deal collapsed as the economy soured.
“Opus was so close to starting,” Kirk said. “In retrospect, I’m glad they didn’t, because we’d have a lot of empty buildings there.”
Dan Foster — a commercial real estate broker at Pacific Cascade Real Estate Partners in Bellevue — said the failed bid to build The High Streets could turn out to be a blessing in disguise.
“From my perspective, doing this for 15 years, I think we are all so lucky this thing didn’t get off the ground for many reasons,” he said last week at a town hall meeting hosted by Port Blakely.
Set the standard
The urban village concept also requires developers to build unique — and pricier — stores to fit into the community. Standards require buildings with several sides visible to patrons and multiple entrances. Kirk said the touches dissuade some potential tenants.
“Don’t get me wrong, I still believe strongly in the vision,” he said. “But I think it needs to be realistic and flexible enough, because, you know, you can have a wonderful plan and never be able to build it.”
City Major Development Review Team Program Manager Keith Niven likens the proposed retail area to a fishbowl.
“Whoever ends up building in the fishbowl, you have to deal with the public seeing all sides of the building,” he said.
In some ways, however, city rules work against the standards. The city code, for instance, could be tweaked to allow more signs on commercial buildings in the highlands.
Beyond code changes, the city holds little power to influence development in the highlands and elsewhere in the community. Officials make zoning and code decisions, and planners review building and development permits.
“I think the path is pretty easy from a permitting standpoint and a governance standpoint,” city Economic Development Manager Dan Trimble said.
Residents also questioned whether Port Blakely slowed retail development by asking too much for rent.
“Some people think, ‘Gosh, Port Blakely, if you just lower your rents or make your prices lower, you’ll get ’em.’ That has never been the problem with retailers, because their occupancy cost is less than 10 percent of their total costs,” Kirk said. “It’s not the rent.”
The effort to open a single business — like, say, a movie theater — can be complicated further, because agreements between prospective tenants and Port Blakely include a co-tenancy clause, a standard part of development deals. The rider allows a tenant to delay development until a high-traffic business commits to a site.
Reilly reaffirmed a plan by Port Blakely to announce a grocery store deal next month. The planned movie theater, she added, requires a grocery store as a main co-tenant. The co-tenancy deal also includes restaurants.
“The cinema, they don’t want to be the lone ranger on the hill, so they do have some co-tenancy requirements,” she continued.
Nobody wants to gamble on a new development — especially in a weak economy.
“You don’t want to be alone in a new shopping center,” Odegaard said. “The first tenants pay the marketing costs to attract new tenants to that space.”
Preparations for the highlands began in the early 1990s, after the landmark Growth Management Act altered the way cities planned for the future.
Early opponents to the project focused on deforestation atop Grand Ridge, as well concerns about ground water contamination and spoiled views. Plans called for dense development — residences, offices, stores and restaurants — buffeted by open space and connected to the regional trails network.
“The environmental pieces of it seemed to be the pendulum that swung the community,” city Senior Planner Trish Heinonen said.
The initial, ambitious plan for the community included a 150-acre Microsoft campus.
Port Blakely scrambled after Microsoft scuttled plans to build the campus in 2004. The tech giant had announced a deal to build the campus with fanfare in 1997, and unveiled detailed plans for the campus a decade ago.
Microsoft retains some land in the highlands, enough to build about 1 million square feet of office space.
“If they announce tomorrow that they’re going to build here, we would have retailers banging on our door,” Kirk said “They’d be willing to pay a lot more to be here, because they would see they could get a lot more sales, which means we could afford more structured parking.”
City Councilman Mark Mullet built a house on Harrison Street and moved to the highlands in 2006.
“All of us, myself included, bought the sales pitch,” he said while eating a slice at the Zeeks Pizza outlet he opened in the highlands last June.
Mullet plans to open a Ben & Jerry’s Scoop Shop near the theater, but the plans hinge on mercurial factors, like co-tenancy clauses and economic recovery. He understands the frustration highlands residents feel about the undeveloped commercial land.
The recession also reprioritized what residents want in the neighborhood. Nowadays, the councilman said, people seem less concerned with a specialty grocer, like Whole Foods.
“Maybe five years ago they wanted that, but now they’re looking at the economic reality and they’d be thrilled with any good grocery,” he said.
Mullet called on highlands residents to remain patient — for awhile longer, at least.
“If we’re sitting here in 2012 and nothing has happened,” he said, “all of that positive energy will go away.”
Warren Kagarise: 392-6434, ext. 234, or firstname.lastname@example.org. Comment at www.issaquahpress.com.