Safeco weighs downtown exit; owners of insurer's building market space

September 15, 2008

Insurance giant Safeco Corp. is expected to either vacate or scale back its downtown operation next year--a move that could deal a major blow to the office market.

At stake are about 700 downtown jobs, some or all of which could be eliminated or shifted to the suburbs.

A final decision about the fate of Safeco's five-building downtown office complex likely will come after Boston-based Liberty Mutual completes its $6.2 billion acquisition of Seattle-based Safeco, a move expected sometime this month.

But already, a local brokerage firm is recruiting new tenants for 200,000 square feet Safeco now leases in the 436,000-square-foot complex at 500 N. Meridian St.

If the company closes the office or moves to the suburbs--where Liberty Mutual already owns a newer building--the move will dump more than 3 percent of downtown's office space back on the market.

Safeco leases nearly all the downtown complex--which includes two seven-story buildings--except for 56,000 square feet occupied by IU Medical Group. But the insurer uses only about half the space.

The owners of the building, a group of investors from Michigan, recently hired locally based Meridian Real Estate to market the property for lease. They plan to spend millions adding a workout facility and 150-seat conference center to existing amenities that include a cafeteria and a 1,000-space parking garage.

"It was very well maintained as a corporate headquarters," said Jeff Harris, president of Meridian Real Estate. "It's got the features you'd find in the suburbs, downtown."

Harris said Safeco, which sells property and casualty insurance, has not given final word on whether it will maintain a presence in its current building. Meridian's task for now is finding tenants for the part of the building Safeco is no longer using.

The company's existing lease expires in August 2009, and it has opted against inking a new deal in favor of exploring options for space elsewhere.

A Safeco spokesman said the company had planned to explore its office situation before the deal with Liberty Mutual was struck this spring. A Liberty Mutual spokesman pointed to a statement that says the firm will not comment on potential changes at Safeco until the deal closes.

Safeco said in a July regulatory filing that it plans to lay off as many as 350 of its 7,000 U.S. employees. The company said the move is part of a "restructuring initiative that includes activities related to corporate reorganization, real estate consolidation and business process outsourcing" unrelated to the Liberty Mutual deal. Safeco has not said where or when the jobs would be cut.

Insurance mergers frequently lead to job cuts, as buyers seek efficiencies and eliminate redundant operations. Liberty Mutual has said Safeco will continue to run as a separate company, an approach that could limit opportunities for cost-cutting.

During a July 31 hearing, Indiana Insurance Commissioner Jim Atterholt questioned Liberty Mutual executives about how the merger might affect Safeco's Indiana work force, which includes about 100 employees who aren't housed downtown.

"Are there synergies here that are going to have an adverse impact on the 814 employees that Safeco currently has?" Atterholt asked, according to a transcript.

Liberty Mutual Senior Vice President Richard Quinlan responded: "Commissioner, I will tell you that we're very early on in our transition planning so really can't give you an answer to that question. We just don't know and won't know until we take control and start working through, you know, a more detailed plan."

After more pushing from Atterholt, fellow Liberty Mutual executive Michael Fallon said it is "highly unlikely" the Safeco jobs would disappear from the state.

Indiana regulatory officials approved the merger Aug. 12.

Some real estate brokers think Liberty Mutual might consolidate its Indianapolis operations, including those of Safeco, into a 100,000-square-foot building it bought earlier this year at Duke Realty Corp.'s Parkwood development at 96th and Meridian streets. It wasn't clear whether space is available in that building.

Such a move would vacate about 3.5 percent of the existing office stock downtown, said Jon Owens, a principal with the local office of St. Louis-based Colliers Turley Martin Tucker.

"Adding that much square footage to the mix will be a challenge in this environment," Owens said. "It's still going to be a viable office location; it will just take time for that amount of space to be absorbed."

If Safeco elects to leave downtown, it also would mark the end of an era: The forerunner to the local insurance operation was founded almost 100 years ago on the same block.

Brothers Edward and Dudley Gallahue founded what would become American States Insurance in rented space in the early 1900s. They survived the Depression and gradually bought up properties on the block to expand, said Robert Anker, a civic leader and former CEO of American States.

AT&T built its Indiana headquarters across the street so it could be close to its largest long-distance customer in the state. And top executives worked out of the local headquarters.

Anker began working for American States in 1974 and remembers the pounding of construction on the second phase of the office complex. The owners sold the buildings and leased the space back sometime in the 1990s, he said.

The company also changed owners a few times: First it was sold to Lincoln National Life Insurance Co. of Fort Wayne, which spun it off as a public company in 1996. Seattle-based Safeco bought the company a year later. The $2.8 billion sale at the time was the largest for an Indiana company in the state's history.

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