CURRENT STATE OF THE MARKET:

The Eastside Market saw 109,000 square feet of positive absorption over the 1st quarter. This growth, coupled with the decrease in overall vacancy to 14.5%, has caused average rental rates to increase to $27.67/SF (the first increase since 2007). While nearly all submarkets on the Eastside saw a steady increase of activity over the quarter, there is little doubt that the Bellevue CBD has lead the way. Currently there are Tenants looking to lease over 300,000 cumulative square feet of new space in the CBD.

SUMMARY:

• Vacancy has decreased slightly from 14.8% to 14.5% across the Eastside Office Market.
• Net absorption was again positive, with 109,864 square feet absorbed in the first quarter.
• Average asking rates increased to $27.67/SF, gross.

FORECAST:

With increasing demand for large, contiguous space, and several tenants getting close to completing significant leases in the Bellevue CBD, look for demand to push outward to other submarkets (I-90/Suburban Bellevue/Redmond) over the remainder of 2012 and into 2013. Currently, there are only 4 options for a 100,000 square foot user and less than 15 options for users looking for between 50,000 and 100,000 square feet. As the number of large spaces dwindles down, new development may soon become a reality.

Click here to read the complete Eastside Market Real Report for First Quarter 2012

Current Market Conditions

At 14.13% the Downtown Seattle office vacancy rate for the end of the First Quarter 2012 is down 30 basis points from the previous quarter. The downtown market saw 158,000 square feet of positive absorption for the quarter. Significant downtown leases signed during the first quarter included City University 87,500 SF, Omerous 64,500 SF and Cell Therapeutics 63,000 SF.

Space in the top 10 premium Class A+ High-rises continues to be in high demand. The direct vacancy rate within these buildings is a mere 6.0%. Full service rates for the premium space ranges from the mid $30’s to mid $40’s and tenants are now receiving smaller concession packages than what was previously offered. This positive trend has caught the attention of several prominent developers. Skanska USA’s Commercial Development business unit purchased the 43,000 square foot parcel at 400 Fairview Avenue North, in the heart of South Lake Union. Spear Street Capital broke ground on 202 Westlake (Lake Union, Urban Visions is marketing 200 Occidental (Pioneer Square) and Daniels Development is marketing The North Lot Project (Pioneer Square).

Click here to read the complete Seattle Market Real Report for First Quarter 2012.

Click here to read the article, “CenturyLink sells Seattle’s Qwest Plaza; Nordstrom inks big lease.”

Click here to read the article, “Insurer expects to sell Russell Center for three times what it invested.”

Click here to read the Seattle Times article, “Seattle’s office towers filling up, brokers report.”

At year end, the Full Service asking rates for Downtown Seattle office space saw a slight uptick to $27.95/SF compared to $27.45/SF in 2010. However, Class A, hi-rise space with western views are in high demand. Landlords are sending proposals to tenants with rates $3/SF to $4/SF higher compared to year end 2010. Hi-rise space with western views in Class A+ buildings now fetches rates above $40/SF. Overall, landlords have been able to cut back on concessions such as free rent and tenant improvement allowances.

2011 was a banner year for Downtown Seattle investment sales as Seattle continues to attract institutional investors. Several significant office projects sold in 2011 at peak prices. Notable sales included Schnitzer West’s 1918 Eighth and 818 Stewart to JP Morgan Chase, Westlake Center to TIAA, 83 King/505 First to Spear Street Capital, 705 Union Station to PCCP, 1800 Ninth Avenue to Talon Private Capital & Prudential and Seattle Tower to Invesco.

2012 Forecast
2012 is expected to be another relatively good year for landlords in the Downtown Seattle office market. Amazon is rumored to be in the market for a significant amount of space near their Lake Union Campus. Nordstrom is also expected to significantly increase their footprint in the CBD. Rents in Class A projects with view space are expected to steadily rise due to high demand and limited supply. The recent sale of several Class A projects will also continue to put upwards pressure on rents as these new owners attempt to meet their pro-forma rent projections.
Click here for the complete Seattle Market 2011 Year End Real Report

The overall vacancy rate at the close of 2011 was 14.8% and conservative projections have the Eastside vacancy rate at 8.4% by year end 2015 (see related data and graphs). However, within this vacancy, there are only three (3) options that can accommodate a 100,000 RSF tenant on the Eastside, and none that can accommodate a 150,000 RSF requirement. As tech tenants again start to expand on the Eastside, the larger blocks of space (2 contiguous floors or more) will be gone, setting into motion rental rate spikes for Class A quality contiguous space.

In past years suburban office building construction with surface parking could be brought to market quickly (18 to 24 months) to meet office demand. Today, with few quality suburban construction sites available and expensive land prices that require subterranean parking, the bulk of future development will occur in downtown Bellevue where there is plenty of underutilized land waiting to be developed. Additionally, the typical Eastside office tenant has matured and places a higher value on quality construction, proximity to mass transit, and immediate access to retail and restaurants for employees. Based on a three (3) year average construction time to permit, excavate a multi-level subterranean garage, and then go up 30 stories, now is the time to initiate new construction on two to three high-rises for downtown Bellevue to meet future tenant demand.

In the interim, Summitt III (Bentall) in downtown Bellevue sits in the catbird seat as the only quality office project that can deliver any significant space (320,000 RSF) in the next two to three years.

Historically the Eastside market has trailed the greater San Francisco market by one to two years. If this remains true, the Eastside can expect sharp rental rate increases and competition for the best spaces in 2013-2015. Competition will be heightened by Bay Area tenants looking to relocate to the greater Seattle market for office space that offers a new hiring pool of educated employees and less expensive space (examples Facebook, Ebay, VMware, ServiceNow).

Expect a steady recovery in the Eastside Office Market in 2012, and coupled with a constrained supply, expect rental rates spiking in 2013-2016 until enough new construction is delivered to meet demand.

Please click here for Broderick Group’s Year End Market Report for 2011.

Click here for complete Third Quarter Real Report 2011

A quick summary follows:

-Net Absorption was 136,355 SF for the third quarter, putting the year to date total at 698,598 SF. Following are the main deals that have contributed to YTD absorption, most of which were signed some time ago:

135,000 RSF: Eastpointe CC/Sanmar (sale to owner/user occupant)
67,000: Sunset North/ArenaNet
58,000: Valley View Kirkland/Silicon Designs (sale to owner/user occupant)
55,000: Skyline Tower/Expedia
35,000: Laguna South/HCL
20,000: Lake Washington Park/iSoftStone
21,000: 112th @ 12th/Coca-Cola
19,000: Plaza Center/Penn Mutual (expansion/renewal)
18,000: 200 Building/GLY

-Class A and B vacancy on the Eastside is 15.3% (excludes owner user and buildings under 10k RSF), a slight increase from 15.2% vacancy the prior quarter. The recent completion of Overlake Medical Pavilion is largely responsible for this increase, adding 190,000 SF of near-vacant product to the Eastside market.

-Bellevue CBD vacancy stands at 14.7%, up from 14.1% the prior quarter.

-Redmond is the softest Eastside Submarket at 20.6% vacancy.

-Contiguous Blocks of Space- Per CoStar, there are only 3 spaces that can provide a 100k RSF or more contiguous on the Eastside, this statistic alone will encourage many developers to re-focus on when to deliver their next office development

-Leasing Activity has not been dramatic, it continues to slowly improve and with very little construction (see projected Construction Supply statistics per attached), vacancy will steadily decline over the coming years as expected, and noted in our attached projections. The only sizable project that can add space as you know, before 2015 is Summit III (320,000 RSF). Given their short time to delivery with garage already complete, pre-leasing would likely be a pre-requisite (if they did move forward so should not negatively impact the market when Summit III does deliver

-Finally Evidence of Market Reversal- While there continues to be caution from tenants in the market, the statistics seem to be finally in place to provide strong evidence to tenants that the market is reversing and tenants need to get deals done, and be prepared for increasing rents over the next 3 years.

Please click here for Broderick Group’s 3rd Quarter Eastside Office Market Report.