Current Vacancy Broderick vacancy numbers are based on just Class A and B space, excluding owner user buildings which do not impact the leasing market, and excluding 10,000 RSF and less buildings; we also include the Bothell markets of Canyon Park and Northcreek because they are in the Eastside submarket and therefore have a direct impact although Costar and others exclude Bothell). While Costar vacancies are 11.3% for the Eastside, our numbers show a year end vacancy of 16.8% which is more in line with the kind of market we are actually feeling (ie significant competition for tenants and an environment where rates have fallen each year for the past 3 years). I-90 vacancies are 17.5%, downtown Bellevue is 15.4% (1.275 million square feet available, mostly in smaller spaces 2500-20,000 RSF).
Contiguous Block Study/Available Spaces (see attached) For a market that has been very competitive for tenants there is an extremely rare absence of large contiguous blocks of space with only 3 contiguous blocks (in one building) on the Eastside currently that accommodate a 100k RSF tenant (Legacy Redmond, now being sold by Key Bank-103k RSF, Newport Tower 112k RSF, and Eastpointe in Issaquah 109K RSF). On the flip side, there is a huge surplus of spaces 2500 to 20,000 RSF which represents the bulk of our available space. So we don’t have the advantage of a quicker recovery that could be spurred by big takedowns from companies like Microsoft because we simply don’t have large blocks of space on the eastside, and it will continue to be a tenant’s market in these size ranges.
2011 Projections / Tenant Activity Extremely Slow but Positive Signs While corporate America is starting to become active again (ie Google’s recent announcement to hire 6000 people across all their markets-their biggest hiring spree ever, T-Mobile and AT&T Wireless recently leasing larger blocks of space on the eastside, Amazon’s large Seattle leases), the overall tenant demand continues to be very, very quiet , especially relative to the smaller users (4,000 RSF -20,000 RSF), the bulk of our vacancy on the Eastside as noted above. On the positive side, the amount of tenant defaults and sublease/give back spaces has diminished greatly over the last year, which usually signals the end of a falling market. Additionally there is no new construction scheduled to come on line in 2011 (as well as 2012 and 2013, see supply statistics attached). As corporate America loosens their purse strings smaller space users should reap the benefits through corporate contracts and the overall trickle down effect. As such, we expect smaller users will follow suit and again begin to consider hiring/expansion, upgrading space, or both. 2011 should see a bottoming out of this market and although not dramatic, by year end the start of a healthy reversal in rental rates.
2012-2014 As a country we are still recovering, and not from a 10 year cycle, but a 40 year cycle that significantly affected and still is draining business resources. As such, unlike past booms we expect this recovery to be slow and steady but by no means do we expect a boom in demand. Unless Microsoft (which occupies approximately 26% of all office space on the Eastside) makes some dramatic space grabs, per the attached graphs it will be 2014/2015 before we see sub 10% vacancies which is typically the point at which the pendulum swings to a Landlord market and rental rates spike upward. That being said, if a large user like Microsoft needs space, their only choice will be aggregating small blocks which could speed recovery, or building new ( the parking garage capped Summit II, 332k RSF with only 18 months to deliver is a logical for Microsoft in downtown Bellevue). Due to the lack of large blocks of space on the Eastside, new construction is viable in 2 to 3 years despite the fact the overall market may not yet be sub-ten percent vacancies, as large tenants will simply have to pay the freight if they want to secure larger spaces on the Eastside.
Please click the link below for Broderick Group’s Eastside office market report through 2010 year end.
Eastside Office Market Overview – Q4 2010