The Eastside office market is still very much recovering, and is still considered a “Tenant’s” market. While it may be hard to believe, the time is now to initiate new construction on the Eastside.

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.

CURRENT STATE OF THE MARKET:
The market saw continued positive net absorption in the third quarter, bringing the year to date number to 698,598 SF. Vacancy rates, however, increased very slightly due to the addition of the recently completed Overlake Medical Building (160,000 RSF vacant) to the market. The Eastside Office Market saw average rental rates decrease from the previous quarter. That being said, leasing activity from tenants 10,000 RSF and larger remains extremely slow and until there is a considerable increase, rental rates will not spike upwards anytime soon.
SUMMARY:
• Vacancy has increased slightly from 15.2% to 15.3% across the Eastside Office Market.
• Net absorption was again positive, with 134,717 square feet absorbed in the third quarter, putting year to date absorption at 698,598 SF.
• Average asking rates decreased in the previous quarter to $27.52/SF, gross.

Click here for complete Third Quarter Real Report 2011