Click here to read the Seattle Times article Filling downtown Seattle skyscrapers a tall order, which quotes Broderick Group broker, Paul Sweeney as stating, “The tech tenants are competing for high-paid employees. They want to offer them something more than suburban space. They want amenities, parking, retail, 24-hour nightlife.”
The Downtown Seattle Class A vacancy rate is expected to dip to 11.3% by the end of 2013. The limited supply of Class A view space will continue to cause increasing rents and fewer concessions for tenants. In addition, the recent high sales prices of several significant Class A buildings will also put upwards pressure on rents as these new owners strive to hit their underwriting projections. However, there is still ample supply of commodity low and mid-rise space throughout the market for tenants looking for value space.
Despite the pause in the first half of the year, 2013 will continue a steady recovery with vacancy rates projected to fall from 13.1% to 12.3% (Class A&B, Eastside Market) by year end. Downtown Bellevue, SR-520, and Kirkland (NE 85th south to SR-520) are now very strong Landlord markets. The Bellevue CBD currently has only two buildings (112th @ 12th and 110 Atrium) that can accommodate 50,000 RSF or more contiguous and much of the 110 Atrium space has pending letters of intent. Conversely, I-90 has eleven buildings that can accommodate 50,000 SF or larger tenants. Given the lack of large space in the CBD and the prevalence of options in the suburbs, the bulk of the leasing activity for the remainder of 2013 will shift to I-90 and other tenant favorable markets, such as Redmond and Bothell. Microsoft, which occupies 25% of all office space on the Eastside, continues to sit on the sidelines and has relinquished 176,000 SF in Issaquah (Sammamish Park Place) with possibly more vacancy to come in that project. In all past recoveries Microsoft has been the key driver of growth, but presently it does not appear poised for off-campus expansion. Therefore, this will continue to be a much slower recovery than experienced in prior cycles. Positively speaking, there continues to be a number of new technology firms (Ebay.com, Qualcomm, Godaddy.com, VMWare, ServiceNow) establishing a growing presence in the market. Their emergence bodes well for the long term diversification of Eastside office market.
The Downtown Seattle Class A vacancy rate is expected to dip to under 13% by the end of 2013. Leasing activity is anticipated to remain steady as Amazon, Zulily & Real Networks are expected to sign large leases. However, the overall impact on the market absorption will be somewhat tempered by the following space give backs: Dendreon – 90,000 SF at Russell Investments Center, Federal Home Loan Bank – 100,000 SF at Century Square. The limited supply of Class A view space will continue to cause increasing rents. In addition, the recent high sales prices of several significant Class A buildings will also put upwards pressure on rents as these new owners strive to hit their underwriting projections. However, there is still ample supply of commodity low and mid-rise space throughout the market for tenants looking for value space. Approximately 77% of the available full floors in the CBD are located on floors below floor 30.
The first quarter saw negative absorption and a slight bump in vacancy for the overall Eastside – triggered primarily by increased vacancy on I-90 and in Suburban Bellevue. Much of this vacancy wasn’t new space placed on the market. Instead it was space that was previously being marketed as available, but occupied. Whereas now those spaces are vacant and have negatively impacted the vacancy rate. Examples include the now vacant offices of T-Mobile/I-90 (142,000 sf) and City University/Bellevue Suburban (82,000 sf). This new vacancy coupled with tepid leasing in the first quarter (there were no new larger lease transactions) forced vacancy rates up slightly and caused minor negative absorption.
While the absorption for the quarter was negative, overall activity is beginning to pick up in most of the Eastside submarkets outside of downtown Bellevue. Both the lack of large blocks of space and the dramatic increase in rental rates of Bellevue CBD have resulted in tenants focusing on more cost effective options with free parking in the immediate areas surrounding downtown. Much of the activity has focused on smaller users, as there have been a very limited number of larger (20,000 sf+) tenants seeking office space.
Moving into the second quarter we continue to forecast slow and steady improvement in all sub-markets. Given the relative lack of large blocks of space (with I-90 the glaring exception) vacancy rates will get back on track to continue their gradual but continual descent. Rental rate increases will be modest and restricted from large spikes until tenant activity intensifies and vacancy rates drop further.