Vacancy rates will continue a slow, but steady decline in 2014 (11.3% projected year-end vacancy), as well as through 2015 (9.0% projected year-end). All Eastside submarkets will also continue to experience increasing rental rates, however, those properties that boast immediate access to significant retail and transit have, and will, continue to attract the majority of demand. Those properties will experience a significant spike in rental rates in 2014 as competition between tenants for the best spaces is starting to become more commonplace.
A submarket with vacancy less than 10% typically defines a landlord’s market. The submarkets that can be considered landlord markets currently are: Downtown Bellevue, SR-520 corridor, Kirkland Waterfront and Mercer Island. Markets like Bothell, Redmond, and I-90 are 18 to 24 months away from swinging to a landlord market. Technology job growth from all companies (excluding Microsoft) is strong on the Eastside, and the national economy appears to have finally stabilized after the last 5 years of uncertainty. Landlords in 2014 will enjoy the best office market fundamentals since 2008, and developers will further push along planned development projects.
The Downtown Seattle Class A vacancy rate is expected to dip to 11.8% by the end of 2013. 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 lower lease rates.
After two quarters of slightly negative absorption on the Eastside, the 3rd quarter posted a modest 57,016 sf of positive absorption. I-90 was once again a drag on the overall eastside numbers as that submarket had an additional 30,000 sf hit the market (on top of the 260,000 sf of space already given back this year).
Eastside vacancy trickled down to 12.8%, led by the Bellevue CBD (9.0%) and SR-520 (8.8%) submarket. I-90 remains the biggest blight on the Eastside at 18.9% vacant, but is quickly followed by Bothell coming in at 17.9%.
Rental rates generally eased higher throughout the Eastside and are on target to increase 3-5% on an annual basis at the close of 2013.
Due in part to the lack of large blocks of space in the Bellevue CBD, the largest deals of the quarter took place in predominantly suburban areas. Those include Market Leader (72,000 SF @ 110 Atrium), Samsung’s expansion/renewal (59,000 sf @ Lincoln Executive Center), ServiceNow (42,000 sf @ Carillon Point), booking.com (37,000 sf @ Sunset Corporate Campus II) and HCL expanding (35,000 SF @ Laguna South).
Entering the 4th quarter the theme remains much the same as the first three quarters of 2013; we expect continued growth in rents and absorption, albeit at a very slow methodical pace. Of the 20 remaining vacancies on the eastside greater than 50,000 sf, 12 are located on the I-90 corridor. At the same time, the spread between Bellevue CBD rental rates and the close-in suburbs is dramatic (especially taking into account parking costs). Therefore, while the Bellevue CBD remains in vogue, activity in the immediate suburbs has picked up given the prevalence of tenant favorable lease terms compared to the CBD. The market is seeing steady activity in the 5,000 – 10,000 sf range of tenants, but is very thin with tenants with 15,000 sf and greater requirements. The lack of substantial tenant activity continues to keep a lid on increasing rental and occupancy rates. Consequently, until more larger users enter the market it is going to be a persistently slow pace of rent growth and falling vacancy.
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.