Seattle Office Space News – October 2014

News

Below are comments and links to news articles and other topics relevant to the Seattle office space market from the month of October 2014.

PROPOSED DEVELOPMENTS

Commercial real estate development in Seattle and the Puget Sound area has been expanding for several quarters.  This article provides an interesting profile of 16 huge construction projects in the area that include office, residential, hotel & life science projects.

Martin Selig made lots of news in October.  First he dusted off plans for his proposed 75,000 square foot office building at Third and Battery that he tabled during the recession.  New proposed projects for Selig include a 31 story tower at Third and Lenora in Belltown that will feature 291,000 square feet of office space and 158 residential units.  Also, Selig is planning a 5 story project in Ballard at 15th Avenue NW and NW Market that will include 200,000 square feet of office.

Schnitzer’s Urban Union project in South Lake Union broke ground in October despite having no anchor tenant.  The 12 story 285,000 square foot office project at 501 Fairview Ave N in South Lake Union will be delivered in the first quarter of 2016.

Seattle developer Touchstone and their partner AIG got a construction loan to kick off NorthEdge, the 208,000 square foot office project at 1601 N 34th Street in Fremont.  The Bank of the Ozarks provided the three year loan and NorthEdge is scheduled to open in March of 2016.  NorthEdge is also yet to find an anchor tenant.

Wright Runstad received some more press in October about the Spring District in Bellevue and the 1.2 million square foot tour at Fourth Avenue and Union Street in Seattle.  The 54 story Seattle project will have 750,000 square feet of office space, 220 apartments and 30,000 square feet of retail space.

Also, Clise Properties and Graphite Design Group are hoping build an 11 story data center building at 2229 6th Ave, right in the midst of the new Amazon campus development.

OFFICE LEASES

Early October brought interesting news to the Seattle office leasing market as it was revealed that Facebook is shopping for at least 100,000 square feet of office space and is considering a conversion of the historic Macy’s building at Fourth & Pine in downtown Seattle.

Another tech company setting up shop in Seattle is Alibaba, the Chinese e-commerce company that recently went IPO on the NYSE, who opened an 8,000 square foot Seattle office at the Decatur building on 6th Avenue.  This is interesting given the proximity to Seattle ecommerce giant Amazon.com.

Cambia Health Solutions leased 9,000 square feet at 9th & Olive in Seattle and plans to open The Cambia Grove to connect startups and entrepreneurs with leaders in healthcare, business and government.

Further, local Seattle publication the Stranger is looking to relocate into about 10,000 square feet by March 2015.  Despite the fact that they have operated on Capitol Hill for 22 years, they are considering other areas throughout the city.

BUILDING SALES

Brookfield Office Properties put the twin towers known as Metropolitan Park East & West on the market for sale in October.  The complex is 95% occupied and could sell for up to $283 Million.

Following almost a full building lease by Amazon, Shorenstein Properties put Blanchard Plaza on the market for sale.  The 237,200 square foot building located at 2201 Sixth Ave could fetch up to $125 Million or around $527 per square foot.

Finally, Trinity Real Estate paid close to $36 Million to LBA Realty for 500 Yale Ave North in South Lake Union.  The price for the 71,400 square foot office building equates to $504 per square foot.

TUNNEL/VIADUCT

Seattle Tunnel Partners began digging the pit that will be used to fix Bertha, the stalled tunneling machine needed to bore the tunnel that will replace the Alaskan Way Viaduct.  This news of progress was quickly squashed as it was then reported that the digging was stopped due to a deposit of shells that was found near the repair pit.  The shells could indicate the presence of cultural materials from indigenous tribes or early settlers, so the department of transportation needs to coordinate with the Federal Highway Administration, tribal governments, and the Washington State Department of Archeology and Historic Preservation to determine next steps.

ECONOMY

Job growth is always a leading economic indicator.  This article based on a study by the W.P. Carey School of Business at ASU , reports that Seattle added 2.6% more jobs since the beginning of the year and is the 8th fastest growing city in the country.  The study also indicates that Washington State is number 9 in the country for job growth.

The Seattle area residential market remains robust as supply in King County is low although it seems that buyers are becoming more discriminating according to brokerage sources.   This trend is supported by Zillow who indicated in October that residential appreciation slowed to 6.9% in Q3 of 2014 when compared to Q3 2013 when homes were appreciating at 12%.  However, the regional housing market should continue to be healthy as investment from China heats up.

OTHER NEWS

This article provides an interesting fact that of the 10 largest office buildings in the region, none of them were built in the last 8 years.  It is anticipated that there will be a few buildings built in this cycle that will crack the top 25.

The Pike Place Market Foundation is raising money for MarketFront, the $66 Million complex bridging the gap between the market and the waterfront that will be built on the surface parking lot on Western Ave adjacent to the Joe Desimone Bridge.  MarketFront is expected to open in 2016.

Finally, some cool office spaces were profiled in October with photos for Tableau in Fremont, Mithun on the waterfront, Porch in South Lake Union and Flowplay in Pioneer Square.

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Q3 2014 Seattle Office Market – Tenant Perspective

Analyzing the Data

General Conclusion: Seattle’s office market in Q3 2014 remained relatively flat when compared to Q2 as the vacancy rate increased slightly to 10.2% and year to date positive absorption remained at 492,310 square feet.  However, due to strong demand for Seattle commercial real estate investment product, rental rates across all submarkets and building classes are still on the rise while concessions continue to decrease.  Market fundamentals have been in the favor of landlords for all of 2014.

Economy: In general, local and regional economic data inspires cautious optimism about a slow and steady recovery.  David Schumacher, director of The Office of Financial Management, said “It is encouraging to see this economic and revenue growth, but we are still climbing out of a deep hole.”  Washington’s preliminary seasonally adjusted unemployment rate dropped to 5.9% in September according to The Washington State Employment Security DepartmentThe Bureau of Labor Statistics is reporting an unemployment rate of 5.3% as of August for the Seattle/Tacoma/Bellevue area.

Office Construction: Office development activity is steadily ramping up.  Notable projects currently under construction include:

  • Amazon II, and Amazon Phases VI, VII & VIII totaling 2,094,000 square feet
  • Troy Block South Tower: ~400,000 square feet
  • 400 Fairview: 367,898 square feet with Tommy Bahama as the anchor tenant
  • Dexter Station: 345,992 square feet
  • Hill7: ~285,000

Two projects broke ground in Q3 2014:

  • Schnitzer West’s Urban Union ~291,000 sf at 501 Fairview
  • Holland Partner Group’s mixed use project at 1101 Westlake – 150,000sf of office

Also in Q3, Touchstone and Trammell Crow announced plans to break ground soon on Tilt 49 (~307,000 square feet at 1812 Boren) and 1007 Stewart (365,000sf of office) respectively. It should be noted that all of the existing office construction is in South Lake Union or the Denny Triangle, which doesn’t pose much of a supply relief in Seattle’s Central Business District.  All of the proposed office developments in the CBD are on hold until they achieve significant pre-lease at top of the market rental rates.  Activity for the CBD projects is limited.

Office Sales:  Sales action in Q3 2014 was steady as institutional developers and investors from all over the world are eager to grab a stake in the Seattle market. The following transactions were completed in Q3 2014:

  • Hines & Morgan Stanley purchased the land lease of 800 5th Ave from James Campbell Company for $165 Million.  This purchase solidifies Hines’ control of the 934,000 square foot office building on the site.
  • Prudential Real Estate purchased 8th & Olive from Hines for $101 Million or $362 per square foot. The 19 story 279,000 square foot building was previously known as 720 Olive.
  • Goodman Real Estate sold 1415 Western to Stream Real Estate for $12.4 Million or $281 per square foot
  • Lake Union Partners purchased 1012 First Avenue for $130 per square foot or $4.3 Million (33,000 square feet).  This number is somewhat misleading as the historic building will require substantial renovation and seismic retrofitting.

The above closings only scratch the surface of the story because the following properties came to market in Q3:

  • 1111 3rd (322,826 square feet) & 1100 2nd Ave (134,545 square feet) came to market as a part of a 9 building portfolio sale by Walton Street Capital
  • CBRE investors put the Smith Tower at 506 Avenue on the market.  The iconic Seattle building was the first high-rise in the city when it was completed in 1914 with 256,481 square feet in 42 stories.
  • The 168,250 square foot headquarters for Pemco at 325 Eastlake came to market.  This site is interesting because the adjoining lots can be developed creating roughly 343,000 square feet of office on the site.
  • Finally, Skanska USA put the 120,000 square foot Brooks Sports HQ building at 3400 stone Way on the market.

Office Leases:  Office leasing activity was on fire again this quarter.  Below are lease transactions that were concluded in Q3 2014:

  • Amazon leased 251,000 square feet at 1915 Terry Avenue
  • Weyerhaeuser announced that they will relocate their HQ from Federal Way to a  200,000 square foot building at 200 Occidental Ave S in Seattle’s Pioneer Square
  • The Seattle City Attorney’s office leased 63,563 square feet on floors 18-20 of Columbia Center
  • Acucela leased 38,725 square feet on floors 41 & 42 at Russell Investments Center (1301 2nd Ave)
  • Groupon added another floor at 505 5th Ave
  • UW Medicine leased 30,000 square feet at 1455 NW Leary
  • McGraw-Hill Education leased 24,000 square feet at 83 S King
  • Crown Castle USA leased 25,874 square feet at West Lake Union Center
  • A Place For Mom leased 24,039 square feet at Coluimbia Center

Below is a table providing information for the major submarkets of Seattle:

3Q2014 Market Data

The total vacancy rate for Seattle is 10.2%.

Recommendations:

If your company:

  1. Doesn’t need to move
  2. Has an upcoming space/lease requirement in the next 2 years
  3. Can reasonably forecast headcount needs for years into the future
  4. Has a rental rate in line with or above market

- Start educating yourself on available alternatives and negotiating with your current building to get an understanding of your landlord’s position in the market.  Given the increasing pressure on rents and decreasing concessions, companies are incentivized to be educated on proposed developments that will be delivering in 18-24 months.  It is also helpful to be educated on the market so you can prepare to react quickly to increasingly volatile conditions.

Alternatively, if your company:

  1. Might need to move
  2. Needs size flexibility
  3. Wants to pursue a sublease or plug-n-play opportunity
  4. Prefers not to commit to a lease term beyond the next six months

- Wait until six months prior to your lease expiration and be prepared to act quickly.  The three to six month window prior to lease expiration is when you are most attractive to potential landlords and when they will offer you the best economics.   However, have a lease/sublease signed three months before your lease expires.  You don’t want to be in a holdover situation or without space and you need to give your company time to complete tenant improvements and plan a move.

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Seattle Office Space News – September 2014

News

Below are comments and links to news articles and other topics relevant to the Seattle office space market from the month of September 2014.

PROPOSED DEVELOPMENTS

Seattle office space news in September was dominated by proposed developments.  Most intriguing is the news that Amazon is already planning to add to their 3.3 Million square foot campus addition that is currently under construction in South Lake Union.  Amazon’s development entity submitted site plans to the city for two new office buildings at 2201 8th Ave (24 stories – 551,600sf) and 2204 7th Ave (6 stories 226,000sf) for a total of 777,600 square feet.  The site is currently home to a Cornish College dorm, the Hurricane Café and Budget rental car.  This article indicates that Amazon currently occupies 3.7 Million square feet and by 2021 it will occupy 8.2 Million square feet.  With all of this construction in the pipeline for Amazon it is comforting that they are looking for innovative ways to be environmentally conscious, including using energy from nearby data centers to heat some of their buildings.  The heat will be captured by a 400,000 gallon reservoir and heat-reclaiming chiller plant.

Vulcan Real Estate was extremely active in September working on plans for more office development in South Lake Union.  First, Vulcan is proposing a new 12 story office building that calls for 322,127 square feet of office space at 500-534 Westlake Avenue north.  The site is currently home to Guitar Center and Uptown Espresso.  Next, Vulcan applied for a master use permit for a mixed use development at Westlake Avenue North and Denny way that will include a 41 story apartment building and an 18 story office building with 398,900 square feet.  Vulcan’s other proposed office projects in South Lake Union include two six story office buildings at 300 & 333 Eighth Avenue North that will have a total of 388,400 square feet and a seven story 156,000 square foot building on one of the blocks between Westlake & Terry.  Aside from office space, Vulcan is also planning to build a lot of apartments closer to Lake Union.

Vulcan and Amazon aren’t the only ones planning on swinging hammers in South Lake Union.  Schnitzer West is close to beginning construction on Urban Union, which will be a 12 story office building comprised of 285,000 square feet.

Also, Trammell Crow closed on the 1007 Stewart site in September and is planning a 21 story office tower with 332,000 square feet of office space.  Trammell paid $21.8 Million for the half acre site and the development rights equating to $1,050 per square foot! The building will replace the 102 year old-49 unit-Williamsburg Court Apartments.

Finally, Sugar Mountain, the company behind Beecher’s Cheese, is renovating and adding two floors of office space at 2121 Westlake Ave in South Lake Union.  Once complete, the building will have a total of ~27,200 square feet and will be the headquarters location for Sugar Mountain.

Outside of South Lake Union, Martin Selig has enough land under contract to build a 185,000 square foot office project at 220 W Harrison in Lower Queen Anne.  Selig released renderings prepared by architecture firm Perkins + Will for the proposed six story building.

OFFICE LEASES

Although the deal isn’t done yet, the lone exciting lease transaction reported in September was that of King 5 TV moving to Home Plate Center at 1501 First Avenue South.  King 5 is said to be close to leasing 70,000 square feet in the 158,000 square foot building near Safeco Field and owned by American Life.  King 5 would relocate from their owned headquarters in the South Lake Union submarket.

BUILDING SALES

Skanska USA put the 120,000 square foot office building at 3400 Stone Way on the market for sale in September.  Located in the Fremont submarket, the super-green building called Stone34 is the headquarters for Brooks Sports.

Hines and Morgan Stanley reached an agreement in September to partner on the purchase of the 934,000 square foot building at 800 5th Ave from James Campbell Co.  The complete ownership structure is unclear as Morgan Stanley is apparently lending Hines $176.1 Million and subsequently Hines has purchased the land for $165 Million.  Hines previously leased the block.

TUNNEL/VIADUCT

Even though Bertha (the machine boring the tunnel that will replace the Alaskan Way Viaduct) is stalled, there are still more than 230 workers on the job.  Seattle Tunnel Partners, the team tasked with the entire project, is trying to maintain productivity in a few ways to make up for the fact that Bertha is stuck after travelling only 1,028 feet of the 9,720 route.  Bertha is currently scheduled to resume digging in March of 2015 and the expected opening date of the tunnel is November 2016.

ECONOMY

Seattle’s housing market always provides an interesting economic indicator.  In September it was reported that while the rate of price increases cooled when compared to the same time in 2013 there is still a lack of inventory in the region.  With the number of homes for sale dropping, some suspect that prices will drop as buyers are more willing to be patient after a period of frenzied activity in the last few quarters.  Still, demand remains strong and part of it comes from Chinese buyers who supposedly represent 40% of the purchases of homes over $1 Million on the Eastside

TRANSIT

With the local economy booming, lots of cranes in the ground and transit projects under way, one negative effect is that traffic is seemingly getting worse.  This article provides some interesting case studies for traffic in different areas of Seattle at different times of the day.

OTHER NEWS

To wrap up this September post, check out this slide deck showing pictures of a unique office space in the historic Exchange Building.

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Seattle Office Space News – August 2014

News

Below are comments and links to news articles and other topics relevant to the Seattle office space market from the month of August 2014.

OFFICE LEASES

In some of the more exciting leasing news in months, Weyerhaeuser announced that they will relocate their headquarters from Federal Way into ~200,000 square feet at 200 Occidental Ave S in Seattle’s Pioneer Square neighborhood.  While Pioneer Square has been a hub for startups, creative companies and three Seattle sports franchises, the influx of Weyerhaeuser’s 800 employees will be a major boost for the area which has otherwise been known as a downtrodden neighborhood with a lot of transient activity.  200 Occidental will have 15,000 square feet of retail and will be developed by Urban Visions.

BUILDING SALES

The investment market was somewhat quiet in August with only the 44,100 square foot historic building at 1415 Western trading hands.  Goodman Real Estate sold the office building near Seattle’s waterfront to Stream Real Estate for $12.4 Million or roughly $281 per square foot.

PROPOSED DEVELOPMENTS

News about commercial development in Seattle is certainly no longer limited to hotels and apartment buildings.  August brought lots of stories about office developers with sites that are in advanced planning stages and others who are threatening to start construction without a tenant.

BioMed Realty started construction on a 123,000 square foot life science building at 500 Fairview Ave N in Seattle’s South Lake Union Neighborhood.  When combined with BioMed’s 530 Fairview building the project will have a total of 223,000 square feet and will be called the BioMed Realty Research Center.

Another speculative office building in Seattle’s South Lake Union neighborhood broke ground in August.  Holland Partner Group and North America Sekisui House started on 1101 Westlake, which will have 150,000 square feet of office with high ceilings and 29,000 square foot floor plates.  Holland has built several apartment buildings in the neighborhood and this project represents their first effort into office space in the region.

Of course Vulcan, Paul Allen’s real estate company with no shortage of sites in Seattle’s South Lake Union neighborhood, revealed some new plans for a few apartment buildings and a 100,000-150,000 square foot office building across from Lake Union Park.

Washington Holding has indicated that they will start construction in October of The Atrium, which is a 212,000 square foot office and lab project at 1818 Fairview in South Lake Union.

Touchstone Corp has a new potential project between Capitol Hill and South Lake Union called Tilt 49, which will include 307,000 square feet of office space and 368 residential units.  This site is across the street from Hill7 where Touchstone is already underway on an 11 story office tower.

Touchstone also started construction without a tenant this month on NorthEdge in Seattle’s Fremont neighborhood.  Given the demand for space in the area due to tech companies like Google and Tableau Software, Touchstone is confident that if they build the 214,000 square foot building – tenants will come.

The developers of Madison Centre, which is a proposed 37 story 754,000 square foot office building at 5th & Madison in Seattle’s central business district, are supposedly planning  start construction without a tenant soon.  Schnitzer West says the building will take 27 months to build and could open in late 2016.

Finally, the Seattle Housing Authority and Kidder Mathews are hoping to land a large new tenant for a 4.41 acre development site that could accommodate up to 900,000 square feet of office space.  The site known as Yesler Terrace is in the First Hill submarket next to Harborview Medical Center.

TUNNEL/VIADUCT

Progress is being made in the repair of Bertha, the stalled boring machine creating the tunnel to replace the Alaskan Way viaduct.  Seattle Tunnel Partners say that the pit being dug to access and repair the cutter-head is almost complete and they are hoping that the machine will resume work in March of 2015.

ECONOMY

It is no surprise with Amazon, Microsoft and a slew of other established and emerging tech companies that Washington was named one of the fastest growing states for tech jobs in August.  This article indicates that the state created as many jobs in Q1 & Q2 of 2014 as it did in all of 2013 and the only problem is a lack of supply of tech workers.  Tech jobs have accounted for nearly 85% of all new jobs in the Puget Sound in the last couple of years resulting in Seattle’s office market being the 7th strongest in the country

Tech experts in the area agree that we aren’t in a tech bubble similar to the year 2000 because despite an alarming spike in valuations, the business fundamentals are good.

OTHER NEWS

This story provides interesting insight into Suzie Burk, who is one of the largest commercial property owners in Seattle’s Fremont neighborhood.  Suzie and her son Michael Osterfeld have been converting the property along the North bank of Lake Union into campuses for tech companies like Adobe, Google and Tableau Software over the past couple of decades.  J.R. Burke originally bought the site in 1929 as a lumber company.

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Seattle Office Space News – July 2014

News

Below are comments and links to news articles and other topics relevant to the Seattle office space market from the month of July 2014.

BUILDING SALES

July marked one of the busier months in recent memory as it relates to news about the Seattle office market.  The biggest news in the regional investment market came late in the month as Walton Street Capital put a portfolio of 9 office buildings on the market for sale.  The two Seattle buildings involved in the offering are 1111 3rd Avenue (322,826 square feet in 34 floors) and 1100 2nd Ave (134,545 square feet in 5 floors).

Office buildings that closed included the 19 story, 279,000 square foot office building at 720 Olive.  Prudential Real Estate bought the building from Hines for $101 Million or $362 per square foot and the building will be renovated and renamed 8th & Olive.

Also, Seattle based Lake Union Partners purchased the historic building at 1012 First Avenue for $4.3 Million.  The 33,000 square foot building traded for $130 per square foot, but will require substantial renovation including a full seismic retrofit.  The seller was a family partnership led by Hans Wehl.

Other buildings that hit the market included the headquarters for Pemco at 325 Eastlake in Seattle’s South Lake Union neighborhood.  The two adjacent office buildings owned by Pemco include 168,250 square feet of space and are being offered as a sale-lease-back until Pemco can determine where to relocate.

After stabilizing the Smith Tower to 75% occupancy, CBRE investors have decided to sell the building at 506 2nd Avenue (which happened to be completed in July of 1914 marking the 100 year anniversary). The iconic Seattle building was the first high-rise in the city with 256,481 square feet in 42 stories.

Finally the 3 story building, which is home to the famous J & M Café at 201 First Avenue South, hit the market for sale in July.  The asking price for the Pioneer Square building originally built in 1889 is $3.9 Million.

OFFICE LEASES

There was lots of leasing activity in Seattle in July.  It seems like every month there is new news of a large office lease by Amazon.  In July it was reported that the online retailer leased 251,000 square feet at 1915 Terry Avenue.  The building, owned by Seattle Children’s Institute, is near Amazon’s South Lake Union campus.  The deal improbably came together after a lot of research on feasibility for how to save the structure rather than tear it down.  Amazon has tripled their employment base over the past 3 years and now has 132,000 people.

Seattle’s tallest building, Columbia Center, has 76 stories and over 1.5 Million square feet.  In July the building owned by Beacon Capital landed another tenant.  The Seattle City Attorney’s office leased 63,563 square feet on floors 18-20.  This article notes that the building has gone from 40% vacant to 20% vacant since the low of the recession in 2008 and is expected to be put on the market by Beacon Capital soon.  Other new major tenants include Rhapsody, NBC News, Envestnet, U.S. Health & Human Services and UW Physicians.

Other significant leases included biotech company Acucela subleasing two floors at Russell Investments Center at 1301 2nd Avenue from Boeing.  The 38,725 square foot space on floors 41 & 42 was lavishly built out by Boeing in 2011 and then surprisingly the commercial airplane builder decided to relocate the employees enjoying the views there.

Also, Groupon, the Chicago based daily deals site, added another floor at 505 5th Avenue South.  This is yet another example of a technology company based elsewhere having success hiring talent in Seattle as Groupon plans to bring their total headcount to 270 people with the new space.

UW Medicine leased 30,000 square feet at 1455 N.W. Leary in Ballard for a medical clinic.

Finally, McGraw-Hill Education leased 24,000 square feet at 83 S King Street providing room for up to 150 people in the Pioneer Square building.

PROPOSED DEVELOPMENTS

It seems more Seattle developers, who have been itching to develop office product but waiting for an anchor tenant, have been hinting that going spec may be a possibility.  In July Touchstone Corp made news that they are getting ready to go on the 210,000 square foot NorthEdge project at North 34th Street & Densmore Avenue North in Seattle’s Fremont neighborhood.  It remains to be seen if Touchstone will actually begin construction or if they are just moving dirt around in the hopes of expressing seriousness to potential tenants.

American Life, known for using the EB-5 foreign investor financing program, revealed plans in July to add to their Seattle portfolio with a 23 story hotel and 9 story office building near Century Link field.

TUNNEL/VIADUCT/WATERFRONT

Unfortunately Bertha, the machine who is supposed to be digging the tunnel that will replace the Alaskan Way Viaduct, has been delayed another month.  Seattle Tunnel Partners say that Bertha will return to action in March of 2015. A new 3,500 square foot showroom next to Pike Place market will exhibit some of the visions for Seattle’s waterfront once the viaduct is finally torn down.

ECONOMY

There are many different indicators that continue to provide warm and fuzzy feelings for the Seattle economy today and in the future.  The unemployment rate in Washington State dropped to 5.8%, which is the lowest in 6 years.  Residential real estate prices in Seattle continue to outperform the majority of the rest of the country as we are getting close to pre-recession levels. The median sale price for homes in Seattle is up 10% above this time last year. In Q2 venture capital investments were up 73% above the same time the previous year with $410 million invested in 40 deals. Finally, Forbes reported that Seattle is the ninth best city in the country for business and careers based on 12 factors including: availability of jobs, costs of business and living, growth potential, education, quality of life and quality of workforce.

However, in a significant blow to Seattle’s biotech community, Amgen announced that they will be closing their operations in the Seattle region, which include a 40 acre campus along Seattle’s waterfront.  About 660 people will be cut and it is still unknown what the Thousand Oaks, California company will do with the real estate here.

In July this article provided an interesting comparison between this cycle and previous boom times for the region.  To summarize, while sectors like technology, construction, aerospace and real estate seem to be back to bubble times, there are more players taking a long term view that should provide better insulation against the next shock.

OTHER NEWS

Mayfield Cos out of Palo Alto successfully refinanced 4th & Pike achieving a loan for $29.5 Million for the 10 story 132,000 square foot building that is 95% occupied.

 

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Q2 2014 Seattle Office Market – Tenant Perspective

Analyzing the Data

General Conclusion: With the conclusion of Q2 2014, Seattle’s office market continues to strengthen as the vacancy rate dropped to 9.7%.   Year to date positive absorption is up to 492,308 square feet.  Rental rates across all submarkets and building classes are as high as we’ve seen in the past decade while concessions continue to decrease.

Economy: As of May, Washington’s preliminary seasonally adjusted unemployment rate dropped to 6.1% according to The Washington State Employment Security Department.  The Bureau of Labor Statistics is indicating that the Seattle/Tacoma/Bellevue unemployment rate is down to 5.2%.  In Q2 the Census Bureau released data that Seattle is the fastest growing city in America in terms of population.  Other indicators like high wages and increases in venture capital investment also bolster confidence about the regional economy.

Office Construction: Notable office projects currently under construction include Amazon II, and Amazon Phases VI, VII & VIII that total 2,094,000 – all in Seattle’s South Lake Union submarket.  Also, 400 Fairview (360,000sf (Tommy Bahama as anchor tenant)), Dexter Station (~341,000 square feet), Hill7 (~300,000 square feet), and Stone34 (129,000 square feet for Brooks Sports) are all under way.  As previously reported, Schnitzer West (278,000 sf at 501 Fairview) and Holland Partner Group (150,000sf of office as part of a mixed use project at 1101 Westlake) are still planning to start construction soon without any prelease.  There are still a lot of other proposed office developments that are on hold until they achieve significant pre-lease at top of the market rental rates.  One of these, the redevelopment of Rainier Square in downtown Seattle, was revealed in Q2.

Office Sales:  While sales activity was relatively slow in Q2, 2014, developers and investors across the globe are eager to be involved in office product in the Seattle market and throughout the Puget Sound region. The following transactions were completed in Q2 2014:

  • A partnership between Talon Private Capital and Prudential Realty Group bought the 297,000 square foot 720 Olive building in Seattle’s CBD for $101 Million or $340 per square foot
  • First Western Development purchased 50,000 square foot building at 437 N 34th street in Fremont for $11.6 Million or $232 per square foot.
  • Liz Dunn bought 1101 E Pike Street in Capitol Hill for $5.4 Million or $288 per square foot.
  • John & Shari Behnke also bought 123 3rd Ave in Pioneer Square for an undisclosed price.

Office Leases:  Office leasing activity was on fire this quarter.  Below are lease transactions that were concluded in Q2 2014:

  • Amazon leased:
    • 255,000 square feet at Blanchard Plaza at 2201 6th Ave
    • 187,000 square feet at 635 Elliott
    • 100,000 square feet at 5th & Bell at 2301 5th Ave
    • 26,000 square feet at the Supply Laundry Building at 1265 Republican
  • The State of Washington Department of Commerce leased 195,368 square feet at Pacific Tower at 1200 12th Ave South
  • Price Waterhouse Coopers leased 43,032 square feet at the US Bank Centre at 1420 5th Ave
  • McGraw-Hill Global Education Holdings leased 24,646 square feet at 83 S King Street
  • Twitter leased another 20,983 square feet at Century Square at 1501 4th Ave
  • Howard S Wright leased 20,000 square feet at 415 First Ave North
  • HBO leased 18,000 square feet at Metropolitan Park East at 1730 Minor Ave
  • West Monroe Partners leased 15,612 square feet also at Century Square at 1501 4th Ave
  • Frog Design leased 13,059 square feet at 413 Pine Street
  • Seattle Sounders FC leased 12,272 square feet at 400 Occidental Ave S
  • Wright Runstad & Co leased 11,916 square feet at 1201 3rd
  • Finally DatStat, Inc. leased 10,731 square feet at 2505 2nd Ave

Below is a table providing information for the major submarkets of Seattle:

2Q2014 Market Data

The total vacancy rate for Seattle is 9.7%.

Recommendations:

If your company:

  1. Doesn’t need to move
  2. Has an upcoming space/lease requirement in the next 2 years
  3. Can reasonably forecast headcount needs for years into the future
  4. Has a rental rate in line with or above market

- Start educating yourself on available alternatives and negotiating with your current building to get an understanding of your landlord’s position in the market.  Given the increasing pressure on rents and decreasing concessions, companies are incentivized to be educated on proposed developments that will be delivering in 18-24 months.  It is also helpful to be educated on the market so you can prepare to react quickly to increasingly competitive conditions.

Alternatively, if your company:

  1. Might need to move
  2. Needs size flexibility
  3. Wants to pursue a sublease or plug-n-play opportunity
  4. Prefers not to commit to a lease term beyond the next six months

- Wait until six months prior to your lease expiration and be prepared to act quickly.  The three to six month window prior to lease expiration is when you are most attractive to potential landlords and when they will offer you the best economics.   However, have a lease/sublease signed three months before your lease expires.  You don’t want to be in a holdover situation or without space and you need to give your company time to complete tenant improvements and plan a move.

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Seattle Office Space News – June 2014

News

Below are comments and links to news articles and other topics relevant to the Seattle office space market from the month of June 2014.

BUILDING SALES

Only a couple of small office buildings were reported to have traded hands in June.  First, the historic retail and office building located at 1101 E Pike Street in Seattle’s Capitol Hill submarket sold for $5.4 Million.  Liz Dunn bought the 18,725 square foot 103 year old building from an LLC managed by Susan Singleton for what equates to $288 per square foot.

Also, John & Shari Behnke bought the 13,400 square foot office building at 123 3rd Avenue South in Seattle’s Pioneer Square submarket for an undisclosed price.  The philanthropic couple plans to open a new arts and cultural center for non-profits on the property.

OFFICE LEASES

The rumors that Amazon would lease an additional ~568,000 square feet in four different buildings were finally confirmed in June.  The buildings, which are near Amazon’s 5.2 Million square foot campus in the South Lake Union submarket, are:

  • Blanchard Plaza – 2201 6th Ave (Amazon leased ~255,000sf of the 300,508sf building) – owned by Shorenstein Properties
  • 635 Elliott (amazon leased all ~187,000 sf of the building) – owned by Martin Selig Real Estate
  • 5th & Bell – 2301 5th Ave (Amazon leased ~100,000 on floors 1-3) owned by Hines
  • The Supply Laundry Building – 1265 Republican Street (Amazon leased ~26,000sf of the 36,000sf building) – owned by Vulcan Real Estate

Facebook is reportedly searching for a new office space of about 80,000-100,000 square feet, which should fit well over 500 people.  This signifies a good amount of growth for the Bay Area company which only employed 90 people in Seattle two years ago.

Also, HBO’s Seattle engineering office supposedly took another floor in Met Park East at 1730 Minor Avenue.  The typical floor size in the building is just over 18,000 square feet.

PROPOSED DEVELOPMENTS

There continues to be a lot of news about potential office development in Seattle.  First, Daniels Real Estate is showing signs that they will be going spec on 5th & Columbia, the proposed 45 story office building and hotel project.  ‘Drilling and other activity’ began in mid June with the official groundbreaking ceremony planned for August or September.

Also, renderings were revealed by Vulcan Real Estate for their proposed full block development at the corner of Denny Way and Westlake Avenue North in South Lake Union. The plans call for a 41 story apartment tower with 500 units and an 18 story office building.

The Washington State Convention Center is moving forward with a 1.2 Million square foot expansion plan that is being managed by Aecom and Pine Street Group.  The expansion could include office, a hotel project and lots of exhibit space, meeting rooms and ballrooms.  Some are anticipating that the development could lead to other projects in the neighborhood.

Next, Alexandria Real Estate Equities plans to develop an 11 story office/lab project at 400 Dexter Avenue North in South Lake Union.

Lease Crutcher Lewis received permits in June for the renovation of the 63,768 square foot office building at 2200 Western.  Tenants will include Lease Crutcher Lewis, Weinstein A/U architects, and HasOffers.

Lastly, Hunters Capital is starting a $28.4 Million renovation of 501 East Pike Street in Seattle’s Capitol Hill neighborhood.  The plans are for 7,000 square feet of office, 7,000 square feet of retail and 89 apartments.

TUNNEL/VIADUCT

Bertha, the machine built to bore the tunnel that will replace the Alaskan Way Viaduct along Seattle’s waterfront, has been stalled for months and isn’t expected to be repaired until March of 2015.  Despite the setback work continues to manufacture the 14,000 curved concrete segments that will line the tunnel.

ECONOMY

Indicators persist that the Seattle area economy remains one of the strongest in the nation.  This article provides statistics indicating that the average Seattle area worker earns 27% more than the national average.

Also, the housing market in the Seattle area remains hot as median prices in King County have risen 6% above this time a year ago.

OTHER NEWS

Unico Properties, upon the expiration of their 60 year land lease, has retained the management and leasing duties of the Metropolitan Tract.  The 1.6 million square foot contiguous parcel in the central business district has 1.1 million square feet of commercial and residential space and is owned by the University of Washington.

Many developers are continuing preparation and planning for when the viaduct is removed.  The Seattle Design Commission has approved a schematic design of an Overlook Walk which will connect the Pike Place Market and Victor Steinbrueck Park. Also, the city of Seattle will potentially buy $5-$7 Million of artwork for the new 20 acres of parks and public spaces there.

This report highlights the costs of Chris Hansen’s 12-acre holdings in Seattle’s Sodo neighborhood where he plans to develop an NBA and NHL arena and surrounding retail.  The 217,575 square feet of commercial space currently on the properties is apparently earning Hansen a measly 2.6% return while he waits to land an NBA team.

TRANSIT

Plans for a proposed First Avenue streetcar were to be up for a vote by the Seattle City Council.  The $100 million project would link up South Lake Union with Pike Place Market and the First Hill streetcar lines.

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