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 Department. The 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:
The total vacancy rate for Seattle is 10.2%.
If your company:
- Doesn’t need to move
- Has an upcoming space/lease requirement in the next 2 years
- Can reasonably forecast headcount needs for years into the future
- 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:
- Might need to move
- Needs size flexibility
- Wants to pursue a sublease or plug-n-play opportunity
- 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.