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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Seattle Office Space News – May 2014

News

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

BUILDING SALES

720 Olive is tied up by a partnership between Talon Private Capital and Prudential Realty Group.  The 301,000 square foot – 20 story building is expected to be sold by Hines for $120 Million or ~$399 per square foot.

PROPOSED DEVELOPMENTS

The University of Washington is getting serious about redeveloping a portion of Rainier Square in downtown Seattle.  First, the UW selected Wright Runstad as the developer for the 1.2 Million square foot mixed use project.  Next the UW distributed conceptual design renderings of the building that will include office, hotel and retail space.  Wright Runstad has indicated that it will cost up to $10 Million just to get through the design and permitting phase of the project.

Vulcan Real Estate has more plans to develop different product types in South Lake Union.  After having already built 5.2 Million square feet of space in the neighborhood, Vulcan has several sites ready for further development.  Future projects will be taller and more dense after the Seattle City Council passed a rezone last year.

Urban Visions is still hoping to land an anchor tenant for their 200 Occidental project that will include 155,000 square feet of office and 15,000 square feet of retail.

TUNNEL/VIADUCT

The stalled machine, known as Bertha, that is creating the tunnel that will replace the Alaskan Way viaduct is in the process of repair.  Drill rigs are digging a 120 foot-deep pit so they can access and fix the clogged cutter head.

ECONOMY

There was lots of news in May providing economic indicators for the Seattle area.  According to the Census Bureau, Seattle is the fastest growing city in America in terms of population.  The Seattle office market has been fortunate to be supported by strong job growth in the tech market while wages for these positions are historically high.

Although the amount of residential real estate sales have decreased,  brokers say there are more listings and that demand is exceeding supply as prices continue to rise.  Despite many positive statistics in the residential real estate market, it seems that the dramatic price increases may be on the verge of steadying.

OTHER NEWS

The city of Seattle is advertising available office space above the historic King Street Station in Seattle’s Pioneer Square neighborhood.  The rareness of the 23,500 square foot office space leaves the city feeling confident that it will lease quickly.

Finally, competitive office buildings throughout Seattle have been racing to build amenities including in-building workout rooms, shower facilities & bicycle lockers/storage.  The Dexter Horton building has created a new type of amenity – a dog bathroom.

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Seattle Office Space News – April 2014

News

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

BUILDING SALES

Following a full building lease by Tableau Software, the former Sound Mind & Body Gym at 437 N 34th Street in Freemont closed on a sale for 11.6 Million in April.  First Western Development purchased the building from Richard & Vickie Harrington for roughly $232 per square foot.

Also, the 165,000 King (5) TV headquarters building at 333 Dexter Ave North was put on the market for sale.

OFFICE LEASES

Further confirmation that Amazon plans to lease 515,000 square feet in three different buildings was revealed when Interior Architects filed for buildout permits.   The rumor is that they will lease 228,000 square feet at 2201 6th Avenue, 187,000 square feet 635 Elliott and 100,000 square feet at 2301 5th Avenue.

The only other significant lease reported in April was that of Howard S. Wright Construction who will move into 20,000 square feet at 415 First Avenue North in Queen Anne.

In other news, the Interbay Work lofts in Seattle’s Ballard submarket is filling up.  The 105,000 square foot building located at 1631 15th Ave W and designed for startups and small companies is 40% leased as of early April.

Also, the Bullitt Center, Seattle’s greenest building at 1501 E. Madison in Capitol Hill, is 80% leased. After a year of operation the solar panels and rain water re-distribution systems in the 50,000 square foot building have proven to save on operating costs.

PROPOSED DEVELOPMENTS

Daniels Development, the owners of the proposed development at 5th & Columbia including 558,000 square feet of office, are eager to get started.  They have indicated that a July start date would be possible, but they are waiting for an anchor tenant.

C.D. Stimson Co. is ramping up marketing efforts for their 500,000 square foot office campus in Ballard.  The five building project at 5423 Shilshole Ave NW adjacent to the canal is also awaiting pre-lease.

Schnitzer West closed on a site at 501 Fairview Avenue North for $15.75 Million.  The plan for the South Lake Union location is to go spec on a 12 story building that will include 285,000 square feet of office and 6,000 square feet of retail.

TUNNEL/VIADUCT

Bertha, the stalled machine that will drill the 1.7 mile tunnel to replace the Alaskan Way viaduct, is undergoing the process of repair.  The hope is that operations will resume in March of 2015, which pushes back the opening until November of 2016.

ECONOMY

There were a lot of indications reported on the health of the regional economy in April.  Demand for residential real estate in the area is greater than the supply as prices rose 12 % over the last year and .6% last month.  Accrding to Redfin, 41% of homes in Seattle are selling in 2 weeks or less, which crushes the national average of 22.5%.  Salaries were up 1.1% in Q1 and Seattle’s wage growth rates second in the nation.  To top it off, PricewaterhouseCoopers reported that venture capital investments have reached heights that are similar to the dot.com bubble in Q2 of 2001.

OTHER NEWS

Plans continue to develop for the redesign of Seattle’s waterfront following the removal of the Alaskan Way viaduct.  The critical design elements being considered include the creation of pedestrian connections between the city and the water in a visually appealing way.

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Q1 2014 Seattle Office Market – Tenant Perspective

Analyzing the Data

General Conclusion: At the start of 2014, the vacancy rate for Seattle’s office market dipped below 10% for the first time in this cycle to 9.9% and .6% below the 10.5% rate in Q4 2013.  Year to date positive absorption is already 347,990 square feet signaling a fast start to an increasingly tight market.  Rental rates are high and concessions are decreasing for all submarkets and building classes when compared to recent years.  Office owners, developers and investors are extremely confident about the Seattle market and the Puget Sound region.

Economy: The seasonally adjusted unemployment rate for the state of Washington continues to drop as it is now 6.4% according to The Washington State Employment Security Department. The state unemployment rate was 6.8% last quarter and 7.2% at this time in 2013.  According to the Bureau of Labor Statistics, the Seattle/Tacoma/Bellevue unemployment rate increased slightly to 6% in February although it is also historically low.  Confidence in the regional economy is also supported the strong residential real estate market with indicators like property valuations and sales volume at pre-recession levels.

Office Construction: In the first quarter of 2014, Amazon broke ground on phase one of their proposed 3.3 Million square foot development in South Lake Union.   Also, a couple of office developers announced plans to begin construction on speculative projects including 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).  Other notable office projects that are under construction include: 400 Fairview (360,000sf (Tommy Bahama as anchor tenant)), Dexter Station (~341,000 square feet), Hill7 (~300,000 square feet), Stone34 (129,000 square feet for Brooks Sports), and a couple of Vulcan projects in South Lake Union (260,000 for the Allen Institute for Brain Science and 380,000sf for Amazon Phase VI). 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.

Office Sales:  Investment interest and activity in office product in Seattle continues to be extremely strong. The following transactions were completed in Q1 2014:

  • Vulcan sold 401 Terry to Kilry Realty for $106.1Million or $755 per square foot.
  • Equity Office Properties sold the World Trade Center East building at 2211 Elliott to LaSalle Investment Management for $74.5 Million or $414 per square foot.
  • Hudson Pacific Properties paid $302 per square foot or $57.7 Million for the historic Merrill Place at 411 1st Ave S.
  • Manchester Capital Management purchased the F.X. McRory’s building at 419 Occidental Ave S for $17.55 Million or $205 per square foot.
  • Principal Real Estate Investors sold the Broderick Building at 615 2nd Ave and the Miken building at 1417 4th Ave to Hannay Realty Advisors out of Phoenix. The prices paid for the historic buildings were announced to be $13.75 Million for the Broderick Building and $9.3 Million for the Miken Building or $196 per square foot and $198 per square foot respectively.
  • Sun Capital bought the Pioneer Building at 606 1st Ave in Pioneer square for $170 per square foot or $12.3 Million.

Office Leases:  Below are lease transactions that were concluded in Q1 2014:

  • MulvannyG2 leased 63,000 square feet at 1101 2nd Ave
  • Tableau Software leased the 50,000 square foot former Sound Mind & Body gym at 437 N 34th Street.  The building will be used as office space
  • Chef leased 42,000 square feet and Artifact leased 28,000 square feet both at 619 Western Ave
  • SURF Incubator leased 21,400 square feet at 999 3rd Ave
  • Co-working company Makers expanded into 11,000 square feet at 92 Lenora
  • AssureStart leased 8,400 square feet at Merrill Place

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

1Q2014 Market Data

The total vacancy rate for Seattle is 9.9%.

Recommendations:

If your company:

  1. Doesn’t need to move
  2. Has an upcoming space/lease requirement in the next 2 years
  3. Can 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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