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:
The total vacancy rate for Seattle is 9.9%.
If your company:
- Doesn’t need to move
- Has an upcoming space/lease requirement in the next 2 years
- Can 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 competitive 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.