Q3 2012 Seattle Office Market – Tenant Perspective

Analyzing the DataGeneral Conclusion: The overall trend throughout 2012 is that the market is tightening. Year to date positive absorption for downtown Seattle is 1,301,545 square feet. However, in the third quarter vacancy rates and rental rates seem to have flattened out after big changes in the first six months of the year.

Economy: Despite uncertainty in the global economic picture, Seattle’s economy has been consistently stronger than the national average.  Demand for space has been solid and most of the big news throughout the year has been about the continued growth of Amazon.com.  According to the Bureau of Labor Statistics, the regional unemployment rate has hovered around 8% in Q3.

Lack of Office Development: Although the third quarter was quiet, when looking into the future the Seattle office market should continue to tighten due to a lack of new development. The only office projects that are currently under way won’t have a significant impact on the market.  Bank of America, Real Networks and Dendreon are the biggest companies rumored to be giving back space, but combined they will only affect the market by a fraction of a point.  This year Facebook, Zillow, F5 Networks, Zulily.com, Amazon, Nordstrom, and Boeing have been expanding.  Significant transactions in the third quarter included: Amazon (~102,000sf), Attachmate (~75,000sf) and Cell Therapeutics (~66,000sf).

There are two planned office building developments of significance (over 500,000sf) in the Seattle market.  They are 5th & Madison and 5th & Columbia.  The soonest these buildings will hit the market ready for tenant improvements is late 2015.  Each building will need a pre-lease of roughly 1/3 of the building at a NNN rate in the mid $30’s/SF to get financing. Otherwise, the only new office projects that haven’t been pre-leased by Amazon.com are  Homeplate Center Phase ~150,000sf of office in SODO and Skanska’s 320,000sf office building at 400 Fairview.

Hot Investment Market:  Another factor that has been putting upward pressure on rents in Seattle has been the investment of outside institutions.  When institutions pay too much for office buildings based on an above market pro-forma rent schedule, they must keep rents high in order to justify these prices to their investors.  Taking advantage of the hot investment market in Seattle, a handful of significant office buildings hit the market for sale in the third quarter including: West 8th, 1201 3rd and Seventh and Madison.

Market Reports:  Attached are a couple of market reports for your review:

  1. The 2012 office market report published by the Downtown Seattle Association.  Although the DSA uses information from CBRE, it is meant to offer an independent understanding of the state of the market.
  2. Below is a table providing information for the major submarkets of Seattle:

The total vacancy rate for Seattle is 11.0%.  Office landlords across the board are feeling very confident despite a fair amount of vacancy in commodity Class A and Class B properties.

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 as soon as possible.  Given the foreseeable upward pressure on rents, look for buildings/spaces that your organization can use to leverage renewal discussions today.  The educational process is quick/free and should only take a couple of hours.

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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