General Conclusion: The vacancy rate in Seattle’s office market ended Q4 at 10.7 % and total positive absorption for 2012 was 1,709,113. Most of the positive absorption in 2012 occurred in the first two quarters led mainly by the expansion of Amazon.com and other technology companies. Although the market flattened slightly in the second half of the year, office building owners are still confident that the market will continue tightening into 2013.
Economy: Despite uncertainty in the global economic picture and the threat of the fiscal cliff in Q4, Seattle’s economy has been growing at a steady clip. The technology industry continues to be a strong leader in the area, bolstered by talented workers who are churned out by local universities. According to the Bureau of Labor Statistics, the regional unemployment rate dropped to 6.8% towards the end of the year.
Office Developers Going Spec: Confidence in the Seattle office market is leading some office developers to go spec on smaller projects for the first time in this cycle. However, when looking at overall supply of space, the projects that are going spec will only affect the market by a percentage point or two. The fact that developers are ready to take risks again is symbolic of the expectation that the market will continue to tighten. Also supporting this notion is the fact that any significant development that will have a bigger effect on the market is still challenged by financing and prelease requirements.
Hot Investment Market: Institutional money chasing office product continues to find a home in Seattle. A few notable transactions were completed in Q4 2012 including:
- Amazon closed on a $1.16 Billion dollar purchase of their 1.8Million square foot campus in South Lake Union. This was the biggest real estate deal in the country in 2012 and the 27th largest of all time nationally.
- Amazon also purchased land from Clise Properties in Q4 for a potential future development of a 3.3Million square foot campus.
- 1201 3rd Avenue was purchased by Met Life/Clarion in November for $548.8 Million or $499 per square foot (1.1Million SF)
- West 8th was purchased for $278.7Million (498,893SF or $558/SF) by an LLC affiliated with AEW Capital Management
A couple of office projects also came to market for sale including:
- Westlake/Terry (~325,000sf) – owned by Vulcan
- 605 and 705 Union Station (~500,000sf) – owned by the McCaw Family
- Dexter Horton Building (~328,000sf) – owned by Lasalle
Below is a table providing information for the major submarkets of Seattle:
The total vacancy rate for Seattle is 10.7%. Office landlords across the board are feeling very confident citing high levels of activity (building tours by tenants) in Q4.
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 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.