Q1 2013 Seattle Office Market – Tenant Perspective

Analyzing the Data

General Conclusion: The vacancy rate in Seattle’s office market ended Q1 at 10.5% and positive absorption so far this year totals 239,763 square feet.  The trend of positive absorption continues to bolster confidence of office building owners and investors, putting upward pressure on rents.

Economy: According to the Bureau of Labor Statistics, the regional unemployment rate continued to drop (6.6% in February). Growth, mostly in the technology industry, has kept Seattle ahead of the rest of the country in the comeback from the Great Recession.  Most indicators encourage optimism for continued growth throughout 2013.

Office Construction: Office developers are eager to get ahead of the next construction cycle, but financing for significant office projects still requires a significant prelease.  Some developers are going spec on smaller projects with the expectation of continued demand.

Office Sales:  Money chasing office product continues to find a home in Seattle. The following transactions were completed in Q1 2013:

  • Kilroy Realty purchased the 317,000 square foot Westlake/Terry property for $170 Million ($535/SF) from a Vulcan/Group Health partnership.
  • The LA County Employees Retirement Association bought 605 & 625 Union Station from the McCaw Family for $96.6 Million or $301 per square foot (320,806 SF)
  • Gerding Edlen purchased the historic Dexter Horton building at 710 2nd Ave for $76.6 Million from Prudential.  The sale price for the 328,000 square foot building equates to $233 per square foot.
  • Unico Properties bought the Logan building at 5th & University for $28.24 Million dollars or roughly $248 per square foot (114,000sf).

Office Leases:  Leasing activity in Q1 2013 included the following transactions:

  • Amazon leased over 5 floors at 1800 9th Ave (typical floor size is 19,600sf)
  • Intel leased 50,000 square feet at 705 5th Ave S
  • Zillow leased another 22,000 square feet at Russell Investments Center (1301 2nd Ave)
  • Cooley LLP leased 22,000 square feet at 1700 7th Ave.

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

1Q2013 CoStar Data

The total vacancy rate for Seattle is 10.5%. Despite the fact that vacancy rates have remained relatively flat since Q2 2012 office landlords across the board remain confident.

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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