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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