General Conclusion: The vacancy rate in Seattle’s office market dipped to 9.5% at the end of Q4 2014 and positive absorption for the year concluded at 1,392,917 square feet. Looking ahead to 2015, strong demand for Seattle commercial real estate investment product is anticipated with rental rates rising and a decrease in concessions. Barring any unforeseeable geopolitical or economic crises, market forces will be trending in the favor of landlords for all of 2015.
Economy: According to the Washington State Economic and Revenue Forecast Counsel, the moderate pace of economic recovery should continue in Washington. The Washington State Employment Security Department reported that the State’s preliminary seasonally adjusted unemployment rate for November 2014 was 6.2% down from 6.8% in November of 2013. The unemployment rate reported by the Bureau of Labor Statistics dropped from 6% at the start of 2014 to 5.1% as of November in the Seattle/Tacoma/Bellevue area.
Office Construction: Office development activity took a big jump at the end of 2014 with several significant projects breaking ground. Notable office buildings currently under construction include:
- Amazon II and Amazon Phases VII & VIII totaling ~1,734,000 square feet
- Madison Centre = ~746,000 square feet
- Fifth + Columbia = ~528,000 square feet of office
- 400 Fairview = 367,898 square feet
- 1007 Stewart = ~365,000sf of office
- Troy Block South Tower = 362,108 square feet
- Dexter Station = 345,992 square feet
- Hill7 = 295,936 square feet
- Urban Union = ~285,000 square feet
- NorthEdge = ~208,000 square feet
- 1101 Westlake Ave N = 150,621 square feet
Many of these projects have started construction without any pre-lease, which is a significant sign that developers and capital markets are increasingly confident about Seattle’s office market. Also, it should be noted that office buildings under construction are no longer limited to the South Lake Union and Denny Triangle submarkets as 1,274,000 square feet of office is under construction in the CBD. We should expect more news of office projects breaking ground throughout Seattle into 2015.
Office Sales: Sales activity remained strong at the end of 2014 with the continued trend of institutional developers and investors from outside of the area buying Seattle assets. The following notable transactions were completed in Q4 2014:
- Ivanhoe Cambridge bought 1111 Third Avenue and 1100 Second Avenue from Walton Street Capital. The Canadian pension fund paid $280 million or $395 per square foot blended for the 709,000 square foot project.
- Unico and Laird Norton bought Stone 34 at 3400 Stone Way from Skanska USA for $70.1 million or $539 per square foot.
- Unico purchased Pemco’s headquarters building at 325 Eastlake for $51.75 million or $277 per square foot.
- Rockpoint Group of Boston sold the 130,500 square foot Pacific Building at 720 Third Avenue to Brickman for $50.4 Million or $386 per square foot.
- Trinity Real Estate purchased 500 Yale from LBA Realty for close to $36 Million. The price for the 71,400 square foot office building equates to $504 per square foot.
- Finally, Hines sold the 437,900 square foot Seattle Design Center to Greenbridge Investment partners out of Beverly Hills for $24.9 million or $56.86 per square foot.
Additionally, the following buildings are pending a sale:
- Unico is rumored to be the buyer for the Smith Tower at 506 Avenue which is 256,481 square feet in 42 stories.
- Brookfield Office Properties is selling the twin towers known as Metropolitan Park East & West.
- Shorenstein Properties put the 237,200 square foot Blanchard Plaza on the market in Q4.
Office Leases: Office leasing activity closed the year in strong form. Below are lease transactions that were concluded in Q4 2014:
- Disney closed a 170,000 square foot lease at the 4th & Madison tower
- Zillow closed on a lease for another ~110,000 square feet at the 1301 2nd Avenue
- Galvanize leased 70,599 square feet at 111 S Jackson
- Impinj leased 52,000 square feet at 400 Fairview
- Tableau Software leased another 38,000 square feet at 701 N 34th Street
- Avalara leased 24,428 square feet at Second & Spring
- Cambia health Solutions leased 9,000 square feet at 9th & Olive
- Chinese e-commerce company Alibaba leased 8,000 square feet at the Decatur building
- Apple leased a small amount of space at 1455 NW Leary Way in Ballard
Below is a table providing information for the major submarkets of Seattle:
The total vacancy rate for Seattle at the end of 2014 is 9.5%.
If your company:
- Doesn’t need to move
- Has an upcoming space/lease requirement in the next 2 years
- Can reasonably 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 volatile 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.