By Meghan Hall
The growth and development of Seattle’s commercial real estate market has been on a steady climb since 2009 thanks, in part, to the carefully planned growth of Amazon and other tech companies as they have spread their footprints throughout the city’s central business district and urban core. What many experts did not see coming, according to Broderick Group’s First Quarter Seattle and Eastside Market Overviews, was the explosion of growth that would come to characterize the Eastside office market at the end of 2018 and heading into 2019. While leasing absorption in Seattle was more moderate during the first quarter of this year, the Eastside saw a string of major lease announcements, including Facebook’s lease of more than 300,000 square feet of space at Block 16 in the Spring District.
“Developer expectations of tenant demand in this cycle were significantly underestimated,” states Broderick Group in its Eastside report. “As a result, there are virtually no new office buildings deliverable prior to 2023 that aren’t already preleased, creating significant runway for continuing rental rate increases for existing product.”
During the first quarter, Seattle experienced approximately 413,000 in new significant leases executed by seven major companies. The bulk of these leases were the result of expanding technology and coworking companies. The largest lease In Seattle during the first quarter was inked by Seattle-based Zipwhip. The business text messaging platform took 75,000 square feet of space at the Elliott Bay Office Park, while Hulu, who inked the second largest lease, will take 67,400 square feet of space at Madison Center in the Central Business District. Coworking giants WeWork and Regus also both signed leases for space in Seattle; WeWork expanded its Fourth & Madison lease to 58,000 square feet while Regus signed a 32,200 square foot lease for Buildings A & D in Belltown.
“A majority of these leases were the result of expanding technology companies focused on growing their Seattle presence,” says Broderick Group. “We have seen those competing companies taking office space in comparable buildings in an effort to take advantage of the economic opportunities available in the Seattle area…”
While Amazon did announce during the first quarter its intention to put its entire 722,000 square foot lease at Rainier Square on the sublease market, Broderick Group does not interpret this as any sort of market slowdown, and notes that Apple, Facebook, Convoy and Oracle are all actively looking for large blocks of expansion space throughout Seattle, while Amazon itself is still on track to add more than two million square feet to market. During the first quarter, Arbor Blocks, which is 100 percent preleased by Facebook, added 384,000 square feet of space to the submarket when it came online. While four million square feet is expected to deliver in the next three years, states the report, net absorption is estimated to be 3.8 million, keeping vacancy rates low and rental rates high. Vacancy rates for Class A assets currently hovers at 4.8 percent, and the average gross rental rate is $46.54.
The Eastside, however, experienced an unprecedented first quarter, according to Broderick. In addition to Facebook’s Spring District leasing commitment, Jacobs Engineering expanded and renewed its lease at One Twelfth @ Twelfth, which totaled 96,441 square feet. WeWork also signed a new lease at Sunset North along the I-90 Corridor for 78,303 square feet. A myriad of other, smaller leases, including Seagull Scientific’s 26,431 square foot lease at the Eastgate Office Park and Intermedia.net’s 23,368 square foot lease at the Lincoln Executive Center also added to an active first quarter. At the end of 2018, T-Mobile also expanded its footprint on the Eastside by 240,000 square feet. 1,783,526 square feet of total new construction is expected to deliver over the next three years, with total net absorption anticipated to be closer to 2.75 million.
“It is difficult to be anything but optimistic about the current and long-term trends on the Eastside,” states the report. “The Eastside market is more dynamic, diverse and mature than at any time in its history.”
The vacancy rate in the Eastside markets is a little higher than Seattle, at 7 percent, and the average gross rental rate is lower at $35.17 per square foot. By 2022, Broderick Group projects that vacancy on the Eastside will drop to four percent while Seattle’s will drop to 3.6 percent, making both submarkets more competitive. However, Seattle’s rental rate is expected to climb much faster than the Eastside’s; Broderick group anticipates that rates in Seattle and the Eastside will reach $53.26 and $38.07 over the next three years, respectively.
Growth on the Eastside is expected to bring 26,000 employees to the submarket over the next several years, and Broderick Group notes that like Seattle, the Eastside will experience its own growing pains. Overall, though, the future for the market is bright.
“…There is a deep pool of tech talent that now resides on the Eastside while the Eastside cities and schools have done a commendable job of making this a desirable place for both families and businesses,” states Broderick Group. “Employees will continue to desire Eastside living, and employers will continue to seek out this valuable talent. Certainly, these are good challenges to face, and given the City of Bellevue’s past performance (as well as Kirkland, Redmond, Bothell and Issaquah), there is no reason to believe the Eastside won’t rise to the challenge.”