By Meghan Hall
By many accounts, the third quarter in Seattle simply brought about an extension of conversations that have governed the year thus far: the length of work-from-home policies and a potential “exodus” of companies from urban areas. However, Broderick Group believes that the Puget Sound will remain attractive to those in the commercial real estate industry long-term thanks to well-established fundamentals that existed prior to the advent of the global health crisis.
“The evaluation and implementation of work from home will continue well into 2021, and while the issues we face are challenging in the short term, the fundamentals of Seattle and the Puget Sound firmly place us among the strongest areas in the country to weather the economic fallout of the pandemic, and to continue to develop as a top destination for company location and investment,” states Broderick Group. “…It will take some time to return to our pre COVID-19 levels but we are confident of our recovery. Bet on cities. Bet on Seattle.”
Vacancy in the Seattle market reached 5.6 percent during the third quarter, up from the 4.6 percent that was reported during 2019. Leasing activity remained largely flat, but several deals peppered the office landscape. In the largest transaction, BlackRock leased 53,000 square feet a Two Union Square, a downsize of its current space, while Chef Software renewed for 38,148 square feet at 619 Western along the Waterfront. In a new lease, CDK Global signed up for 22,735 square feet at the U.S. Bank Centre in the Central Business District. Net absorption for the third quarter came in at a negative 305,139 square feet.
Broderick Group also notes, however, that the leases were in negotiations for months, and that the majority of tenants are looking to push major leasing decisions into the future. Signing of short-term renewals has been a strategy implemented as companies wait for a clearer sign of what the market will be like in the coming year.
“We expect tenant demand to remain quiet through at least early to mid-2021 as we await the move into Phase-4 and companies return to their offices with a clear picture the long-term impacts of the economic recovery and “work from home” will have on their office needs,” Broderick Group explains.
Broderick Group notes that there is now a slightly higher percentage of employees spending time in the office. About 20 to 25 percent are now back in their spaces, compared with the low range of five to 10 percent during the second quarter. Companies such as Amazon, Salesforce, Microsoft and Apple aren’t slated to return to the office until January 2021, while Google and Facebook are expected to return next summer. A number of companies such as AT&T, Accenture, Redfin and Deloitte have no slated return date, while others—Verizon, Twitter, Zillow—have offered permanent work from home options.
As companies figure out how to proceed, sublease space has also been on the rise—though it has not risen as dramatically as in some markets such as San Francisco. Since April, about 1.02 million square feet of sublease space has been added to the market. Broderick Group states that only about 30 percent of sublease space that has hit the market is directly attributed to the impact of COVID-19; the remainder was already listed or planned prior to the emergence of the pandemic.
“Even with the additional sublease vacancy, our direct vacancy has been so low that we are just beginning to see the pendulum swing from a strong Landlord favorable market, to a
market more equitable between tenants and landlords at 10.5 percent overall vacancy,” explains Broderick Group.
As a result of a slower market and a slight increase in vacancy, rental rates are expected to decrease 1.1 percent by year’s end, and decrease 2.2 percent during 2021. In the Central Business District, rates now sit at $50.64 per square foot, while in the Denny Triangle, rates at the end of the third quarter came in at $47.31 per square foot. Along the waterfront, rental rates are now $40.43 per square foot.
A number of assets have also hit the market this year. Skanska’s 2+U—also known as Qualtrics Tower—hit the market in the summer. In March, Urban Visions put 200 Occidental in Pioneer Square up for sale; at the time, The Registry reported that guidance could reach about $160 million. 1918 8th Ave., owned by JP Morgan is also up for sale. At 669,000 square feet, the property is one of the largest office buildings in Seattle.
325 Eastlake, a 170,000 square foot building, is also still on the market after Blackstone pulled out of a deal to buy the asset in April, according to The Registry. The office building is owned in a partnership between Unico Properties and Goldman Sachs Asset Management. 25 Eastlake sold in January of 2019 with two other properties for a combined $116 million.
Long term, Broderick Group believes the Seattle office market will pick up again. Access to a competitive and diverse talent pool, innovation clusters and physical perks like public transportation and amenities will provide companies with an opportunity to thrive in the city.