By Jack Stubbs
As the U.S. – and, indeed, the entire world – continues to emerge and recover from the COVID-19 pandemic, there is perhaps no better time to assess the state of the economy and various national markets.
According to commercial real estate services firm Broderick Group’s second quarter 2022 Seattle Office Market Report, the Emerald City is no different as it looks to rebound from long standing impacts of the pandemic. The recently-released report delved into various aspects of Seattle’s commercial real estate industry including significant leases, proposed commercial developments, a historic overview of the city’s CRE industry and broader trends such as working-from-home as a result of the pandemic.
“Throughout [the second quarter], Seattle continues to realize some of the lasting impacts from a combination of macroeconomic slowdowns, looming concerns around [COVID-19] and the resulting work-from-home movement, as well as public safety concerns,” the report states. “These issues are not specific to Seattle and instead have been experienced across the nation. History has shown our recurring ability to overcome these external threats to office space…the question is not if the office market will return but when.”
In terms of some of its overarching findings, the report notes how increased interest rates have not only impacted office valuations, but have also increased material and labor costs, subsequently driving up tenant improvement costs for new leases. Prior to the pandemic, the Broderick Group’s Seattle office calculated roughly 5.5 million square feet of active tenant demand, while the second quarter of this year reflected active tenant demand of around 2.2 million square feet.
Despite several metrics that suggest uncertain times ahead for Seattle, Broderick Group’s analyses suggest long term fundamentals that will likely enable a solid recovery in times ahead, due to the Puget Sound region’s significant talent supply across various industries (for example, Seattle’s growth is expected to be twice the national average over the next few years).
Leasing activity throughout the second quarter reflected an active commercial market in the city, with 380,000 square feet of “significant” leases – a combination of new/existing tenants growing and expanding on a long-term basis – across the entire market, according to the report. Broderick Group is monitoring roughly 400,000 square feet of pending leases that are expected to close by the end of the year.
In terms of product-type, a majority of the signed leases during the second quarter focused on Class A buildings with proximity to major transit lines and high-quality amenities and accommodations that will be increasingly desirable because of the “flight-to-quality” preference of market tenants.
Some of the notable leases included Seattle Housing Authority’s lease of 85,000 square feet at 101 Elliott on the waterfront and Eddie Bauer’s lease at 2201 1st Avenue in the Pioneer Square neighborhood for 50,000 square feet.
The trend of working from home versus from the office has long been a notable topic of focus ever since the onset of the pandemic, with investors, developers and tenants keeping a close eye on how this pattern might take shape. Broderick Group’s report notes that, while the most serious impacts of the pandemic are in the rearview mirror, the expected return of workers back to the physical workplace has not materialized.
“Overall, office buildings are struggling to average beyond 40 percent occupancy. As major corporations amble through the evolving workplace, they have been caught flat-footed by the staying power of remote work…most companies are prolonging long-term decisions as it pertains to their real estate portfolios. A number are reducing leased square footage as leases expire,” the report states.
While a recent Stanford study indicated that employees working from home were 13 percent more productive than those working in person, it is likely too early to discern the long-term effects of working from home versus working in person.
Along similar lines, vacancy rates in Seattle during the second quarter reflected uncertainty as to the impact of the above trends: the overall Seattle direct vacancy rate increased to 13.84 percent, while sublease vacancy slightly increased to 4.67 percent. While Class A assets remain desirable to tenants, buildings in the B/C asset class continue to struggle most, as companies take advantage of decreasing Class A rental rates or affordable sublease alternatives.
The report also looked at Seattle Class A rental rates across its different submarkets. The overall Class A average gross rental rate was $45.95 per square foot. This figure stood at $48.59 for the Central Business District; $47.73 for Lake Union; and $44.46 in the Denny Regrade submarket.
Looking ahead, the development pipeline suggests little slowdown of activity in Seattle’s commercial real estate market. Second quarter saw three new office developments delivered: Dexter Yard and 520 Westlake, both in Lake Union, and 1075 Lenora located in the Denny Regrade/Belltown neighborhood.
Dexter Yard, a 500,000 square foot life science/office development, was delivered 24 percent pre-leased with approximately 390,000 square feet still vacant. Vulcan’s 372,000 square foot endeavor at 520 Westlake delivered fully pre-leased. Holland Partners’ 1075 Lenora residential/office development delivered with 100 percent vacancy in the office portion, the report states. With construction delays over the first half of 2022, Broderick Group expects a number of the new office developments currently under construction to deliver in 2023 and 2024.