By Jack Stubbs
The state of the commercial real estate market in the Puget Sound is in a constant state of flux, and with the new year having just begun, 2018 is sure to bring new factors to the table.
We recently spoke with Zach Zaborowski, senior vice president at Broderick Group’s Bellevue office, about current trends in the Eastside market and what he foresees for the year ahead.
Founded in 1997, Broderick Group specializes in commercial real estate brokerage services around Seattle, Bellevue and the greater Puget Sound region with a focus on office, technology and industrial properties.
The company’s landlord representation team works directly with owners to identify their objectives and develop strategies to increase the value of their real estate assets. In terms of tenant representation, Broderick Group is also committed to providing its tenants with the highest quality real estate services to deliver value-added results. Specializing in local and regional asset types, the company’s sales team provides buyers and sellers with the knowledge and expertise to successfully purchase and dispose of properties at the best possible terms.
Zach started with Broderick Group in 2009 and specializes in the leasing and sales of office product on the Eastside. He provides advisory services to both tenants and landlords, specializing in market analysis and site selection, proposal and lease negotiation and property acquisition and dispositions.
Looking in the rear view mirror, how did 2017 shape up based on your expectations at the beginning of the year?
2017 was a banner year for the office leasing market. I think it ended up being stronger than most people anticipated as there were a lot of big, positive transactions on the leasing front.
Were there any particular trends in the commercial real estate market that surprised you in 2017, and do you think these trends will continue into 2018?
It’s easy to point to the tech sector as the main source of growth and absorption of space, which likely isn’t a surprise to anyone. That trend will continue to be the main driver in the Puget Sound market, we are already seeing signs of that happening in 2018 and it is only January.
Were there any significant deals that shaped the market in 2017? How did the Eastside market compare to that of Seattle (in terms of overflow, cost, etc.)?
There were a handful of deals that shaped the market in 2017, the majority of them based around companies leasing new construction. F5 leased all of The Mark, Amazon leased over 3 million square feet in both Bellevue & Seattle and WeWork continues to take space on both sides of Lake Washington as well. The Eastside saw less sizable transactions when compared to Seattle, but that is likely due the fact that the Eastside market itself is smaller in size.
Looking forward, how do you think prospective tenants and employers will view Seattle in relation to the Eastside? Is Bellevue and the Eastside becoming more of a destination now compared to years past?
I believe the Eastside continues to pick up traction with each year that goes by. Employers can decide to bring their businesses here and know that there is enough housing, transportation, retail and entertainment to ensure their employees have a good work life balance. The difference between the two markets was more substantial 10 to 15 years ago, and I believe the Eastside (particularly the Bellevue CBD) has made up a ton of ground since then.
In your view, what were some of the factors that drove demand for office, technology and industrial properties in Seattle, Bellevue and the greater Puget Sound region in 2017? Will demand continue?
The bottom line is that we live in a coastal market with relatively constrained supply and a large talent pool of educated employees. We are fortunate to have some of the most dynamic companies in the country call the Puget Sound home and continue to drive economic growth here. That organic growth, coupled with the influx of companies from the Bay Area setting up shop in the Puget Sound, should continue to drive the market moving forward.
The tech boom—and the influx of tech tenants—significantly impacted the landscape of the office market in 2017. How has the influence of tech changed since the recession in 2008? How do you think tech will evolve in 2018 and beyond?
By nature, technology companies are on the cutting edge. They provide dynamic environments to go along with the products and services they offer. The biggest change since the recession has been the amount of companies looking for space and the size of spaces they are leasing. Additionally, we are seeing a substantial amount of capital (above the construction allowances that a landlord will provide) being invested into the spaces tech companies lease.
What types of firms do you think will drive demand for office space in 2018 (i.e. larger established companies versus smaller, emerging companies)? What sort of office spaces do you think employers will be seeking out?
Larger companies will drive the demand in Seattle and Bellevue in 2018. There are “market changing” transactions underway with big names in the tech industry. These companies have continued to lease space in urban centers to provide their employees with the best work experience possible. With all the growth in this region, time has become the most important commodity for every company and employee. It’s important that companies seek out opportunities that allow their employees to avoid long commutes (or at least make the commute easier with access to rail, bus or ride-sharing) and work in dynamic environments, which generally come with leasing space in a close-in, urban center.
Where do you think leasing rates will go in 2018 in relation to last year? Do you think they will flatten out or continue at a steady rate? Do you predict landlord incentives increasing in the coming year?
Rates should continue to increase, mainly due to the constraint in supply. I expect landlord concession packages to remain the same, or potentially slightly decrease.
Given that Broderick Group operates in Seattle, the Eastside and the greater Puget Sound region, how do you think these distinct geographical areas will diverge or converge in the coming year?
There are some very distinct differences between the two markets, but the lines are seemingly becoming more blurred as time goes on. We’ve seen a lot of companies looking on both sides of Lake Washington, particularly those companies that are entirely new to the Puget Sound market. Seattle and the Eastside certainly have their differences (relative to office space), but with the low amount of large blocks of space (50,000 square feet or greater) available, many companies aren’t in a position to pick one side of the lake and focus there.
There has been a need to look at the options in Seattle and the Eastside and evaluate every opportunity available to a larger user. Additionally, several companies who already have an established presence in Seattle (most notably Amazon, but others as well) have come to the Eastside to lease space. I think there is value from an employee attraction and retention standpoint to offer offices in Seattle and Bellevue, [since] it helps broaden the talent pool a company can pick from.
What are some of the numbers and trends that you track personally, and what do these indicate about the current state of the market? What do these figures indicate about the year ahead?
The square footage of “Tenants in the Market” is perhaps the most valuable piece of information that Broderick Group actively tracks. More specifically, the amount of square footage of tenants looking for space that represents growth and absorption into the market (e.g. if a tenant is 50,000 square feet now but looking for 100,000 square feet, so 50,000 square feet of expansion).
Tenants in the Market (tenants actively looking for space) allows us to accurately make predictions on current demand relative to existing/future supply. In the Bellevue CBD specifically, we are tracking approximately 1,000,000 square feet of companies actively looking for space. Of that number, roughly 300,000 to 350,000 square feet would result in new office space being leased in 2018 (or positive absorption into the market).
We accurately track this metric in each submarket, then make assumptions on existing leases to predict what direction the market will head. Right now, we are seeing a mix of companies looking to grow versus relocate to a space of similar size that they are currently occupying. The most positive trend is that there are very few companies downsizing.