The commercial real estate market is going strong in Seattle, while the Eastside area that includes Bellevue is benefitting from Amazon’s entry into the region this year, according to market reports released on July 19 by the Broderick Group.
Overall demand for the Eastside market is strong from credit tenants, the Broderick Group’s report for the second quarter of 2017 said, while “new construction is now mostly full with very little new product scheduled to be delivered in the next two years.”
Another recent win for the Eastside is Amazon’s expansion outside its Seattle core. The online retail giant set up shop in neighboring Bellevue earlier this year, a presence that Broderick Group principal Grant Yerke said is “likely is just the beginning” for the online giant beyond its current headquarters in Seattle.
In addition, Yerke said, tech firm Microsoft has continued to renew space in Eastside, “basically solidifying their presence as a major tenant.”
The Eastside region’s office industry also saw a few hiccups in the second quarter as some weaker tenants filed for bankruptcy and shed excess office space, the Broderick Group’s report said. In addition, “larger corporate users such as Boeing have given back significant space on the Eastside, which we expect may continue,” the report added.
Those developments contributed to a rise in the overall vacancy rate in the area to 12.0 percent in Q2, up from 11.7 percent in the previous quarter, the report stated. Downtown Bellevue’s vacancy rate is currently 16.2 percent, with the actual rate closer to 10.1 percent after taking into account office leases that have been signed but have not yet commenced. Meanwhile, the area’s “best in class” space has an 8.6 percent vacancy level.
The group said: “A wealth of new high-rise and low-rise multi-family development provides housing for a new, younger work force. Significant road and transit improvements are underway, and some of the best schools in the country are right in Bellevue. A pro-business tax environment—and most importantly, one of the most stable, well-educated work forces in the country—will continue to provide a ripe environment for corporate growth on the Eastside for the foreseeable future.”
Overall, the gross asking rates for the entire market stood at $33.03. Narrowing down to Class A, the rate jumps to $38.20, and then to $43.03 for the central business districts. Interestingly, Class A+, which includes 929 Building, Bellevue Place, The Bravern, City Center Plaza, Civica Office Commons, Key Center, Lincoln Square North, Tower 333, saw average asking rates at $42.86, even though vacancy of this group stood at 8.65 percent while the CBD’s was at 16.95 percent.
Notable new leases in the second quarter were Bank of America/Merrill Lynch, taking 76,740 square feet at Lincoln Square-South Tower, OfferUp taking 71,329 square feet at Mercer Pointe, Visa charging 51,891 square feet at 929 Office Tower and Sony leasing 35,623 square feet at 929 Office Tower. In the second quarter, technology tenants made up 58 percent of the tenant breakdown, financial services were 16 percent and all others made up 26 percent of the market.
The robust Seattle market remains in a “continued landlord favorable trend” fueled by growing tech firms, Broderick’s report said, and as no new un-leased developments entered the market during Q2. Of the nine projects completed this year, four are 100 percent leased.
Tech firm growth has positively impacted the Seattle market. “Basically, tech growth is driving absorption in the market. Those are the companies that are leasing new construction projects,” said Broderick Group Principal Damon MCartney.
The most notable leases were made by F5 Networks, with a full building pre-lease of 515,000 square feet at F5 Tower (formerly The Mark) and Amazon fully leasing the Yale & Thomas building for a total of 161,095 square feet, according to the report.
In addition, Seattle Children’s Research Institute subleased 74,122 square feet at 818 Stewart, Airbnb leased 42,717 square feet at the 8th & Olive building, Oculus VR leased 35,877 square feet at the top floor of Home Plate Center South and Society Consulting leased 30,174 square feet at Madison Centre.
Seattle’s Class A vacancy rates slightly increased to a vacancy of 5.59 percent in Q2, the report said, however pricing for overall Class A rates continued to be bright. The overall Class A rates in Q2 rose to an average gross rental rate of $42.08, up from $41.79 in 2016.
The two Seattle submarkets driving the overall Class A vacancy percentage increase were the Denny Regrade, which rose 0.64 percent to 4.9 percent, and Fremont, which gained 1.46 percent to reach 4.08 percent.
While the Denny Regrade rental rate fell by $0.03 to a rate of $34.28, every other submarket experienced an increase in rental rates during the quarter. Lake Union lead the pack by gaining the largest increase of $0.41 to reach $39.11.
In its market forecast for the Seattle office market, Broderick group said it expected the Class A vacancy rate to rise slightly during the second half of the year, “due to the delivery of developments with large blocks of vacant space, most notably Madison Centre.”