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Despite Widespread Demand, Disparity in Market Fundamentals Between Downtown Seattle and Outlying Submarkets Remains

By Meghan Hall

It is easy to paint the region’s explosive growth with broad brush strokes in an assumption that every submarket throughout the region has seen unprecedented growth thanks to the pivotal role technology, life sciences and e-commerce companies are playing in the Puget Sound commercial real estate market. While these industries have, to a certain extent, driven expansion everywhere, Seattle’s Central Business District still remains the epicenter of it all, according to a recent report released by commercial real estate services firm Savills. 

“It’s the same story, just a different day,” explained Eric Blohm, senior managing director at Savills. “If you look back a year ago and asked somebody this question, [of how the market is doing], we would give you the exact same answer. Big blocks are snapped up  by large, primarily tech tenants and any new construction that comes online is typically leased before the last bolt is screwed in.”

Overall, Seattle’s average office asking rate continued to climb throughout the second quarter of 2019, with the average rate reaching $38.88 per square foot, a 4.9 percent increase year-over-year- Savills reports. Leasing activity continued to climb, coming in at 2.8 million square feet during the second quarter of 2019, a 43.8 percent increase from over the same period last year. The growth also marks a 12 percent gain over the five-year leasing average of 2.5 million square feet.

In the CBD, rents increased 5 percent to $44.28 per square foot, and Class A rates rose 2.6 percent to $49.91 per square foot. The vacancy rate in the CBD currently sits at 10.1 percent, compared with a combined average 19.7 percent for all other non-CBD markets. The Class A CBD vacancy rate is even lower, at 8.7 percent, a 190-basis point drop over the course of the year.

Savills notes that office asking rates vary substantially by submarket. For example, Tacoma, to the south, boasts one of the lowest rental rates in the region at $25.49 per square foot. The Northend of Seattle has slightly higher rates, at $27.52 per square foot, and the Southend of Seattle has rates that average about $30.55 per square foot. In these locations, the availability rate is higher than Downtown Seattle, at 14.1 percent, 14.3 percent and 28.2 percent, respectively. 

“You would think [these submarkets] would benefit because of the lack of vacancy in the bigger submarkets,” said Savills’ Associate Director Chris Kagi. “But the reason these people come into these markets is for hiring, and you are not going to get the same type of potential candidates that you would get in downtown Seattle or Bellevue.”

The fundamentals in Bellevue and the Eastside are those closest to rivaling Seattle’s CBD; there, the rental rate comes in at $41.35 per square foot and the vacancy rate is lower than downtown at 8.3 percent. During the second quarter, 69.4 percent of all large transactions occurred in the Bellevue and Eastside submarkets. Major Eastside transactions included Amazon’s new lease at 1001 106th Ave. NE., where the e-commerce giant took 715,000 square feet of space. WeWork took 78,303 square feet at 3120 139th Ave. SE, while Jacobs Engineering Group and Morgan Stanley took 43,059 and 21,022 square feet, respectively.

Meanwhile, in downtown Seattle, the largest leases of the quarter was Dropbox’s 120,886 square feet at 1201 2nd Ave. and Zipwhip’s decision to take 75,000 square feet on Elliott Ave. W.

“Bellevue has less big blocks of space than downtown Seattle,” said  Blohm. “In fact, Seattle doesn’t have big blocks. 25,000 square feet or more in Bellevue, it doesn’t exist.”

Blohm and Kagi stated that Savills is currently tracking more than ten tenants with new requirements of more than 100,000 square feet of space throughout the region.

According to Blohm and Kagi, the impact these major firms have had on the market has been indubitable. 83.5 percent of all major transactions were closed by technology firms, and this trend is likely to continue into the future. Seattle employment is projected to grow by 3.3 percent over the next five years, which will in turn produce an estimated 295,000 new jobs through the first quarter of 2020. And, as a result, growing firms will continue to look for new space.

“There is no penalty for getting started early; there is only a penalty to getting started late,” advised Blohm of tenants looking to find blocks of space in the current market. “Whether it’s the lease expiration or growth, getting started earlier rather than later is in your best interest.”