Home Commercial Eastside Office Supply Has Been “Unexpectedly Devoured” by Tech Companies

Eastside Office Supply Has Been “Unexpectedly Devoured” by Tech Companies

Puget Sound, Bellevue, Redmond, Broderick Group, Eastside Office, Amazon, Microsoft, Seattle, Kirkland, Preylock Real Estate Holdings, T-Mobile, SMARTCAP Group, KBS

By Meghan Hall

To many, the attraction to the Puget Sound’s Eastside Office markets is apparent, with infrastructure, public transportation and private development projects feeding local city economies from Bellevue to Redmond. And while others have cast a warier eye at the Eastside’s economy, expecting demand to wane, a new report recently released the Broderick Group indicates that this development cycle is much different from previous ones in that new projects are rapidly—and surprisingly — being leased up as growing companies competing for space as the regional market tightens.

“Those who have endured real estate booms and busts over the past three decades may be casting a skeptical eye, but this cycle has significant differences compared to those of the past,” the report states. “Most notably, the immediate next wave of new development projects which may have resulted in an oversupply is unexpectedly being devoured by Amazon and other larger users.”

The entire Eastside market, spanning throughout the BelRed Corridor, includes 35,106,049 square feet of office space, of which just 2.15 million square feet, or 6.14 percent, is currently vacant. Class A Central Business District vacancy is even lower, with just 311,707 square feet available. The 2019 year-to-date absorption for these assets is about 149,336 square feet. The Bellevue CBD reached a historically low vacancy rate of four percent in the second quarter, while the I-90 Corridor saw the biggest decrease, lowering from around 10 percent vacancy to 5.1 percent.

The report states that currently, there are no contiguous Class A blocks of space more than 100,000 square feet available. Several pending and signed leases throughout the first half of the year, including Amazon’s 715,000 square foot prelease of the Binary Towers, as well as Microsoft’s 74,197 square foot lease at Redmond Junction at Bear Creek have taken up large blocks of space. Other large leases, such as Seattle Genetics’ 61,094 square foot lease at the Bothell Highlands Campus Tech Centre, or Synology America Corps’ 20,285 renewal for its current digs in Bellevue’s Sterling Plaza I, indicate that companies and tenants looking for growing room on the Eastside are lacking relocation alternatives.

As a result, both the Bellevue CBD and suburban Eastside Markets are experiencing strong rent growth. In Bellevue, rental rates grew by 7.5 percent, and Class A properties can now garner between $44 to $51 per square foot, and, for now, tenant improvement allowances and months of free rent are commonplace in Bellevue’s CBD market, although Broderick Group predicts that those will lessen as the market becomes tighter. In Kirkland, Class A buildings are quoting rents between $48 to $60 per square foot, full service, while Class A rents in the I-90 Corridor have risen to between $27 to $32 triple net, or up to $44 per square foot fully serviced. Redmond and Bothell range between $32 to $41 per square foot and $29 to $36 per square foot, respectively.

The rising rents, however, could bring some relief in future years, as rates are now high enough to support new construction, states Broderick Group. This in turn has spurred investment throughout the Eastside. Los Angeles-based Preylock Real Estate Holdings acquired the Newport Corporate Center, home to T-Mobile’s U.S. Headquarters for $467.5 million, or $482 per square foot. The transaction was Preylock’s second acquisition on the Eastside; the firm originally acquired the Willow Creek Corporate Center in August 2018. Other smaller transactions include SMARTCAP Group’s purchase of the Evergreen Office Park for $32.15 million, or $363 per square foot, and KBS’ purchases of the 107,000 square foot Offices at Riverpark in Redmond for $48.1 million or $449 per square foot.

 Amazon also made a large investment into the Eastside, with its purchase of the Bellevue Corporate Plaza from Equity Commonwealth for $195 million. Like many investors purchasing property in the area, the company plans to redevelop its newly acquired property into a new office tower.

There are several new construction projects in the pipeline, including Kirkland Urban North and Kirkland Urban Center. Each campus will total 190,000 square feet and are in development by Talon with scheduled completion for this year. The Spring District’s Block 16, developed by Wright Runstad, totals 338,526 square feet with delivery anticipated in 2020. All three developments are 100 percent pre-leased or pending. Broderick Group notes that all new development delivered prior to 2022 has been leased or is pending, except for Capstone’s Esterra Park in Overlake. The 245,000 square foot building is expected to deliver in 2021. Other notable projects in the pipeline include Skanska’s 500,000 square foot office tower on NE 8th and 108th, which has garnered significant interest, as well as Onni Group’s 875,000 square foot tower on 106th Ave.

For now, however, companies are now forced to make commercial real estate decisions further in advance, thinking ahead as if they were planning for growth in larger, more established gateway markets such as downtown Seattle or San Francisco. Large tenants who are looking to secure large block of space for the long term have very few options. However, Broderick Group believes that the Eastside markets will continue to grow significantly as developers work to keep pace of demand. Despite the potential for a market correction, the brokerage firm maintains that the Eastside market will remain strong.

“It is difficult to be anything but optimistic about the current and long-term trends on the Eastside,” the report states. “The Eastside market is more dynamic, diverse and mature than at any time in its history. There are plenty of questions and unease with respect to national and global economies, and any downturn surely will have an impact on our local market. Nonetheless, the creditworthiness of the dominant tenants on the Eastside (Amazon, Costco, Facebook, Google, Microsoft, T-Mobile, etc.) is so strong that there is more insulation now than in the past.”

While the immediate future certainly favors landlords, there is currently more than four million square feet of new office space in the construction pipeline, and a projected 35,000 employees will join the Eastside market in the coming years. While Broderick Group predicts that there will be several roadblocks as the Eastside continues to grow, the market is well-poised to handle further expansion.

“Certainly, these are enviable challenges, and given the City of Bellevue’s pastperformance (as well as Kirkland, Redmond, Bothell and Issaquah) there is no reason to believe the Eastside won’t rise to the challenge,” said Broderick Group.