By Meghan Hall
Positive news for investors continues to pour out of the Puget Sound’s Eastside markets, with increasing numbers of credit tenants making the suburbs their home and bolstering the commercial office market in turn. The fourth quarter in and of itself was marked with a high number of sales and leasing transactions, volume that has not been experienced in years, according to a new report released by Broderick Group at the beginning of January. The end of 2019 indicates on many counts that the Eastside—and especially Bellevue—will continue to thrive as a major market for commercial office investment.
“Since the Dot Com crash, there has been a stunning transition from a heavily Microsoft dependent market to one comprised of great credit and some of the most diverse technology giants in the country,” notes the brokerage firm in its report. “Amazon, Facebook, Google, Microsoft and T-Mobile executed on plans in 2019 to vastly expand their Eastside facilities. These companies are the driving force behind the majority of absorption in 2019 and provide ongoing evidence that Bellevue and the Eastside will continue to be a rising star in the national economy.”
The entire Eastside office market includes roughly 35.6 million square feet, with Class A buildings accounting for 17.4 million square feet of inventory. Vacancy for all properties sat at 6.45 percent, down from 7.1 percent in 2018, 9.5 percent in 2017 and 12.5 percent in 2016. Vacancy for Class A properties hit one its lowest points over the last two decades: At the conclusion of 2019, the Class A vacancy on the Eastside hovered at around 4.6 percent, the lowest vacancy rate since the Dot-Com era of 2000.
Bellevue CBD vacancy sits at 3.6 percent and will unlikely get much lower, according to Broderick Group. The I-90 corridor is seeing vacancy of 4.6 percent, while Kirkland and Redmond have vacancy rates of 4.4 percent and 6.7 percent, respectively. Bellevue suburban vacancy is in the middle, at 5.4 percent at the end of 2019.
The Eastside’s low vacancy was due to a combination of sizeable leases inked during the fourth quarter and few new buildings coming to market. In the largest lease of the quarter, Facebook took 325,000 square feet at Block 6 in The Spring District, bringing its Spring District footprint to just about 850,000 square feet spread across three buildings coming to market between the beginning of this year and the fourth quarter of 2022. In Combination with its space at Willows Road, the leases will help the social media giant establish its second largest real estate footprint outside of the Bay Area, with more than twice the space than it currently has in Seattle.
In other notable Eastside leases, General Electric took just over 70,400 square feet at Plaza North Creek in Bothell, while Alibaba signed a lease for 48,000 square feet at the Civica Office Commons in Bellevue’s Central Business District. An undisclosed tenant leased 135,772 square feet at One Twelfth @ Twelfth, around the same time that Beacon Capital Partners acquired the property for $202.67 million, or about $423 per square foot. In August of 2018, Google leased up 80,000 square feet at the complex, with plans to expand further in the future. More than 80,000 square feet was also leased by another undisclosed tenant at the Willows Commerce Park Complex in Redmond.
With vacancy rates at historic lows, rental rates continue to climb; over the course of 2019, the Bellevue CBD rental rates jumped up by 16 percent. Unless significant economic events occur in 2020, Broderick Group posits that rental rates will grow another 8 percent in the coming year. Class A properties garner rents between $46 to $51 per square foot. Class A buildings in the Eastside’s suburbs also saw healthy rental increases of about 10 percent. In Kirkland, buildings are renting for between $35 and $48 triple net, while I-90 Class A assets rent for lower, about $25 to $34 triple net. Rental Rates in Redmond and Bothell are between $23 to $29 and $18 to $25 triple net, respectively. The average gross rental rate across the entire Eastside comes to $38.53, Broderick Group reports.
Rental rates will likely continue to rise, Broderick Group reports, as essentially all new development that will be delivered prior to 2022 has been either leased or pending. Projects in the pipeline include Capstone’s Esterra Park in Overlake, which includes 245,000 square feet that will come to market in early 2021. The property has a lease pending. Onni is also pursuing 875,000 square feet of development on 106th Ave. in Bellevue, and Skanska will break ground on a 525,000 square foot tower on NE8th and 108th during the second quarter of 2020. Broderick Group also reports that 93 percent of all new space coming to market in 2020 is pre-leased.
“Vacancies have been brought to astonishingly low rates by a combination of Bay Area transplants, regionally strong growing tenants, as well as Amazon, Facebook, Google, Microsoft, and T-Mobile,” Broderick Group says. “This in turn has contributed to our forecast of steadily increasing rental rates with the market historically tight and with most new construction either already pre-leased or 3-4 years away from delivery.”
Overall, the current real estate cycle on the Eastside has been characterized by a large supply and demand imbalance that Broderick Group predicts will continue in the future.
“This real estate cycle has been characterized by a scarcity of supply. Developers and brokers grossly underestimated the wave of technology tenant demand on the Eastside. As a result, the market is now more landlord favorable than at any time since 2000,” the report states. “Time will tell, but in the meantime, this continues to be the most robust economy and office market ever witnessed on the Eastside.”