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How Low Can it Go?: Vacancy on the Eastside Can’t Drop Much More, Report Says

Swift Real Estate Partners, Bellevue, San Francisco, SREP Fund III, Bay Area

By Meghan Hall

The breathing room that companies sought on the Eastside for their expanding business operations is now all but gone. With somewhat limited office inventory to begin with, the leasing on the Eastside continues to be largely driven by major technology tenants, from Microsoft to Amazon to Facebook. According to a third quarter report recently released by the Broderick Group, Class A office vacancy on the Eastside hovers around 4.6 percent and cannot go much lower as any available space is often quickly snapped up.

“Seattle is a big market. Bellevue is a young an immature market,” explained Broderick Group’s co-founder, Paul Sweeney. “But there is an incredible amount of both intellectual capital and capital here, meaning there are a lot of people who were very successful technology employees…There’s just a lot of those executives that spin out of those companies. There’s a lot of that that is under the radar…there’s more depth on the Eastside than we’ve ever seen.”

Total vacancy, across all building classes is slightly higher at 6.38 percent, and total office market inventory sits at 35,162,723 square feet of space. Class A buildings account for slightly more than half of that space and amount to just under 17.235 million square feet of inventory.  Class A buildings located in Bellevue’s CBD are seeing vacancy rates of about 3.95 percent, while Class A-Plus buildings — such as Bellevue Place, The Bravern, Centre 425, Summit I and II and more — are experiencing vacancy of just 2.2 percent. 

Bellevue’s Central Business District maintains the lowest vacancy rate of any submarket at 4.3 percent. Bellevue’s suburban submarket, Kirkland and the I-90 Corridor follow closely behind at 4.9 percent for suburban Bellevue and Kirkland and 5.2 percent vacancy for Kirkland. The SR-520 Corridor saw one of the highest vacancy rates of the quarter at 10.3 percent, as did Mercer Island, whose vacancy rate is 33.7 percent. However, in both markets, those rates are expected to diminish as a few recent, but larger, vacancies are leased up.

According to the Broderick Group, although available space remains scarce, some level of fundamental vacancy will always remain due to tenant transitions. However, the Eastside’s transition from a Microsoft-centric market to a diverse, technology credit market has been rapid. Between 1990 and 2019, a span of nearly 30 years, downtown Bellevue developed roughly 5.8 million square feet. In the coming few years, Amazon alone is expected to expand into and develop nearly 4.2 million square feet, which could grow downtown Bellevue’s inventory by 40 percent.

“The result will bring not only significant office growth, but residential developers are also lining up to supply the next wave of Amazon employees with new multi-family housing inventory,” states the report. “The positive impact to the Eastside economy, and to downtown Bellevue in particular, will be nothing short of spectacular. Upwards of 15,000 or more new, highly paid employees may arrive in downtown Bellevue over the next 4 years.”

And while the number of large new leases has been generally limited over the course of the third quarter simply due to lack of available space, several large lease transactions still took place. Microsoft renewed its 170,536 square foot lease at Lincoln Square North in downtown Bellevue, and also took an additional new, 34,000 square feet at Redmond East during the quarter. An  undisclosed tenant signed a new lease for three buildings at the Willow Creek Corporate Center in Redmond which total 160,229 square feet of space. Sweeney declined to comment on the tenancy of Willow Creek, citing non-disclosure agreements. WeWork snapped up 70,000 square feet at 110 Atrium, also in Bellevue’s CBD. 

There are several large blocks of space that will hit the market in the coming months. In downtown Bellevue, Civica and Skyline Tower will become available when Expedia vacates its offices and moves to its new Seattle headquarters. AT&T will be vacating 180,000 square feet in two buildings in Bothell, space in the Redmond Town Center, where the former Macy’s will be repurposed into office space is also expected to become available. Mercer Park, a 155,000 square foot building in Mercer Island will also become available, although Broderick Group notes that significant upgrades are required in order to entice large credit users. 

The result of such compressed vacancy is strong rental growth across all Eastside submarkets. As expected, downtown Bellevue continues to lead the way, with rates growing by nearly 9 percent over the past 12 months. CBD rental rates are anticipated to grow an additional 6 to 8 percent in 2020, with Class A+ properties garnering rents of between $58 to $66 per square foot, triple net and fully serviced. Kirkland Class A buildings are quoting between $48 and $61 per square foot fully serviced, while I-90 rates are coming in between $39 and $44 per square foot triple net, fully  serviced. Redmond and Bothell range from $32 and $41 and $29 and $37 per square foot, respectively.  

Free rent has generally been reduced, but is still utilized in new leases, and tenant improvement allowances have generally remained stable, despite the tightening market.

“In addition, tenants are contributing as much as 100% or more of Landlord allowances to improve spaces to the highest finish standards ever observed in Bellevue,” says Broderick Group. “While typically new construction would be a threat to existing buildings with very low vacancy, downtown Bellevue will remain Landlord favorable due to the extended time to market…”

While the market remains healthy, Broderick Group predicts that the Eastside market could enter a bit of a lull, as opportunities for new and notable leases are slim. Early lease extensions as well as terminations with “tenants in tow” could become increasingly common. However, the firm believes that the strength of the Eastside’s tenant base is more than firm enough to maintain strong market fundamentals into the future.