At the beginning of the year, many companies reflect on the previous year’s performance by analyzing data and statistics to try to identify and understand trends in the real estate market for the year to come, and this year is no different. Two large global brokerages released their Puget Sound Office Market reports over the last couple of weeks, which conclude the commercial real estate industry will be strong as technology tenants continue to drive the market in the region’s two largest cities, Seattle and Bellevue.
Global brokerage group CBRE, which released their 2016 fourth quarter office market report stated that over the previous 12 months, the technology sector has driven the market more than any other sector at 4 million square feet in new office leasing across the region. Other notable sectors include banking, real estate, architecture, engineering, construction, medical, biotech, government, consulting, marketing and natural resources, though none of them compare to the growth the tech sector has experienced. To illustrate that point, the next leading sector for the region is banking, insurance and real estate at just over half a million-square feet, one-eighth of the space the tech industry took.
CBRE estimates that the Puget Sound region is sitting at a total vacancy rate of 11.1 percent, which they attribute to companies seeking more efficient office space where they can reduce their footprint and operational costs while keeping headcount at the same level.
For their own part, JLL focused its analysis on the unprecedented growth streak. Similar to the CBRE report, JLL noted that both markets have been healthy in the last year and largely tech driven. When looking at the type of tenants looking to lease or occupy space in the region, JLL tracked that the 10 largest leases signed in 2016, totaling 2.3 million square feet, were all executed by tech tenants, a trend they see endure through 2017. Additionally, the report found that tech employment has grown so much over the last decade and a half, it has resulted in the fourth highest employment growth rate in the country at 77.7 percent since 2001.
Looking ahead into 2017, Daniel Seger and Chris Hughes with JLL anticipate there will be a continued demand and fight for quality for better spaces by tenants in both markets. While they acknowledge that Bellevue is a much smaller market with a smaller pipeline than Seattle, Seger said new construction in 2016 was “incredibly well leased at the time of delivery and largely by tech tenants, as well.”
For the fourth consecutive year, the Seattle-Bellevue market has had over 2 million square feet of net absorption. In 2016, 2.3 million square feet of office product came online and by the time the buildings were ready for occupancy, they were 97.8 percent leased, according to JLL’s report. From a tenant perspective, the spaces that are being developed have been significantly leased up, and Hughes said that’s something he expects will continue into 2017.
The Eastside: Bellevue
According CBRE’s report, the Eastside has had a strong quarter, following suit from the previous one. Large transactions in the area contributed to the growth and positive momentum of the Eastside including the lease of all 335,000 square feet of Schnitzer West’s Centre 425 in the Bellevue CBD, as well as Peter Pan Seafoods at Corporate Campus East in the SR-520 Corridor and Welfare & Pension Administration Service at Island Corporate Center in the I-90 submarket. The rent per square foot is also among the highest in the region at $42.92, according to CBRE’s estimates.
The Bellevue CBD had two of 2016’s top 10 key leasing transactions for the region, which included Schnitzer West’s Centre 425 and 400 Lincoln Square, which is Pokemon’s facility.
According to Tom Bohman, senior vice president of CBRE’s Puget Sound region, a lot of new inventory is coming online but he doesn’t see that as a negative aspect of the market. “What’s happening in this real estate cycle is we’ve got roughly 1.8 million square feet of new construction that’s entering into the inventory,” said Bohman. “That compares with the cycle in 2000-01 where we had roughly 3 to 3.5 million square feet and then in the cycle in 2007-08 there was about 4.5 million square feet of new space delivered into the new market,” he added.
“With this cycle only being 1.8 million square feet compared to much larger deliveries in the last two cycles, we’re not significantly overbuilt in a way that we ended up being in the last two cycles,” he added.
In terms of supply and demand, Bohman said the marketplace is pretty well matched. “In the previous cycles, a lot more new construction came on board than in this cycle so when some of that space didn’t get leased in the previous cycle we were, for a lack of a better word, overbuilt.”
While Bohman doesn’t consider Bellevue currently overbuilt, the city is seeing a vacancy rate of 10.7 percent. But Bohman anticipates the vacancy rate is only temporary and will likely decline since most of the newly built spaces are pre-leased by tenants who plan to move in this year, contributing to new absorption into the marketplace.
Considering some of the projections for the new year, Bohman said there are positives and negatives. One concern Bohman sees is nothing out of the ordinary but more of a reminder that the construction process and permitting takes time. So for him, the question is when and whether someone will go forward with speculative development rather than if development will occur at all. Another notable concern Bohman sees is the light rail that begins construction this year and plans to connect Seattle and Bellevue. While he said this is something to be excited about, he said the flip side is that the city will be in a construction zone for the next five to seven years.
Even though growth in Seattle continues on a positive and unprecedented trajectory in terms of net absorption, vacancy rates have increased slightly due to “major office deliveries expanding the market inventory,” according to JLL’s report.
Currently the city has a vacancy rate of 9.2 percent and as a consequence, and the market is pushing up the rent. “We’re expecting to see continuing rent growth through 2017 due to lack of good available space,” said Seger.
The demand for quality space is especially prevalent in the region as tenants are demanding flexibility in their spaces. The continued production of more green-friendly and LEED-certified buildings has become an expected amenity in the area. Hughes said this is something that has become a standard in the industry and in part due to the demand from tenants.
While tenants are pushing for more creative and active spaces, the market is still largely in the hands of the landlord. JLL calculates the average asking price per square foot in Seattle CBD is $40.22.
Looking ahead in 2017, JLL’s market report sees that trend continuing. “With consistently strong rent growth and record sales pricing, the market will remain solidly in favor of landlords as the tenants comprising the 5.2 million square feet of current demand battle for quality space,” the report states.
JLL’s report cites ULI and PwC’s Emerging Trends in Real Estate 2017 report which states, “…Seattle-Bellevue currently stands as the top market in terms of local investor demand, but with 5.2 million square feet of new inventory scheduled to deliver in the next 18 months, and just 51.8 percent of it preleased, landlords should not get complacent. Now is the time to position assets and capture tenant demand before several large blocks of space become available.”
JLL anticipates 4.6 million square feet of product to enter the market in 2017, making it the most active year for deliveries since 2000. So far, 51.2 percent of the space has been leased.