By Jack Stubbs
“From a big picture standpoint, what we’re seeing on the Eastside is a lack of large blocks of space, not only in the CBD but throughout the entire Eastside…if you’re a tenant of size in this market, there just aren’t very many options for you right now,” said Chris Rohrbach, senior associate in Broderick Group’s Bellevue office, articulating one of the prominent trends characterizing the Eastside office market.
Broderick Group recently released its second quarter 2018 “Eastside Office Market Overview,” which points to an ever-tightening office market across the submarket, where virtually all of the large full-floor blocks of space are taken up, leaving very few choices for larger tenants. The pressing question at this point in time is where the big tech tenants will go between now and 2022, which the report indicates is the earliest realistic date for significant new space available to be delivered in the Bellevue CBD.
Of the 34,976,377 square feet that comprise the entire Eastside market, there are currently 3,011,514 available, according to the report—the vacancy rate for the entire Eastside market sits at 8.6 percent for Class A and B properties, a figure that has dropped significantly over the last couple of years: in 2015, the Eastside vacancy rate was 10.7 percent, while in 2017 the vacancy sat at 9.5 percent. And by 2020, the projected Eastside vacancy rate is projected to drop to 6.3 percent.
There are currently 470,305 square feet of vacant Class A space in the CBD (out of 8,853,621 square feet of total inventory), and the vacancy rate sits at 5.31 percent—a figure that contrasts with the vacancy rate of 6.69 percent for Class A buildings throughout the broader Eastside market. Average asking rents for Class A buildings in the CBD are $48.69 (which is up from the $43 average posted in second quarter 2017) versus the average asking rate of $42.52 for Class A buildings outside of the CBD.
Over the last couple of years in particular, the significant number of recently-signed and pending leases mean that more pressure is on the local market, according to Rohrbach. “Going back even 2-3 years ago, when Expedia announced when they were moving to Seattle, there were a lot of uncertainties about what would happen in this market. Flash forward to today, and there are lots of signed or pending deals,” he said. According to the report, the first half of 2018 saw 535,000 square feet of positive net absorption across all of the Eastside submarkets, and there are currently 420,000 square feet of signed of pending leases in the Bellevue CBD yet to be recorded, which are expected to drive down the vacancy rates even further.
Significant leases for the second quarter included Puget Sound Energy Inc.’s 223,820 square foot renewal at the Summit I Building in the CBD and WeWork’s new lease of the 32,228 square foot Bellevue Place Corner Building, which is the company’s second Bellevue location (also located in the CBD).
Further afield, Premera Blue Cross leased 65,586 square feet at 3855 Monte Villa Parkway in Bothell and an undisclosed tech tenant leased 29,383 square feet at the Willow Creek Corporate Center in Redmond. Facebook has been expanding its presence on the Eastside in recent months. In late December 2017, the company acquired two high tech/flex office buildings totaling just over 72,000 square feet in Redmond for $20 million from Crane Aerospace Inc. According to sources with direct knowledge of the company’s activities in the region, Facebook has amassed nearly 700,000 square feet across a number of properties around Redmond’s Willows Road.
According to Rohrback, available inventory is severely constrained in Bellevue’s CBD, a relatively recent trend that is expected to continue over the next two to three years. “Even six months ago, there were still a decent amount of vacancies in downtown Bellevue…now, options are down to six or seven options and about half of those have pending deals,” Rohrbach said. “With the amount of time it takes to deliver new product, who knows what the market will look like over the next 2 to 3 years. With the amount of demand, there’s not enough supply to keep up, which will probably continue over the next couple of years.”
And while it is unclear whether available supply will keep up with demand—especially in the CBD—there are a couple of new large-scale projects in the works. Vulcan Real Estate is planning a three-phase office project that could total up to one million square feet in three 16- to 17-story towers. The project site is currently home to the 60,000 square foot Bellevue Plaza, a 1960s-era retail complex located at 117 106th Ave. The current plans call for office space and between 25,000 and 30,00 square feet of retail space. Vulcan, who is working on the project with Graphite Design Group, Compton Design Office and GLY Construction, will not break ground on the new development until at least third quarter 2020 and has not yet identified a tenant for the three-building project. In mid-May, Wright Runstad broke ground on the 325,000 square foot Block 16 Building in the Spring District—for which no space has been pre-leased—which won’t be ready for occupancy until first quarter 2020. An additional 210,000 square feet, in the Block 24 Building, will follow after Block 16 is occupied, according to the report.
In the shorter-term, there is only one project scheduled for delivery in 2018: the 190,000 square foot Kirkland Urban North building that Talon Private Capital is developing is scheduled for completion this year and is currently 48 percent pre-leased. The 190,000 square foot Kirkland Urban Central building, which is currently 46 percent pre-leased, is also scheduled for completion this year. Looking forward, Hines is developing Summit III, a 370,000 square foot project in Bellevue’s CBD that won’t be completed until sometime in 2020.
In the meantime, it remains to be seen on what timeline these larger projects can be delivered, according to Rohrbach. “There are a bunch of development sites in downtown Bellevue that different developers or landlords either own and are figuring out how they can deliver…but a lot of those projects are yet to be determined, and these developers historically haven’t been known to deliver on a spec basis,” he said.
In terms of demand on the Eastside market, speed of development could likely play a role in absorption of space. “The projects that can deliver on a relatively fast timeline have a decent shot at being absorbed rather quickly by larger users. It would be disappointing if the market didn’t see some pretty substantial size deals get done,” said Zach Zaborowski, senior vice president with The Broderick Group.
However, the constrained market in downtown Bellevue along with rapidly absorbed space during the last cycle likely means that supply may not be able to keep up with demand for the foreseeable future, according to Zaborowski. “We thought the market would level out in 2016 or 2017…and that buildings that were delivered then would absorb the demand for this entire cycle. But that absorption happened so quickly that all of a sudden, we’re talking about another cycle of development in downtown Bellevue, which is really the only place that new development is being planned,” he said. “With the fact that these companies are looking to grow here, still, it wouldn’t be surprising to think that they wouldn’t still be growing or looking for space in 3-4 years.”
In spite of concerns around the lack of large-scale blocks of space available, the overall outlook for the Eastside market looks positive due to the already-established tenant base, according to Rohrbach. “It’s a really dynamic market today with a lot of strong credit tenants—though Microsoft hasn’t been one of those, which is interesting because historically, Microsoft has always been a big player in downtown Bellevue—and I don’t see anything happening in our local economy to slow any of that down. Local indicators that we track indicate that the market will continue to be healthy for the foreseeable future,” Rohrbach said.
In the meantime, given the present demand for space in the CBD, companies might begin to look further afield at other geographical alternatives, with Bothell as one notable example according to Denin Grcic, research associate in Colliers International’s Bellevue office.
“The prominent area definitely is expanding beyond the CBD, especially due to the lack of large blocks of space there. If you go further north to areas like Bothell, we’re seeing smaller companies looking there because of the lack of space in core markets like Bellevue and Redmond,” he said.
The CBD’s vacancy rate of 5.8 percent stands in stark contrast to the vacancy rate in Bothell, which sits at 13.4 percent (450,097 square feet of the 3,356,068 square feet are available). Redmond’s market is also constrained and has an overall vacancy rate of 5.5 percent, with no new construction planned.
Zaborowski, also, thinks that the opportunities in Bothell and the I-90 Corridor, in particular, represent potential future landing spots for companies looking to locate on the Eastside (the net absorption for the I-90 Corridor submarket sits at negative 64,508, and the vacant rate is currently 17.9 percent). However, even in spite of more space being available in these further-out submarkets, the desirability of Bellevue’s CBD will likely continue to play a role in companies’ decisions. “There’s still opportunities in Bothell and the I-90 Corridor for some tenants…but it’s all about amenities, transit, livability…so downtown Bellevue makes sense if you’re trying to attract the large types of tenants that I believe will drive demand,” he said.