By Jack Stubbs
Activity in the Puget Sound region’s office market shows little signs of slowing, as technology companies continue to expand their footprint by taking up space in Seattle and the surrounding submarkets on the Eastside (typically defined as the city of Bellevue and surrounding submarkets on the east side of Lake Washington), record per square foot sales prices for commercial buildings continue to rise and net absorption rentable square foot (RSF) figures continue increasing. According to JLL’s 2018 “State of the Market Report”—in which the Capital Markets Team analyzes trends in the office, retail and industrial markets—wider growth across the Puget Sound region continues to contribute to the vitality of the office market, in particular.
Active requirements—the amount of office space currently being sought out by prospective tenants looking for space—is one metric used to gauge the future prospects of the local office market. According to the report, there are currently 150 active requirements (totalling 9.6 million square feet of space), 60 percent of which are attributed to software and technology companies. While JLL’s Capital Markets team could not name the specific companies who are looking for space, there are several sizable active requirements in the works, according to Sudarshan Sampath, research manager at JLL’s Seattle office. There are eleven active requirements for over 100,000 square feet in Seattle and eight active requirements of that scale on the Eastside in Bellevue.
Clearly, the presence of technology companies in the office market continues to play a role, and other statistics highlighted in the report indicate that growth in the tech sector—and the wider region—is in part driven by wider demographic trends. According to the report, the population of the Seattle-Tacoma metropolitan area—which encompasses the three largest counties: King, Pierce and Snohomish—is 3.8 million, and the unemployment rate for the region sits at 3.8 percent. This unemployment figure marks a decline from the figure posted over the last few months, which, according to the Bureau of Labor Statistics, was at 4.5 percent in January 2018 and 4.3 percent in February 2018. The report also indicates how population growth across the wider region is fueled in in large part by those looking to relocate to the Emerald City from other areas—according to Forbes, more new employees moved to Seattle than anywhere else in the U.S. in 2017.
As is often the case in a hot office market like Seattle’s and that of the Eastside, the question looking forward is whether supply—dictated by new construction projects coming online—will be able to keep up with demand. There are 4.4 million square feet set for delivery in 2018 (with 85 percent of that figure pre-leased). Sampath thinks that this figure—along with the lack of new construction over the next couple of years—will put pressure on the ability of supply to keep up with demand in the market over the next couple of years. “Given the amount of demand in the market, only new construction space is readily available, which commands a premium. When evaluating the delivery dates, there is a real shortfall after 2019,” he said. “Depending on employment rates into the future, this will likely cause upward pressure on office rents. For example, a dozen local projects with expected delivery dates between the first quarter of 2019 and the third quarter of 2020 total 3.7 million square feet.”
The fact that 85 percent of the 4.4 million square feet set for delivery is already pre-leased indicates that demand for space in the market will continue over the next couple of years. Over the last few years, downtown Seattle and the Bellevue CBD have been the driving force behind leasing activity in the wider region—and Sampath doesn’t see this dynamic changing in the near future. “Both the Seattle and Bellevue Central Business Districts are the main drivers of leasing activity and have been for the past three years,” he said. “This has not broadly changed, with 44 percent of deliveries occurring in Lake Union neighborhood over the time period.”
Indeed, in 2017, the net absorption for the Puget Sound region was 4.1 million square feet—the second highest net absorption figure in the U.S. behind Dallas, according to the report: of that figure, 1.3 million square feet occurred in downtown Seattle; 1.3 million square feet in Bellevue CBD; and 1 million in Lake Union.
The net absorption RSF figure—another metric used to gauge the current state of the office market in relation to years past—also indicates that downtown Seattle continues to lead the way when it comes to driving the office market. In 2017, the net absorption RSF for the entire region (encompassing downtown Seattle, Eastside, Northend and Southend) was 4,126,741, up from the 2016 market total of 2,476,060. Of that 2017 figure, 3,158,803 occurred in downtown Seattle and 1,213,161 occurred on the Eastside (Southend experienced negative absorption of 273,196).
Vacancy rates in the region, also, indicate that the downtown Seattle and Eastside submarkets remain strong in relation to the rest of the region. The vacancy rate for downtown Seattle sits at 8.9 percent; the vacancy rate for the Eastside is 7.1 percent. The vacancy rate for Northend exceeds both those figures, sitting at 11.6 percent; and the Southend’s vacancy rate of 20.2 percent dwarfs the three aforementioned. All told, the 2017 market total RSF sits at 98,834,807—of that figure, 9.6 percent (9,488,141) is vacant, a figure down from the 9.2 percent vacancy rate posted for the total market in 2016.
Looking ahead to 2018, sales volume and activity will be something to watch in the year ahead, especially over on the Eastside, according to Sampath, who added that he thinks sales activity will continue to increase throughout the year. And although there were more sales over $10 million posted in 2016 than in 2017 (54 in 2016 versus the 39 in 2017), Sampath thinks that in the year ahead the sales price for transactions will continue to increase. “Initial sales and activity are in the suburban Bellevue/Redmond market,” he said. “Despite relatively slow sales activity in the first quarter, volume will pick up significantly toward the end of 2018 in Seattle, and sales will likely break $1,000 per square foot.” According to the report, the record price per square foot has been increasingly steadily over the last few years: since 2012, the record PSF high watermark has increased by 44.5 percent.
The highest price per square foot sale in 2017 was $926 for a sale in downtown Bellevue: on December 5th 2017, Japanese Takenaka Corporation acquired the 11-floor, 290,573 square foot Tilt49 building (100 percent leased to Amazon) for $269 million from Touchstone, the project developer. There were several other notable sales in 2017. On June 15th 2017, Metzler and Union Investment acquired the 373,458 square foot Midtown21 building in downtown Seattle (which is also 100 percent leased to Amazon) for $330.2 million, or approximately $884 per square foot, from Trammell Crow/MetLife. On October 18th 2017, Tristar Capital and RFR Realty acquired the 356,909 square foot Centre425 building in downtown Bellevue for $313 million, or roughly $877 per square foot, from Schnitzer West.
Other sizable transactions posted in 2017 included Tristar Capital/RFR Realty’s capture in early January 2017 of the 292,593 square foot Urban Union building in downtown Seattle from Schnitzer West for $268.9 million, or approximately $919 per square foot. And in a comparable sale per square foot posted on June 30th 2017, Commonwealth Realty acquired the 88,546 square foot 428 Westlake Building in Seattle from Vulcan for $81.5 million, or approximately $920 per square foot, as part of a 1031 Exchange.