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Puget Sound Office Market Continues on Boom Pace

California State Teachers Retirement System, Los Angeles, Resmark, ResCal Investments, San Francisco Bay Area, Seattle, CalSTRS

By Neil Gonzales

The Puget Sound office market shows no signs of letup as development, investment and leasing continue on an upward trajectory.

Underlying that surge is the region’s employment growth and affordability relative to other major markets.

“We’re seeing great absorption in and around the CBD”

“We feel bullish that our market is still continuing to grow,” said JJ Shephard, Seattle-based managing director for commercial real estate services firm JLL. “The economy is continuing to expand. A lot of companies are migrating here, and all are hiring still.”

According to JLL’s Seattle-Bellevue market report for the last quarter of 2015, office construction has returned to pre-recession levels; sales volume has nearly matched the combined total of 2013 and 2014; and net absorption has surpassed 2 million square feet for the third year in a row.

The report pointed out that seven major office projects totaling more than 2.2 million square feet were delivered in 2015, making the year the busiest for development since before the recession.

The largest of these projects was Dallas-based developer Trammell Crow’s 462,000-square-foot 929 Office Tower – the first new Class A commercial building to rise out of downtown Bellevue in several years. San Francisco-based cloud-computing leader Salesforce announced plans to lease about 85,000 square feet there with an option to expand to more than 100,000 square feet.

Demand for such big blocks of contiguous, high-quality space is expected to remain high, but Shephard said, “A lot of deliveries are starting to happen.”

The JLL report noted that more than 5.9 million square feet should become available over the next two years. Among the larger projects under way are The Mark (766,779 square feet) and Madison Centre (746,000 square feet) in the Seattle CBD, the Troy Block towers (818,000 square feet) in South Lake Union and 400 Lincoln Square (724,693 square feet) in downtown Bellevue.

“Tenants will have ample opportunity to acquire premier space and continue migrating to and growing in Puget Sound as just 35.1 percent of the space is currently preleased,” the report said.

As for investment deals, the report said, more than $4.4 billion occurred in Puget Sound in 2015, representing a whopping increase of 152.5 percent over 2014.

The Seattle CBD and South Lake Union were the most active submarkets for sales with volumes of $1.3 billion and $849.9 million, respectively, the report said.

The biggest sales transaction since online retail giant Amazon bought its headquarters in 2012 was the acquisition of Seattle’s tallest skyscraper – the 76-story Columbia Center – for $711 million (about $460 per square foot) in the third quarter by Hong Kong-based private equity fund manager Gaw Capital Partners.

Last year also saw a new record for pricing in terms of square footage when Glendale, Calif.-based American Realty Advisors acquired 2201 Westlake Ave. in South Lake Union for $251 million ($792 a square foot).

“We’re seeing great absorption in and around the CBD,” Shephard also said.

According to the report, about 552,000 square feet of space was taken down in the fourth quarter, bringing the 2015 total to nearly 2.5 million square feet.

Seattle-Bellevue’s total vacancy dipped to 10.2 percent – the lowest the past decade – with the average annual asking rent of nearly $34 per square foot up 7.5 percent year-over-year, the report said.

Leasing activity has remained robust and been primarily driven by technology firms although other types of tenants such as Safeco, Antioch University and Bank of America have been signing or renewing leases, the report said.

Industry experts expect the market growth to continue into the foreseeable future based on the region’s strengthening economy, which boasts one of the lowest unemployment rates of any major metropolitan area.

The report noted that the Puget Sound unemployment rate in October stood at 3.8 percent while job growth is forecasted to rise 2.3 percent this year and 1.5 percent in 2017.

Experts also point out that despite the strong rent growth Puget Sound is still a much more affordable region in which to open an office compared to other major markets such as San Francisco and New York.

Similarly, the cost of living in the Seattle area is much lower than that in San Francisco or New York – a fact that helps tech and other companies in their recruitment efforts of highly skilled talent.

Other economic forces such as a potential federal rate hike and global financial uncertainties triggered recently by tumbling oil prices and ongoing volatility in Chinese stocks are not expected to significantly slow down Puget Sound’s office market.

“I think we’ll be fairly shielded,” Shephard said. “Compared to the past, this market cycle has a lot more depth” given the number of established, publicly traded companies with solid balance sheets that are taking up space in Puget Sound.

Matt Griffin, principal and managing partner of Seattle-based commercial developer Pine Street Group, echoed that sentiment, saying, “The key to us is continuing to have job growth from a multiple number of companies.”

Griffin’s concern is the market possibly having too much new supply down the line and not enough tenants to fill all that space sooner rather than later. “I worry about that,” he said.

For Shephard, the challenge for the market is growing pains in terms of how the region can quickly and adequately provide housing, mass transportation and other public needs in response to the current boom.

“There are great initiatives” to address such issues, Shephard said, “but they take a long time to happen.”