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Puget Sound Office Market Growth Driven by Tech and Coworking Demand

Puget Sound, Colliers International, CBD, Google, Amazon, Clark Nuber, Seattle, Bellevue, U District, Facebook, Arbor, Lakefront

By Meghan Hall

The Puget Sound commercial real estate market was incredibly active during the fourth quarter of 2018, finishing as one of the best performing office markets in the county, according to a new report released by Colliers International at the beginning of 2019. Vacancy in the Puget Sound fell to 7.6 percent, thanks in part to demand driven by the region’s active tech employers and the increasing popularity of coworking spaces. According to Colliers, tech and coworking will continue to insulate the Puget Sound real estate market from rising interest rates and geopolitical events in the near future.

During the fourth quarter, the market boasted 896,174 square feet of net absorption for an annual total of 3,399,680 square feet, thanks to strong leasing in recently delivered properties such as Madison Centre, where tenants leased up 346,468 square feet in the fourth quarter. Seattle submarkets accounted for an aggregate of 424,761 square feet of net absorption in the fourth quarter, which was primarily concentrated in Class A office buildings located in the CBD. Absorption in the Eastside markets also fared better than the two previous quarters, where absorption reached 412,504 square feet at the end of the year, increasing the annual total to 528,813 square feet. Colliers attributes the increase to large, new leases such as Google, Amazon and Clark Nuber.

Vacancy in Seattle declined to 7 percent during the fourth quarter from 7.6 percent, while the City’s Central Business District’s vacancy rate declined to 9.2 percent, a significant decrease from the 13.6 percent vacancy rate the CBD posted at the end of 2017. Vacancy in the Eastside closed out even lower at 4.9 percent due to large scale move-ins.

The decreasing vacancy rates have driven up rental rates for both Class A and Class B rents year over year in both Seattle and Bellevue. During the third quarter of 2017, Seattle and Bellevue posted rates of $46.50 and $44.94 per square foot of Class A office space, respectively. Rental rates for full service buildings in both metros broke $50 per square foot for the first time, with rates in Seattle’s CBD coming in at $50.39 per square foot and Bellevue even higher at $52.28 per square foot, a 16.3 percent increase year-over-year. Seattle and Bellevue also saw rates for Class B space increase; Seattle saw a jump from $36.96 to $40.40 between the fourth quarter of 2017 to the fourth quarter of 2018, while Class B rates in Bellevue went from $34.92 to $41.77 per square foot.

There was only one delivery in the fourth quarter of 2018, the WSECU Building in the U District neighborhood, totaling 66,800 square feet. However, according to Colliers, 2019 will be more active with more than 4 million square feet of office space slated for delivery throughout the year in Seattle. However, new projects in the Eastside are lagging behind, with the reporting stating that it will be years before new product will enter the market. However, several significant developments were issued permits in the fourth quarter, including Vulcan’s 2.15 million square foot office development planned for Bellevue’s CBD and the proposed pipeline increased to 8.7 million square feet of space.

Colliers predicts that tech and coworking spaces will continue to drive the market forward in 2019, and the firm estimates that tenants are looking for 7.1 million square feet of space, 3.7 million of which is in Seattle, and the remaining 3.4 million is on the Eastside. Approximately 3 million square feet of those requirements are from tech tenants, according to the report. The Eastside will also continue to grow tremendously, as only one office space larger than 30,000 square feet was available at the end of 2018, although the Eastside’s growth in 2019 will likely not surpass 2018, said Colliers. Full service rates in Seattle will continue to increase as well, as Facebook gears up to occupy almost 400,000 square feet in Arbor Blocks East and West, and Google takes up 600,000 square feet in Lakefront Blocks.