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REIS: Seattle is a Steady Economic Engine, Expecting Q4 Office Vacancy to Increase

Marcus & Millichap, Seattle, Tacoma, Amazon, Bellevue, Central Business District. Facebook, Menlo Park, Arbor Blocks Building, South Lake Union, Puget Sound

By Jacob Bourne

In June REIS analysts reported that Seattle leads a list of 190 office markets in the nation in terms of the highest projected change in vacancy rates coming ahead for the end of 2017. Seattle is expected to experience an increase by 140 basis points in office market vacancy between Q1 and year’s end. The city’s Q1 vacancy stood at 10.8 percent, however bustling economic growth has fueled a wealth of new office construction, which will push the vacancy rate up to 12.2 percent by the end of Q4, according to the study. The report described Seattle as one of the nation’s strongest economies with the associated boost in new office construction.

“Seattle is often in the top five office markets in the nation,” said Barbara Denham, senior economist, REIS. “It was near the top five this quarter and is still doing well but not as superior as before. Seattle is growing faster than the national average. It’s doing so well due to the new construction. There will be 4.7 million square feet of new office space delivered this year, up from 1.3 million square feet last year. It won’t be fully absorbed right away—vacancy is at 10.8 percent, and we expect to see it at 12.2 percent by the end of the year.”

On average across the nation, markets are experiencing slower rental rate growth. Although Seattle has above average rent growth, Denham expects to see a 3.9 percent office rent growth for the year, compared to 4.3 percent last year. In 2015, the growth rate was 7.8 percent, the highest jump in the period between 2010 and 2017 for the city. Increased supply tends to be a factor in slowing rent growth, however the new office product delivered to Seattle this year will be priced at a premium, so it won’t have a significant downward impact on rents.

“The ‘Amazon effect’ has contributed to Seattle’s economic growth,” Denham commented. “Year over year office job growth is 3.4 percent, which is very strong putting Seattle in the top 20 for the nation. Total job growth is 2.9 percent, putting the city at number 14 or 15 in the nation. The tech factor is strong in Seattle. Rents are lower than in San Francisco or San Jose, so employers prefer to expand into a market like Seattle. Planning has also been better in Seattle and zoning is not as restrictive as in San Francisco.”

Following the delivery of the 4.7 million square feet of new multi-tenant office inventory to the city, the total net absorption is forecasted to be 2.9 million square feet with an associated vacancy rate of 12.2 percent. Construction is geared to continue at a strong pace over the next two years adding another 2.8 million square feet by 2019. Denham stated that vacancy will go up and hold steady between 11 and 12 percent over the next three to four years. Office job growth is forecasted for continued growth during that time frame, driving absorption of the new product. According to the REIS report, Amazon, alongside overall economic strength will be key to avoiding supply issues.

“It’s been a steady economic engine,” Denham remarked about Seattle. “People’s eyes are on Amazon more than most companies because of the purchase of Whole Foods. However it’s hard to say what effect that will have on Seattle’s economy.”

Denham also added that Tacoma’s economy is also thriving despite a small office market. The city has the number one retail rent growth for all metros tracked due to a number of successful retailers as well as food and beverage.