By Meghan Hall
The Puget Sound’s Eastside markets have made headlines in recent years thanks to the increasing number of big-name technology companies who have staked a claim in the area. As the economy continues to recover from the recent pandemic, this has proven especially beneficial to Eastside markets, so much so that big tech is “carrying” the market, according to recent analysis by brokerage firm Broderick Group.
“The massive investments by the likes of Amazon, Facebook, Google, T-Mobile and Microsoft are catapulting the Eastside into an elite regional tech engineering hub,” states Broderick Group’s third quarter Eastside market report. “…An undercurrent of optimism is reverberating throughout the real estate community as the Eastside is in the midst of an enormous transformation.”
At the end of the third quarter, the Eastside posted 9.48 percent market vacancy, which still sits above 2019’s low of 5.9 percent. However, stronger leasing activity during the third quarter seems to be counterbalancing higher vacancy rates and sublease availability. Broderick Group notes that more than 50 percent of square footage leased was from sublease spaces being absorbed.
“Best-in-class assets are the most highly sought after, as well as recently refurbished offices listed for sublease offering fully furnished move-in ready space,” states the report. “Many of the most desirable subleases have now been leased, and have been a blessing in disguise as they have created incubator space for growing tenants that plan further expansion down the road.”
Broderick Group also notes that because much of the sublease space on the market is from “financially sound” tenants, there have been very few defaults, and landlords have been largely insulated from the impacts of the pandemic. To date, there are just eight spaces greater than 50,000 square feet on the sublease market, and 25 spaces between 20,000 and 50,000 square feet.
The largest lease of the quarter was from Snowflake Computing, who sublet 77,000 square feet in downtown Bellevue. In one of the two larger, new leases signed, Robinhood took 52,870 square feet at 5501 Lakeview in Kirkland, and DTG Enterprises signed up to take just over 20,000 square feet at Canyon Park 228 in Bothell.
The remaining leases listed as part of Broderick Group’s report were all either subleases, expansions or renewals. Bytedance sublet 44,332 square feet at Key Center in Bellevue, while Pushpay expanded into 34,350 square feet in the Redmond Technology Center.
Moving forward, there remains one larger hurdle that Broderick Group expects will impact demand” the work from home movement. At the end of the third quarter, office occupancy on the Eastside sat between 15 to 25 percent. Most companies have not yet established firm timelines for a return to the office. One notable exception remains: T-Mobile intends to return to its offices at the end of October of this year.
“Many employees believe that is enhanced by WFH, with no commute, and the ability to live where they want to live,” Broderick Group acknowledges. “In the short run, as long as the labor market remains competitive, WFH will somewhat dampen office demand and there will continue to be space give backs, and a restructuring of how and where office users lease space.”
A number of tenants have downsized in recent months, including Premera, who gave up 65,000 square feet in Redmond, and Farmers, who put 60,000 square feet up for sublease in the I-90 submarket. In another notable move, Allstate downsized, decreasing its footprint in Bothell from 69,000 square feet to 10,000 square feet.
However, investors and developers are keenly and eagerly planning for the Eastside’s future. Despite questions around work from home and the future of office space, rental rates have proven to be remarkably stable, with rents continuing to rise through the end of the year. By 2024, Broderick Group predicts that rents will increase to $42.05 per square foot, up from $38.57 per square foot in 2019. In particular, rents in downtown Bellevue are expected to increase between three to five percent.
With this in mind, a number of construction projects are moving forward, with 5.5 million square feet of space under construction across 10 different projects alone. Just one of those projects–Skanska’s 541,000 square foot “The Eight–has not been preleased. The other project include Amazon’s 1001 Towers, Vulcan’s 555 108th and West Main, as well as Schnitzer West’s The Artise. Combined, the projects total 4.2 million square feet of space.
During the third quarter, nearly 1.6 million square feet was delivered, including Summit III, which totals 370,000 square feet and was leased by Hines to Amazon, Capstone’s 245,000 square foot development in Esterra Park leased to Microsoft, and the Spring District’s Block 24, which totals 198,498 square feet and will be occupied by Facebook. Next year, two Google-owned or occupied buildings are expected to be delivered in Kirkland: Kirkland Urban South, which totals 265,000 square feet, and 509 6th Street, which will total 136,000 square feet and is owned by SRM Development.
Such development and investment has set the stage for continued growth on the Eastside, and Broderick Group has predicted that the market is “beyond” the impacts of the pandemic. The deep pockets of tech companies, as well as other investors flooding the market, continues to buoy the Eastside, and will help support its vitality into the future.
“The massive Eastside investment by the tech behemoths (Amazon, Facebook, Google, Microsoft, and a host of other new tech tenants planting a flag on the Eastside) is the catalyst that will drive our economy in years to come,” states Broderick Group. “The tidal wave of investment from these technology tenants is planting the seeds for the future of the Eastside.”