By Meghan Hall
The new year was jam-packed with optimism, especially from those in the office sector who believed that companies would finally return to the office as the pandemic wound down. However, as a spike in the number of Omicron cases once again hindered the plans of many firms, office activity remained slow, even for hubs like Seattle’s Eastside. According to a first quarter report released by Broderick Group, COVID-19 has continued to thwart return to work plans, but recent rollbacks in mask mandates and other restrictions are providing long-awaited hope in the sector.
“From a statistical and transactional perspective, Q1 2022 was inconsequential. Vacancy rates trended slightly higher, rental rates treaded water… and large tenant activity paused,” Broderick Group notes in its report. “…Despite a sluggish first quarter, demand is expected to reduce supply for the balance of the year. The lack of immediate new available inventory means landlords will still hold the upper hand in 2022, despite legitimate concerns about Work From Home (WFH) and Hybrid Work slamming the door on net demand.”
Broderick Group estimates that at the end of the first quarter, offices on the Eastside were roughly 30 percent occupied. However, the firm expects to see a “significant bump” in occupancy levels in the coming weeks. Across the entire Eastside market, vacancy also remains elevated, rising to 8.8 percent during Q1. Class A buildings fared better than their less modern counterparts, with a vacancy rate of 6.89 percent. At a time when the future of downtown offices has been questioned, Class A CBD properties held onto even lower vacancy rates. Class A CBD properties had a vacancy rate of 4.26 percent, while Class A + CBD properties had a vacancy of just 1.51 percent by the end of the quarter.
“With a flight to quality, the premier buildings have fared well,” states the report. “On the flip side, the buildings of lower quality have reached a little further and lowered rents in search of occupancy.”
During the first quarter however, leasing activity remained muted. Large firms largely held off on pursuing deals, although there was activity amongst tenants seeking between 1,500 to 15,000 square feet of space. The largest lease of the quarter was about 77,000 square feet, in which Snap Inc. signed an agreement with Unico for offices at Mid Station Bellevue. In the next largest deal of the quarter, Probably Monsters, a video game producer, sublet 57,911 square feet at Sunset North Building IV.
The biggest question for the future of office, however, is how work-from-home policies will evolve. A number of recent studies have shown that employees have come to prefer remote work, with 84 percent stating they would be happier to continue working from home post pandemic. Another 90 percent believed they were as productive, or more, while working from home.
“Management would like employees in the office the majority of the time, and on a consistent basis. Employees have grown to appreciate a more flexible work schedule, and many wish to work from home full time,” Broderick Group expresses in its report. “Given the tight, high tech dominated job market and the battle for talent, employees currently hold the upper hand over management.”
The local construction market is also battling not just supply chain constraints and rising expenses due to inflation but a months-long concrete strike. The strike has resulted in lengthy project delays. With these factors in mind, Broderick Group explains that now new construction in downtown Bellevue will need to achieve rental rates of about $60 to $65 per square foot.
“As the teamsters strike bleeds into the fourth month of work stoppage, a number of contractors have employed ‘ghost trucks’ to deliver concrete to stalled developments,” the report said. “While this has allowed numerous projects to restart construction, the amount of concrete flowing is a small percentage of what is needed for most of the giant projects across the Puget Sound.”
In all, there are about 6.3 million square feet of projects in the Eastside Construction pipeline. Developers in downtown Bellevue, in particular, are racing to bring their products to market in a bid to secure big-name tenants.
“The new supply is coming; it just won’t be here until 2024/2025,” said Broderick Group. “With no new inventory in 2022 or 2023, landlords should be able to continue to dictate terms in the coming year, although landlords may need to accommodate shorter term leases and/or concessions to retain expiring tenants, while they analyze changing space needs.”
Long-term, however, the number of tech firms in the market are expected to be a catalyst for growth. Amazon, Facebook (now Meta), Google and Microsoft have staked their claim on the Eastside, and other tech-oriented firms are likely to follow suit.