By Meghan Hall
Experts within the commercial office market had high hopes for the first half of 2021, due to the beginning of widespread vaccination efforts and rumblings from companies about potential returns to the office. However, two second quarter reports released by Broderick Group state that office fundamentals during the first half of the year were “sobering” for many, and even Bellevue, considered perhaps the premier market throughout the pandemic, has struggled. The brokerage firm is maintaining a positive outlook, however, as COVID-19 restrictions formally lift and a sense of normality can return.
“Now that we are thankfully half-way into 2021, the future is continuing to be brighter than the 17 months we have all endured during the long lasting pandemic,” states Broderick Group in its Seattle report. “We still project 2021 to be primarily viewed as a recovery year for our market, and most signs are proving that point. The Seattle market’s growth will continue to offer unexpected surprises from growing local companies and from companies located in the San Francisco Bay Area and other areas of our country who will open a Seattle expansion office. Seattle’s bright future is real!”
Seattle Still to Play Catch-Up
In Seattle, while some employees have returned to the office, only about 10 to 20 percent of employees were working in their offices at the end of the second quarter. Most companies are pursuing “phased openings,” where return to work will be gradual. Long-term, however, the brokerage firm notes that there is “little doubt that a greater degree of flexibility for in-person working for employees is here to stay.”
Additionally, Class A vacancy has still crept up, increasing 0.91 percent during the second quarter to 9.7 percent. Asking rents also softened, declining to $47.15 per rentable square foot, full service. During the second quarter, the largest leases were renewals or expansions: the Casey Family Programs renewed for 61,500 square feet at West 8th, while Dell-EMC also signed a renewal for 46,500 square feet at 505 First. Zymeworks is expanding by 15,000 square feet to 57,000 square feet in the Financial Center. The largest new lease of the second quarter was signed by RSM, who will be taking 22,193 square feet in the Madison Centre.
Despite this, Broderick Group believes leasing will increase.
“We expect significant lease activity to pick-up in Q3 and Q4 2021 as large and notable Seattle and San Francisco based companies are rumored to be close in executing new lease agreements with a mixture of direct and sublease options throughout the Seattle area,” states Broderick Group.
Broderick Group points to a few different factors that are driving the City’s market forward. Tour activity for available space continues to rise as more Seattle-based companies are willing to bet on the future of the market and commit to real estate. The third and fourth quarters are slated to be significant for the City, if major tenants such as Amazon return to the office.
Sublease space is also declining, and over the quarter shrunk in size from 4.21 million square feet to 3.85 million square feet. An additional 360,000 square feet of space has also been pulled from the market by incoming subtenants or by those who are expecting to return to their spaces. In the future, Broderick Group predicts that another 600,000 square feet of space will be coming off the market.
Bellevue is “Boomtown”
Bellevue and the Eastside have not been immune to the impacts of coronavirus, with the beginning of the year marked by “massive” negative absorption and increasing vacancy rates. However, the second quarter was marked by a number of notable transactions–both leasing and sales. The largest lease, located at the Redmond Town Center, was for 137,103 square feet of space and was taken by Amazon. In Bellevue’s Central Business District, Epic Games leased 57,339 square feet in the Key Center, while HNTB Corp took 52,379 square feet at Symetra Center.
Across the entire Eastside, vacancy sits at 9.61 percent, up from 7.6 percent in 2020. Class A buildings have vacancy rates of 8.72 percent. Kirkland has the lowest vacancy rate on the Eastside, at five percent, and Redmond’s vacancy is just a bit higher at 6.9 percent. In Bellevue’s CBD and suburban markets, rental rates sit at eight percent and 8.6 percent, respectively. The I-90 Corridor recorded a vacancy rate of 12.2 percent, while Bothell’s office market had 18.8 percent vacancy at the end of the second quarter.
Broderick Group notes that it will take some time for market fundamentals to catch up to activity.
“Much of this good news has not yet been reflected in overall market statistics, but suffice to say vacancies will drop significantly over the next 18 months once recently signed and pending leases are recorded,” explains Broderick Group.
Across the Eastside, rental rates came to $39.51 per square foot, still a historic high and a positive boon for landlords and investors. The rates have encouraged not just major transactions, such as the sale of Block 24 within the Spring District for $200 million and the GIX Building in Bellevue for $85 million, but a huge amount of development.
In Bellevue alone, there are six office projects totaling more than 5 million square feet. The projects will be added to the market over the next several years.
“On a percentage basis there can’t be another market in the country experiencing such explosive growth,” said Broderick Group. “Combine the office projects with those in multi-family, hospitality and light rail, and the city is in a transformative development boom.”
Across the Eastside as a whole, there are 5.5 million square feet and ten different projects currently under construction. Skanska broke ground on The Eight, a 541,000 square foot tower in downtown Bellevue. Skanska kicked off the project on a speculative basis. Amazon broke ground on two towers at 600 Bellevue, which will total 840,000 square feet. Out of 25 major new construction projects listed by Broderick Group, 18 are located in Bellevue.
Projects beyond Bellevue include Esterra Park, a 245,000 square foot project in the SR-520 corridor, Kirkland Urban South, to be developed by Google and which totals 265,000 square feet, and 509 Sixth Street, also in Kirkland, which will total 136,000 square feet.
Such activity will drive the Eastside market forward for years to come and contribute to the region’s overall growth.
“The massive Eastside investment by the tech behemoths (Amazon, Facebook, Google, Microsoft) is the catalyst of what will drive our economy in years to come,”states Broderick Group. “Long-term capital is pouring in from institutional investors who are confident in the budding evolution.”