The office market across Puget Sound has taken a turn for the worse in the first quarter of 2023, following a tough year in 2022, according to a newly released report from Newmark. The report indicates that the region experienced a negative absorption of 772,742 square feet, leading to a rise in vacancy to 12.5 percent, up 70 basis points from the previous quarter. Availability now stands at 20.4 percent, indicating a significant oversupply of office space in the region.
One of the main drivers of the worsening market conditions has been the large layoffs in the tech sector, which have led to a subsequent reduction in office space needs by those companies. The report highlights that 1.3 million square feet of space was leased in the first quarter, which is up from 1 million in the previous quarter, but 36.7 percent lower than a year ago. This suggests that the demand for office space remains weak, even as the economy begins to recover from the pandemic.
Another key trend highlighted in the report is the fact that tenants are increasingly looking for flexible terms and smaller office footprints. This is reflected in the fact that 3.8 million square feet of requirements remain in the market, but tenants are looking for smaller office spaces than before. This trend is likely to continue in the short term, as more office tenants downsize their space requirements in response to the changing business environment.
The report also notes that slower leasing, along with higher borrowing costs, has put downward pressure on office valuations. The total sales volume in the first quarter was $102.7 million, compared to $1.8 billion in the first quarter of the year before. This suggests that investors are becoming more cautious about investing in the Seattle office market, as the outlook for the sector remains uncertain.
Downtown Seattle has been hit particularly hard during the pandemic, and it continues to struggle with high office vacancies. In the first quarter, downtown Seattle saw 519,872 square feet of negative absorption, and total vacancy increased to 15.8 percent, which is 100 basis points higher than the previous quarter. The Eastside submarket has also been affected, with 159,669 square feet of negative absorption and overall vacancy hitting 6.5 percent, or 50 basis points higher than the previous quarter.
In the short term, it is likely that more space will hit the market as a result of office tenants downsizing. This could lead to asking rents coming down, as landlords compete to fill vacant space. However, the longer-term outlook for the Seattle office market remains uncertain, as the aftereffects of the global COVID-19 pandemic continue to disrupt the economy and the business environment.