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Report: Outlook for Eastside’s Commercial Office Market Positive as Big Tech’s Domino Effect Remains in Motion

Amazon Bellevue Vulcan Schnitzer West Eastside Turner Construction Sellen Construction
Amazon’s impact on downtown Bellevue. Courtesy of Broderick Group

By Meghan Hall

The Eastside’s commercial office market had so much momentum prior to the pandemic, that even as COVID-19 spread, it was impossible to halt its forward motion all together. The momentum has proven a boon for the Eastside market, as fundamentals have held relatively steady compared to other, major national markets. Major projects continue to move forward, and with so much square footage pre-leased, brokerage firm Broderick Group predicts that the coming year will continue to be dominated by pre-pandemic activity.

“The massive investments by Amazon, Facebook, Google and Microsoft carried the Eastside through the early months of the pandemic, and for the better part of a year the Eastside has benefited from a wide swath of demand rooted in the technology and gaming industries,” the company explains in its most recent fourth quarter report. “Big Tech has created a domino effect of tenant interest in the Eastside, as other companies are moving to the area to open offices in order to capitalize on the widespread computer engineering talent.”

During the fourth quarter, the entire Eastside market maintained a vacancy rate of about 9.4 percent; Class A buildings saw lower vacancy rates of about 7.74 percent. The average gross rental rate also remained relatively stable, ending the year at $40.59 per square foot. While this is still higher than 2020, when vacancy sat at about 7.6 percent, Broderick Group notes that the fourth quarter saw a flurry of leasing activity, much of which still remains to be recorded in public records.

At the end of the fourth quarter, year-to-date absorption totaled 720,648 square feet. Significant leases included Facebook’s decision to lease the Spring District’s Block 13, which totals 217,998 square feet. By the end of 2022, Facebook, now Meta, will have a 1.5 million square foot footprint on the Eastside.

In other deals, an undisclosed tenant took 178,957 square feet in Redmond, while Riot Games plans to expand into 155,200 square feet on Mercer Island. T-Mobile leased 26,297 square feet in suburban Bellevue, and Pokemon has expanded into 53,127 square feet at Lincoln Square North. In all, there were more than 16 leases greater than 15,000 square feet signed.

Another large indicator of the market’s health has been subleasing. 2020 saw a significant amount of sublease space hit the market, and while considered a roadblock for the market as a whole, the circumstances provided a rare opportunity for expanding companies to establish a presence on the Eastside. 2021, stated Broderick Group, provided a needed reprieve from the amount of new space hitting the market.

“In marked contrast to the end of 2020, there were essentially no new notable subleases that were placed on the market during the fourth quarter. Nearly all the recently improved sublease space located in best-in-class assets has been sublet.” 

Broderick Group states that “nearly all” space marketed for sublease is from financially sound tenants, and there has been no defaults amidst non-coworking tenants. At the end of the fourth quarter, subleasing accounted for 2.2 percent of available commercial space on the market.

Moving ahead, however, will not be totally without challenges. Currently, in-office occupancy remains limited, at about 30 percent. The emergence of the Omicron variant, and the almost scary rate at which it spreads, has deterred many companies from reopening their offices. The report notes “anecdotally” that tenant requirements stalled during Q4 once again as companies sought to wait out the impacts of the latest COVID-19 variant. And, even if companies may want to return to work, employees have proven resistant to the change, proving they can work from home just as productively. 

“There is an ongoing struggle between company management and employees. Management would like employees in the office the majority of the time, and on a consistent basis, explains the report. “Employees have grown to appreciate a more flexible work schedule, and many wish to work from home. Given the tight job market and the battle for talent, it is the employees who currently hold the upper hand over management.”

Companies continue to delay their return to the office as developers race to complete construction projects across the Eastside, especially in downtown Bellevue. From 2016 to 2017 alone, Broderick Group estimates that Bellevue’s downtown speculative office inventory increased by 18 percent. In the coming years, the rate of development is unlikely to slow. Houston, Texas-based Patrinely Partners, Columbia Pacific, KG investments, Clarion and Capstone Partners are all working on projects that could bring two million square feet to downtown Bellevue over the next several years. These projects alone would account for a 13.2 percent increase in Bellevue’s CBD inventory.

While such circumstances might be a concern given the Eastside’s robust construction pipeline, there is currently only one project under construction that has not been pre-leased or is pending. Skanska broke ground on its 541,000 square foot NE 8th and 108th development in downtown Bellevue earlier last year. The project is expected to deliver during the fourth quarter of 2023. Eight other projects–totaling 4.6 million square feet–have been pre-leased to Amazon, Google and Meta. 

Broderick Group believes that the coming years will be sound for the Eastside office market, bolstered by its limited inventory, investor interest and rapidly expanding tenant base.

“The Eastside market has boldly moved past the damage that was inflicted due to the pandemic,” states Broderick Group. “A growing diversified base of technology companies (soon to be followed by service companies seeking to serve massive Eastside job growth), continue to proclaim the Eastside market as one of the best living and job opportunities in the country.”