By Kate Snyder
The second quarter was a mixed bag for the Puget Sound region’s Eastside office market, according to a newly released report from Broderick Group. The report, called “Q2 2023 Eastside Market Report,” shows that the area’s availability reached new highs, some tenant demand has returned, leasing and sales remain quiet and multiple developments are under construction on a speculative basis.
“The principal question looming over the Eastside is what companies and business sectors will lease the enormous amount of space being shed by Microsoft, Meta and others along with new construction being delivered,” the report states.
As fundamentals continued spiraling downward since the market peak of 2020, the Eastside’s availability – which includes vacant space plus occupied space listed as available – reached a new high of 23.3 percent, with every submarket other than Kirkland pushing availability higher. The main driver behind that number was Microsoft putting more than 600,000 square feet on the sublease market at Millennium Corporate Park in East Redmond and Redmond Woods in Overlake. Another large block of space hit the market from Salesforce, which listed Tableau’s 128,000 square foot Kirkland offices located in Google-owned Kirkland Urban.
Since hitting a low of 5.9 percent in 2019, Eastside vacancy rates have steadily increased to 11.8 percent, up from 8.7 percent at the start of 2023. In Bellevue’s central business district, vacancy has risen nearly threefold to 8.9 percent from 3.5 percent in 2019, and approximately 24 percent of the district is marketed as available, which includes space at Lincoln Square North and City Center Plaza. In total, there is about 4.4 million square feet of available space in the Bellevue CBD.
However, Amazon’s return to Bellevue earlier this year delivered “a much-needed shot in the arm for downtown Bellevue and the Eastside,” the report stated, with other companies likely to follow suit on bringing employees back to the office.
The I-90 Corridor was hit the hardest and vacancy currently sits at 16 percent with 43 percent of the submarket listed as available. Additionally, T-Mobile recently placed a portion of their 90 North campus on the sublease market, which adds an additional 175,000 square feet of available space.
During the second quarter, large tenant leasing activity was quiet. Flexport signed a three-floor sublease for 55,585 square feet from Amazon at Skyline Tower in the Bellevue CBD. Two leases comprising four floors in total are pending in downtown Bellevue. There are 143 floors vacant or available in the CBD, while across the Eastside, there are 38 buildings offering 40,000 square feet or greater of contiguous space. Outside of the two leases in downtown Bellevue, no notable leases are pending on the Eastside, though the report states that transactions should pick up for full floor users during the second half of 2023.
Investment sales in the second quarter also remained quiet. The only notable sale on the Eastside in the second quarter was a redevelopment site on the I-90 corridor – the 61,218 square foot former Washington Department of Ecology building which sold for $18 million, or approximately $294 per square foot. The buyer was an entity affiliated with Intracorp, a homebuilder with offices in Seattle and Vancouver, British Columbia. The site is estimated to support the construction of 67 townhomes, which works out to approximately $270,000 per buildable door.
“The continued disconnect between owner expectations and buyer underwriting has created an idle sales market,” the report states. “As loans mature, owners will need to determine if it makes sense to continue operating a building that hasn’t shown leasing velocity for two plus years or to hand back the keys. And lenders will need to determine if they want the keys.”
Because of the rising vacancy, lack of tenant demand, increased sublease availability and Microsoft’s retreat from Bellevue, the report argues that developers have more than enough justification to slam the brakes on planned developments.
Two projects in downtown Bellevue and one in Kirkland are currently under construction on a speculative basis with no pre-leasing to date. The Eight, developed by Skanska, is a 552,000 square foot tower on NE 8th in downtown Bellevue that topped out with the curtain wall nearly fully installed and will be delivered in early 2024. Houston-based Patrinely Group is making progress on the 480,000 square foot Four106 on NE 4th, which is scheduled to have a delivery window of 2025’s second quarter, possibly providing more time for the market to heal. Kirkland Ascent, developed by Talon in the Kirkland market, is a 57,000 square foot building that is scheduled to deliver in late 2023.
Overall, the Eastside office market is still in a downward cycle, and the report points out that every recovery is accompanied by major demand surprises. Past Eastside recoveries were driven in large part by Microsoft leasing massive speculative square footage and other tech companies like Amazon, Google and Meta planting major Eastside flags. This recovery may also deliver a surprise to the market.
“While it will take time for the market to regain its footing, it will be the next generation of tech, artificial intelligence, gaming, healthcare technology, telecommunications, life science, advanced manufacturing and a variety of other cutting-edge businesses that will reshape the Eastside office market,” the report states.