By Kate Snyder
With the close of 2022, the Seattle office market continues to remain unsettled and highly volatile, according to a recently released report from Kidder Mathews. The Seattle Office CRE Market Update – 4th Qtr. 2022 shows that as vacancy continues to rise and net absorption has proven to be substantially negative, future office demand remains a big question.
“Early 2023 will be telling as to how changing corporate requirements will dictate work from home/in office policies, office layouts and office employee densities,” the report states.
At the end of 2022, the regional office market showed an increase in vacancy from 10.4 percent the previous quarter to 10.5 percent during the fourth quarter of 2022, which now means that the office market has seen a rise in vacancy for 10 of the last 12 quarters, according to the report. One reason for the surging vacancy posited by the report is that the regional office market continues to post negative net office absorption figures – year-end data shows negative net absorption of negative 1.4 million square feet, which is on the heels of the negative 1.5 million square feet that was recorded in 2021. The two largest markets in the region, Seattle and the Eastside, are both showing increased vacancies, though the Eastside is posting the lowest vacancy rate in the area at 5.6 percent, which is still a jump from last quarter’s mark of 5.5 percent.
New regional construction currently totals 23 major office projects, and while there were no notable deliveries in the fourth quarter, seven office projects are scheduled for delivery in the first quarter of 2023. Three new office construction starts were recorded during the fourth quarter, including The Chapter at 230,000 square feet and 35 Stone at 108,000 square feet in Seattle, both of which are pre-committed. In the Eastside, there was Eight 106 in Bellevue at 440,000 square feet. Although Amazon “put the brakes” on its occupancy and construction plans in the area, the company still had the three largest regional projects with Vulcan’s 555 Tower at 940,000 square feet, West Main at one million square feet and Bellevue 600 at 999,000 square feet, all in Bellevue. Microsoft is also nearing completion with its 2.5 million square foot office expansion.
The construction figures exclude both the Microsoft expansion and several large life sciences projects that are also underway, according to the report. Other office projects are planned in both Seattle and the Eastside, but many developers are hesitant to commence speculative projects until it is known how demand will play out.
While 2021 saw strong regional office investment sale activity, 2022’s rising interest rates, changing economic metrics and lingering effects of the 2020 REET increase hampered office sale volumes in the second half of the past year. Only four office sales that closed above the $10 million mark were recorded in the region – two in the Eastside with one each in both the Southend and Northend submarkets.
In the Eastside, sales included the transfer of the Abossein Building for $10.3 million, or about $981 per square foot, in December and the sale of Belle View Office Park for $28 million, or about $487 per square foot, in October. The Northend saw the transfer of Everett Mall Office Park for $14.3 million, or about $124 per square foot. The largest fourth quarter sale was in the Southend, reflecting the purchase of multiple office buildings in Renton by Seattle Children’s Hospital for $84 million, or about $179 per square foot. Total office sales volume for the quarter was marked at $264 million among 85 transactions compared to $406 million the previous quarter.
“Similar to last quarter, regional investment sale activity slowed in the fourth quarter of 2022,” the report states. “Although trophy office assets remain in demand, there is reluctance on the part of sellers with few offerings compared to recent history. Many buyers are also taking a wait and see approach to evaluate the market over the next few quarters.”