By Meghan Hall
More than a year-and-a-half after the COVID-19 pandemic began, green shoots are beginning to appear in urban office markets like Seattle and momentum within the market is growing. While many companies continue to delay their formal return to the office, leasing activity is up, according to a recent report released by Broderick Group. Such activity is encouraging to those in commercial real estate, who believe in the long-term fundamentals of the market and have been waiting for them to recover.
During the third quarter, several decently-sized leases were signed in Seattle. The largest, for 123,900 square feet at 800 5th Street, was taken by the Attorney General in the Central Business District. The lease was a renewal, according to Broderick Group. The next largest, Bungie’s sublease at 2+U, was for 60,000 square feet. Convoy also took 44,431 square feet at the Russell Investments Center.
In new leases, Highspot took 35,301 square feet at World Trade Center East along the waterfront, and ADA Developers signed up for 30,000 square feet at 5th and Jackson in Pioneer Square. RSM also took 22,193 square feet at Madison Centre.
“While we still continue to see professional services companies making up the recent leasing activity in the Seattle office market, we are also beginning to see a large increase in technology companies leasing space or kicking off their leasing discussions with planned return to work dates just over the horizon,” states Broderick Group in its report. “We expect this velocity to continue into next quarter as 630K RSF is rumored to be pending across several direct/ sublease options throughout the Seattle area.”
In addition, Broderick Group notes that total sublease space has decreased from four million square feet to about 3.16 million square feet, even though current occupancy remains between 15 to 20 percent of leased space. Occupancy is expected to increase more significantly during the first half of 2022 as larger tenants return to the office. Additionally, Seattle continues to grow as companies move into the area from other parts of the country. Currently, there are about two million square feet of active tenant requirements for office space in the market.
“We expect the positive signs to continue and our Seattle area to resume a national powerhouse position for expanding firms and companies,” states Broderick Group.
The life sciences market is also helping to move Seattle along, with over 1.2 million square feet of tenant requirements in the market. While life sciences tenants don’t always take office space, because of a lack of supply these tenants are often moving into offices and converting buildings as their needs grow. This trend is expected to continue.
However, Seattle’s office market is not out of the woods yet. Direct vacancy rates for Class A buildings increased across Seattle, with the CBD seeing an increase of 1.16 percent to 11.3 percent. The Waterfront neighborhood had the highest vacancy rate of any submarket, at 23.9 percent, while Pioneer Square and Fremont trailed behind with vacancy rates of 11.8 percent and 10.3 percent, respectively. Lake Union had the lowest vacancy rate, of just three percent.
Rents also decreased–albeit slightly–across the Board. In the CBD, rents decreased $0.64 per square foot to $45.82 per square foot, while in Denny Regrade and Lake Union, rents decreased about $0.57 per square foot. The two markets have average rental rates of about $41.15 per square foot and $41.29 per square foot, respectively.
Moving ahead, critical to the health of the office market will be the work from home movement. The third quarter saw a number of major companies postpone their returns as the Delta Variant spread, and most companies have not announced new dates for their return. The work-from-home movement, explains Broderick Group, does have the potential to hamper the market, especially has the labor pool remains competitive.
“CEO’s have made it clear that hiring the best talentis paramount to their success, and the number one recruiting tool in that regard is compensation,” explains Broderick Group. ”The number two tool has become providing employee flexibility/quality of life. Many employees believe that is enhanced by WFH (Working from Home), with no commute, and the ability to live where they want to live.”
However, moving ahead, the company believes that hybrid work models will reign supreme, or companies willi implement “hub and spoke” real estate tactics, establishing satellite offices to be closer to critical work bases. Many big firms worked to acquire space during the pandemic–a positive indication that a return to the office will happen in the future. How much square footage each employee will need, how “hot desks” may be implemented, and other concerns still remain to be seen.
“Tenants are in the early stages of learning to optimize their physical work space and coordinating assigned seating, parking and other finite tenant amenities,” says Broderick Group. “There is no blueprint and most companies are looking to their peers as they navigate the post pandemic new world.”