By Jack Stubbs
Even with several large office developments set for delivery in the Seattle market heading into the third quarter of this year, the expectation looking forward is that, with strong pre-leasing activity from large tenants and limited available inventory, supply will likely not be able to keep up with demand.
According to a first quarter 2019 Seattle office market report written by Savills, a global provider of a wide range of commercial real estate advisory services, scarcity of large blocks of available office space, coupled with rising rental rates for Class A product, will continue to put pressure on the Seattle office market throughout 2019.
“With little new space delivering in 2019, this continues to put pressure on the market as a whole. As these [large, 100,000 square foot] tenants land, most likely in new construction options, it reduces the options for the other tenants in the market,” said Chris Kagi, Associate Director, in Savills’ Seattle office, who thinks that this will remain the case for the foreseeable future. “It looks as if the next construction cycle is 24 months out, so we see little relief in sight,” he added.
There are 3.4 million square feet of new construction in the development pipeline, and metrics reflecting demand for space are on the rise across the board. Availability of space rose from 10.8 percent in the first quarter 2018 to 12.7 percent as of first quarter 2019, according to the report, while average asking rental rates for Class A office space rose from $41.38 to $47.33 (an increase of 12 percent) during that same time period.
The expectation is that new space will be chipped away at quickly, the report states. Even with the rising rents, some landlords are a bit more hesitant to commit at this point in time, thinks Kagi. “Landlords are also pulling back from early renewals and are tending to wait for continued increases in rent,” he said. The total quarterly leasing activity as of first quarter 2019 stood at 1.7 million, down from the figure of 2.4 million in first quarter 2018, which marks a decrease of 27 percent.
Perhaps not surprisingly, much of the leasing activity continues to occur in Seattle’s Central Business District. The most active Seattle submarket was Downtown (representing about 54 percent of total leased square feet) and Bellevue/Eastside, which represented about 32 percent of the total square feet leased. As companies look to further cement or establish their presence in the region, even the projects in the pipeline might not be enough to meet demand in Seattle, thinks Kagi. “This is not enough inventory to keep up with the growth we are seeing in the Seattle market. In addition to the tenants that are already in Seattle, the Bellevue market is even tighter, and this is causing some additional users to explore Seattle as an option.”
According to Broderick Group’s first quarter 2019 Seattle and Eastside Market Overview reports, while leasing absorption in Seattle was more moderate during the first quarter of this year, the Eastside saw a number of major lease announcements, including Facebook’s lease of more than 300,000 square feet of space at Block 16 in the Spring District. In another deal signed at the end of April, Amazon signed a 715,000 square foot lease for downtown Bellevue’s Binary Towers, a two-tower project that is expected to be completed in 2022.
Across Lake Washington from Bellevue, there are four buildings in downtown Seattle set to deliver in the coming months. One of these is Skanska USA’s 2+U, a 38-story, 686,000 square foot tower located at 1201 Second Ave. Set for completion and tenant move-in sometime during the middle of 2019. The office portion of 2+U is currently 60 percent pre-leased, with Skanska announcing a 120,886 square foot lease with DropBox Inc. in early April and also signing a 91,000 square foot lease with workspace innovator Spaces, in late December 2018. Also in late December, online job search engine Indeed.com leased 200,000 square feet across ten floors of 2+U.
Another project in the works is Rainier Square (a building entirely pre-leased to Amazon), a 58-story, 722,000 square foot development developed by Wright Runstad & Company that will comprise a full city block across nearly 1.7 million square feet.
Co-working and technology companies continue to drive demand in Seattle’s commercial real estate market, reflecting a pattern that looks set to continue in the year to come. “One would think that this trend [might] slow in ’20 due to the lack of inventory and overabundance of co-working options,” Kagi said. “The other sector that is driving Seattle is tech. Eighty percent of the 100,000 square foot-plus tenants are technology companies. If the last three years are an indicator, this trend will continue.”
Some of the noteworthy leases in first quarter 2019 were Facebook’s 337,996 square foot, thirteen-year lease in the Block 16 project in Bellevue’s Spring District, a project that upon completion will comprise 5.3 million square feet of office, retail, residential and hotel space. Another lease was WeWork’s agreement to ink a 49,232 square foot lease at Hines’ Fourth&Madison building in downtown Seattle. And while demand continues to come largely from co-working and technology companies, there could be a point at which such activity becomes unsustainable. “We’re not sure at what point the market becomes saturated, but for now these users continue to lease space in new buildings [and] signing commitments,” Kagi said.
Worrying for the Seattle area is the fact that, in spite of projected growth—Seattle area employment is expected to grow by 3.2 percent over the next five years, resulting in an aggregate of 286,000 new jobs by year-end 2023, according to Savills’ report—technology companies’ commitment to hiring the region’s best and brightest talent still might not look elsewhere, potentially exacerbating a tightened market even further.
“The south Seattle market (Tukwila/Renton) market has an abundance of large vacancies, yet companies do not seem to be trending in that direction, [which] is due solely to talent. A technology firm looking to hire new personnel will simply not be able to hire and retain talent unless they are in the urban markets,” Kagi said. “With most young employees living city locations, the commute, amenities, and transportation make the south end a difficult place to set up roots even when space is 50 percent the cost of Seattle/Bellevue.”