By Meghan Hall
2020 was a slow year for the office market, and companies and commercial real estate experts are eager to see what the next year will bring. While there has been some movement in the market, but a critical part of the equation is still missing: Demand. According to a recent report released by Broderick Group, while the Puget Sound is well poised for recovery, a healthy office sector will not emerge until employees are able to return to their physical offices and companies are comfortable making long-term real estate decisions.
“…While the issues we face are challenging, the fundamentals of Seattle and the Puget Sound firmly place us among the strongest areas in the country to recover from the economic fallout of the pandemic,” explains Broderick Group. “The recent approval of multiple vaccines for COVID-19 is finally providing us a vision of the end of the pandemic and economic hardships…If everything progresses smoothly, the majority of the American general public will be able to be vaccinated by mid-2021, and employees can begin to return to physical office space.”
At the end of 2020, office occupancy only remained between 10 and 15 percent. Direct vacancy has also increased by 2.72 percent year-over-year to 6.6 percent.
Tour and leasing activity remained limited throughout the fourth quarter as companies continued their current work from home policies. Large office users nearing the end of their leases are often negotiating short-term deals, allowing them to re-evaluate their space needs as the market continues to evolve. Just three leases over 10,000 square feet were signed during Q4, two of which were renewals. Key Bank renewed its lease for 36,635 square feet at Rainier Tower, while Zayo renewed its 12,463 lease at Seattle Tower. In the lone large lease of the fourth quarter, Notkin Engineers sublet 22,774 square feet at Madison Center.
Over the last several months, the sublease market has also grown exponentially, growing to 3.81 million square feet and competing with office up for direct lease. Sublease inventory increased by 900,000 square feet during the fourth quarter. 50 percent of Seattle sublease activity is directly attributed to the impacts of COVID-19.
The addition of sublease space, combined with just 380,000 square feet of absorption throughout 2020 has slowed rent growth to just 0.4 percent. Rental rates at the end of the year sat at $48.47.
“Adding that space to the current directly available space and the 1.5 million square feet of new available space that will be added to our market in the next two years, our market needs the demand part of the equation back in full gear to adequately address the supply metric in our market,” said Broderick Group.
There are a few factors that could help balance the market in the future, notes Broderick Group. Much of the posted sublease space in the market has not been leased, leading the brokerage firm to believe that many spaces on the sublet market will be re-occupied by their original tenants in the future.
Additionally, venture capital investments exceeded $1.1 billion in the third quarter of 2020, while migration data has shown that employees are staying in the area. 2.2 tech employees moved to Seattle for every employee who moved away between March and October of 2020—a sign the market could be poised for growth.
Further movement in the market has been seen in office transactions that have closed in recent months. Skanska sold its 2+U tower to Hana Financial Group for $701 million. GI Partners also purchased Uncio’s Yale & Thomas for $121 million, while the Terry Thomas building sold to Zurich Alternative Asset Management for $52.1 million.
These underlying fundamentals, combined with the widespread distribution of a vaccine in the coming months, will help to kickstart the office market. Recovery may not happen immediately, as companies navigate the evolving role the office and future, long-term real estate decisions.
“While there are many hurdles and inevitable setbacks sure to come in 2021, the Seattle and the Puget Sound markets remain attractive to investors,” states Broderick Group. “As the workforce begins returning and companies clarify new work from home policies, the percentage of employees that it will apply to, and any resulting office space adjustments, there is a massive amount of capital poised to take advantage of heightened opportunities during the recovery.”