The Seattle office market continues to struggle, with softening demand driving down asking rents and pushing vacancy to new heights. Key themes for this quarter include a “flight to quality” among relocating tenants, the stark impact of tech layoffs, and a growing abundance of vacant office space.
Companies who put office space decisions on hold last year are now making moves, resulting in increased leasing activity compared to the first quarter of 2023, according to a Q1 2024 report from international brokerage firm Colliers. However, the trend is overwhelmingly towards downsizing, with many companies taking less space than they did pre-pandemic. This has led to the Seattle CBD vacancy rate climbing from 25.6 percent in Q4 2023 to a worrisome 28.1 percent. That’s the highest mark since the first quarter of 2021.
Concessions and the Flight to Quality
Landlords, desperate to attract tenants, are offering concessions and more flexible deal structures. Asking rents for Class A Seattle CBD space softened slightly this quarter, down one percent to $56.35 per square foot. Even with these incentives, many tenants are opting to upgrade – trading up from Class A properties to the most desirable trophy or top-tier Class A buildings.
This quarter also saw 689,000 square feet of new office space delivered across two projects: 1000 Washington (Seattle CBD) and Northlake Commons (Lake Union). According to firm representatives, Northlake Commons has secured leases with Dunn Lumber and The Wayland Mill café.
Tech Layoffs and a Vacant City
The Seattle metropolitan area’s February unemployment rate is now 4 percent, up from 3.1 percent a year ago. This increase is primarily due to tech industry layoffs, further weakening demand for office space. The largest lease signed this quarter – global non-profit PATH in Fremont – doesn’t reduce the city’s overall vacancy rate since they’re merely replacing Google in an existing sublease.
Even with deals made, most tenants are staying within the same sections of the city. This underscores that companies are primarily seeking updated environments in slightly nicer buildings, not major relocations.
A Glimmer of Hope?
Perhaps realizing the scale of the oversupply issue, Mayor Bruce Harrell has submitted legislation to ease the process of converting office buildings into residential units. While costly, there’s hope this conversion option could take obsolete buildings off the market altogether, slightly improving the vacancy rate.
Grim Outlook
The forecast paints a bleak picture. As more companies face lease expiration decisions, expect further increases in available space. Submarkets like Seattle CBD, Belltown/Denny Regrade, and Queen Anne/Magnolia, already exceeding 30 percent vacancy, are particularly vulnerable. Based on negative net absorption trends, vacancy could potentially reach 30.5 percent by the end of the year, or another 528,000 square feet of additional supply, Colliers concluded.
