By Meghan Hall
Few, if any, can predict with 100 percent accuracy how the Seattle office market will fare in the coming months as so many of the basic fundamentals driving office demand have been impacted by coronavirus. For those at Broderick Group, a local brokerage firm, the fate of the market will be determined by a mixture of short- and long-term trends as tenants continue to evaluate best business practices and their commercial real estate needs.
“As the impact of the COVID-19 pandemic continues to unfold, there is no doubt of the pain we have endured in the Puget Sound region,” explains Broderick Group in a recent second quarter report. “There are still many unknowns that will influence the speed and trajectory of our recovery, i.e. what percentage of temporary unemployment remains temporary, the “Work from Home” trend, the number of retail and restaurants that don’t return, increases in sublease inventory, and how a second wave of COVID-19 could impact the market. But despite those challenges, the Puget Sound office market is poised to weather them better, and recover sooner, than other markets in the nation based on our strong fundamentals.”
At the end of the second quarter, the vacancy rate for Class A office space stood at 4.6 percent, while vacancy across the entire Seattle market came in at 6.57 percent. In all, there is just over 62.2 million square feet of office space in the market. There is also 1.85 million square feet of new development delivering through 2021, of which 65 percent is pre-leased.
Over the course of the second quarter, leasing activity fell to about one-third in a year-over-year comparison. Tenants are slowly coming back to the market, while major companies and credit tenants are continuing to look for available blocks of space. The University of Washington, for example, took 60,000 square feet as part of a new sublease in Safeco Plaza, while Hiya, a company whose software blocks robocalls, took 42,000 square feet at Harold Poll in the Central Business District.
“While demand was certainly put on hold during the past three months, leases are still being signed, and leasing activity while not resounding, is still active,” notes Broderick Group. “There are a large number of tenants whose requirements are still on hold, simply to get a better review of the impacts that “Work from Home” might have to their space demand, and/or to gain better insight into the short and long term impacts a recession might have on their office space projections before finalizing leases.”
The market will fluctuate in a variety of ways moving forward as a result of new, emerging trends. Among them, Broderick Group highlights two factors that will have a particular impact in the near future: a flight from cities and the urban core, and changes in office layouts and reductions in office densities.
Even prior to coronavirus, Broderick Group notes that many tenants were exploring periphery or suburban markets, even though they were also willing to pay premiums for Class A office space in urban cores. More companies are likely to look further out as employee attitudes towards commuting on mass transit and crowded spaces evolve. However, Broderick Group predicts that the perks that come with a core urban location—access to retail and restaurants, mass transit and multifamily housing—will make any flight to the suburbs and short-term trend.
Office densities will also remain reduced in the short-term, but as treatments for coronavirus improve, and a viable vaccine emerges, Broderick Group believes the desire and need for in-person contact will encourage higher density offices to make a comeback.
There are also two trends that Broderick Group knows are here to stay. Work from home will continue to gain traction and remain an option for many companies, decreasing some demand for office space in the future from about 4/1000 to between 6 and 8/1000 square foot average densities. However, Broderick Group states that work from home options were already in effect in major tech markets like Seattle, meaning the impact on the local office market may not be as great long-term.
“…While [work from home] is certainly a long-term trend, and will continue to be embraced by a percentage of the workforce, it will not be the death of office space,” Broderick Group states.
However, as people do return to the office, building design will continue to change to reduce the spread of germs, particularly through new HVAC and air filtration systems, as well as operable windows, touchless doors and higher janitorial standards. All of the above will be increasingly important to tenants moving forward, and for landlords who wish to secure leases.
Moving ahead, Broderick Group predicts that rents will largely remain flat through the end of the year, and that there will be more defaults, sublease listings and giveback space in the coming months. The brokerage firm also notes that thanks to strong fundamentals heading into the current market correction, Seattle still remains a landlord-favorable market, with historically low vacancy rates, a diverse tenant base and less speculative construction—all positive fundamentals needed for recovery.