The Seattle office rental market’s high pricing and low vacancy rates continued in Quarter 3, according to a market study just released by JLL. The brokerage’s analytics unit named the combined Seattle-Eastside market the 3rd most competitive office rental market in the United States. The region’s overall vacancy rate, 8.3 percent, ranks ahead of only Salt Lake City and Nashville.
According to the study, Class A space in Seattle’s central business district was priced slightly lower ($42.34 per square foot, up from $41.35 in the second quarter) than Class A space in Bellevue’s CBD ($45.12 per square foot, up from $44.77), reflecting the much higher supply of Class A space in Seattle proper.
“The vacancy rate is the lowest we’ve seen in fifteen years.”
“The vacancy rate is the lowest we’ve seen in fifteen years,” says JLL analyst Alex Muir. “We don’t see any massive swing from a landlord-favorable market to a tenant-favorable one in the next couple years. We think that the market is pretty strong and it’s going to be that way for at least a few more years.”
Brokers from JLL and Kidder Mathews agreed with JLL’s general assessment of the office rental market. Each broker remarked that the Seattle area’s scarcity can be attributed in part to strong fundamentals in the local economy, as major employers like Amazon, Microsoft, and Expedia have continued to expand.
Additional demand can be attributed to the continuing expansion of Bay Area technology companies into the Puget Sound region. Major Silicon Valley players like Facebook and Google have continued to expand their operations into the Seattle area.
Bay Area companies like this one have found that Seattle enjoys many of the same quality of life and economic advantages as San Francisco. Yet firms have also found that Seattle is a much more affordable market for both employers and employees. Employers enjoy much less expensive office space ($74.83 per square foot for Class A in downtown San Francisco), lower taxes, and a labor market with a glut of talented programmers and engineers. Tech employees, meanwhile, benefit from Seattle’s lower residential rents and home prices, retail pricing, and Washington state’s lack of an income tax.
That influx of Bay Area tech company has driven growth, especially in South Lake Union and Pioneer Square. Brokers say that those neighborhoods’ legacy office stock is appealing to tech companies that want to create a more bohemian, urban ambiance for their workers.
According to Doug Hanafin and Larry Almeleh, brokers with JLL, South Lake Union and Pioneer Square locations help with personnel recruitment and foster an informal style that tech renters find appealing.
“The tech tenants want identity. They want to differentiate themselves from the competition, they want a unique environment that differentiates them from the competition and supports the lifestyle of their employees,” says Hanafin. “High rises are adapting to meet the needs of the high tech tenant, however, most 50,000 square foot high tech tenants would not rank a high rises as their first priority. If there was a tech-ier building in the South Lake Union or Pioneer Square area that might be the first choice, and being in the core might be the second choice.”
Avalara, a tech company that writes business tax software, recently took space in Pioneer Square with the neighborhood’s amenities in mind. The company signed a ten-year lease of 133,329 square feet at a rate of $49 per square foot in Hawk Tower.
The Eastside has plenty of demand, too. “This is getting into the slower part of the year, getting into the holiday season, but we really haven’t seen a lot of slowdown in the suburbs,” says Dan Harden, an Eastside broker for Kidder Mathews. “The suburbs overall are performing really well, and we’re going to see rents increase for the foreseeable future.”
Harden thinks that the market will continue to stay in good shape, even if recession strikes. Brokers expect that demand for new leases will continue to be strong. There are a number of market economic that support that idea. Seattle and Bellevue can be viewed as part of a syncretic whole, and real estate market indicators are reasonable metrics for the health of the regional economy. Puget Sound companies are doing well, expanding business, and hiring.
Institutional and foreign capital is flowing into the region, as global investors start to see Seattle real estate as a sure bet. Given those conditions, Seattle’s economic health depends somewhat on the health of financial markets. Uncertainty about the fiscal policies of the incoming Trump administration and changes in Federal Reserve interest rates—national issues—are the biggest reasons for uncertainty locally.
Brokers on both sides of Lake Washington said that they were fielding plenty of requests from new clients and old ones. They also described a sense of reasonable caution in expansion. Even companies seeing profits and under expansion are trying to avoid overreach, renting modestly above their current needs. The 2008 recession was very costly for firms that bet big on continued growth.
In all, Seattle’s real estate office market is strong and should continue to be for the middle term.