With the economy pressing forward and with job growth in office-using sectors, including tech-related sectors, running positive, the general purpose, multi-tenant office market continues to show considerable strength. With 142,000 square feet completing construction during the first half of the year, all in phase I of Home Plate Center in downtown Seattle, net absorption was 525,000 square feet (no space had been leased in the building as of August, however, Western Real Estate Business reported at the time). July’s minor setback at negative 2,000 square feet was insubstantial; positive net absorption should reign overall for the remainder of the year. With construction cut back (though not cut off), demand has eaten into the high vacancy that resulted from the earlier recessionary contraction of the tenant base. The rate for the second quarter was 14.4%, down 10 basis points for the period, down 110 year-over-year and down 290 from the fourth quarter 2009 peak. July brought no change; vacancy is expected to hold roughly steady for the remainder of the year.
Meanwhile, a growing shortage of large blocks of space could affect market dynamics. Jones Lang LaSalle reports no contiguous space options in downtown Seattle available at larger than 90,000 square feet “and little to choose from” for Central business District (CBD) tenants requiring more than 20,000. Studley, Inc. reports only seven spaces larger than 50,000 square feet available as of mid-year on the Eastside. “The current market presents increasingly challenging conditions to companies seeking bigger blocks of quality space,” this source reports. According to Jones Lang LaSalle, for example, Amazon.com is looking for up to 500,000 square feet (Amazon also has a massive campus under development, as described). Indeed, this source describes Seattle as one of the nation’s top markets for high-tech industry growth (Jones Lang LaSalle cites expansion by Amazon.com, Google, Facebook, Zillow and eBay).
Construction, meanwhile, is picking up, but slowly. Reis’ mid-September report on individual office projects calls for the completion of 757,000 square feet of for-lease space in five projects all told this year. Included is the 325,000-square-foot fifth-phase of the Amazon.com campus in the Lake Union area, due to complete in October. Two other phases with a combined total of 582,000 square feet completed last year. A 3-million-square-foot, three-phase campus, meanwhile, has been proposed for Amazon on 17th Avenue from Lorena to Westlake avenues in the Denny Triangle area, about two miles south of Amazon’s existing spaces. (See Special Real Estate Factors for commentary of Amazon’s potential impacts on the market.) A February start, meanwhile, is indicated for the 114,000-square-foot 202 Westlake Avenue building. Cushman & Wakefield expects completion in the third quarter of 2013. While no space had been leased in the building as of August, Western expects a signing by Spear Street by year-end. In Eastside suburban Bellevue, meanwhile, Wright Runstad & Company is planning The Spring District, a 36-acre mixed-use development intended to host 4 million square feet of office space, according to the developer. Reis reports 3 million square feet proposed for the development per the date of this report. For four additional Bellevue projects alone, Reis reports more than 2.3 million square feet planned and proposed.
Two years of overall severe rental decline (2009-2010) followed a period of no-less-extraordinary increases (2006-2008). The year 2011 brought the return of growth, but in more modest proportions. Modest acceleration has followed. At $29.10 psf and $23.75 psf, asking and effective averages for the latest quarter were up 0.3% each for the period and were up 0.9% and 1.2% since year-end following gains of 0.7% and 1.1% all told last year. “Landlords,” observes Studley, Inc., “have taken heart from the steady leasing and declining availability. Many have dialed back concessions, curbing free rent periods and increasing rents in the very top tier buildings.”
Reis expects vacancy to hold roughly steady over the remainder of the year as net absorption and new supply proceed in relative balance. Gains of 1.5% and 2.0% are projected for the mean asking and effective lease rates for the year. While construction remains subdued despite the tightening of the market, “the dwindling supply of large office blocks… and rising rents could push a new wave of speculative development,” remarks Cushman & Wakefield.