Puget Sound office inventory is heavily concentrated in the Seattle area. At just 7.0 million square feet of existing stock, the Tacoma area general purpose, multi-tenant office market accounts for only 8.5% of the regional total. Not surprisingly, the dramatic performance staged by the Seattle area market, with its large financial sector and high-technology tenant bases, has found little resonance in Tacoma, which remains stagnant. Net absorption for the first half of the year was negative 48,000 square feet. Moreover, 34,000 square feet completed construction during the period, all in the 1920s-era Foremost Building at 25th Street and Pacific Avenue in February, the redevelopment of an old dairy building by American Life Inc. The Social Security Administration has taken space as the building’s anchor tenant. The project received LEED Gold certification in April, exit133.com reported at the time. The building includes a retail component. Per the date of this report only one building remained under construction—a 120,000-square-foot medical-office structure at St. Joseph Medical Center in Tacoma. Reis cites a February 2013 completion date.
A major story in the recent history of the market, from which downtown Tacoma has yet to recover, was the 2010 evacuation by Russell Investments in a move from 909 A Street to downtown Seattle following its acquisition of the former Washington Mutual (WaMu) building in the wake of WaMu’s notorious demise during the recession. The empty 219,000-square-foot building in the Tacoma Central Business District (CBD), in the words of a third quarter 2012 report by Kidder Matthews, amounts to a “major hole” yet to be filled. With Russell’s lease in effect until 2013, the space remains classified as “available” rather than vacant. “The $48 million loan on the former Russell Investments headquarters has been downgraded, raising new questions over the future of downtown Tacoma’s signature office building,” The News Tribune (Tacoma) reported earlier this year. “[S]ome commercial lending experts said the downgrade raises the possibility that the building could be sold to a new owner who would buy it at a discount, then fill it up by charging lower rents. Because Tacoma’s top-tier office market is so small—just five buildings downtown are rated Class A—what happens at 909 A Street has the potential to affect every other downtown commercial property owner.”
Vacancy ended the latest quarter at 16.5%, up 20 basis points from the quarter before, up 60 year-over-year, Reis reports. With weak demand, notes Kidder Matthews, “rents continue to be flat.” Still, Reis’ data indicate small recent improvement. At $20.04 psf and $16.60 psf, asking and effective averages for the second quarter were up 0.1% and unchanged, respectively, for the period and were up 0.5% and 0.4% following growth rates of negative 0.1% and positive 0.2% all told last year. According to Reis’ First Glance selective report of third quarter data, the vacancy rate had added 10 basis points, while the mean asking lease rate added a penny.
Modest positive net absorption over the remainder of the year is expected to lower the vacancy rate to 15.9% by year-end. Gains of 1.0% and 1.4% have been projected for the year for the mean asking and effective rents. Additional improvement is expected for 2013. The fate of the former Russell building bears watching for its effects on the downtown Tacoma market.