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4/24/08
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Here is a review of the Puget Sound office market, as of the end of the first quarter of 2008. This report was provided to us by the Puget Sound office of CB Richard Ellis, based out of Seattle.
The Puget Sound office market remained a true “landlords’ market” in the first quarter of 2008. While institutional investors may finally see some slowdown in activity, current owners are keeping lease rates high because of strong absorption and in order to validate their “top dollar” purchases of 2007. Average rental rates for the region cracked the $30.00 mark for the first time since the first quarter of 2001, averaging exactly $30.00 per sq. ft., per year, fully serviced. Total vacancy declined slightly this quarter ending at 10.63 percent. The decrease of 0.31 percentage points is attributed to smaller office users moving to Class B and suburban buildings. In the last quarter, absorption of Class B space exceeded Class A, 191,000 sq. ft. compared to only 116,000 sq. ft. of Class A space occupied on a net basis.
Due to higher lease rates instituted by downtown landlords, in both recently purchased assets and those held by long-term owners, many office users cannot afford to have a presence in either Downtown Seattle or Bellevue. This being the case, smaller office users are looking to the periphery markets both north and south for more affordable lease rates. Class A direct rents in the Central Business Districts (CBD) of Seattle and Bellevue have remained high, $36.84 per
sq. ft this quarter, as well as a record high in the Bellevue CBD of $38.67 per sq. ft. With 5.5 million sq. ft. of office space under construction throughout the Puget Sound, office developers are planning for record high rental increases in Class A developments in order to cover construction costs.
As the rest of the nation’s economy is seeing signs of slowdown, the Puget Sound remains intact. Local economic drivers Microsoft and Boeing are keeping job growth at a steady pace and the Puget Sound will continue to flourish. Geographical barriers of the area keep the employment base concentrated, limiting expansion possibilities. The “vertical campus” model that has been adopted by Expedia could be a viable alternative to the many Fortune 500s, especially Microsoft, who has been rumored to be in the running for all 571,000 sq. ft. in the soon-to-be-delivered City Center Plaza building.
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