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May 21, 2024
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Seattle Office Market Starting to See Signs of Economic Impact from COVID-19


This report was provided by real estate services firm Kidder Mathews

At the end of last quarter, the Puget Sound region was in the initial stages of Governor Inslee’s Stay at Home mandate due to COVID-19 and the economy had shut down, except for essential businesses. Now, at the end of the 2nd quarter, we are starting to see some signs of the economic impact from the pandemic, which has yet to be contained. For the regional office market, the 2Q 2020 data shows an uptick in vacancy from 6.05% last quarter to 6.20% currently, lackluster net absorption of 301.7k sf (compared to 2.05 msf last quarter) and a continued trickle of sales activity. The start of the quarter was earmarked by a complete stoppage of regional construction and virtual standstill in leasing and sale activity.

As it stands currently, most major office construction projects are again underway to varying degrees and deal activity is beginning to reemerge. Nonetheless, moving forward, the office market is likely to look strikingly different long-term as the region braces for what will be a very interesting second half of 2020, as the punch from the Coronavirus has yet to show a black eye in the latest regional office statistics.

Two important factors to consider long-term for the Seattle office market are statewide economic implications related to both job loss and job growth and the long-term trend for certain companies to embrace the “Work From Home” trend, which was put into fast forward mode over the past three months. The regional unemployment rate in March stood at 5.4%, then nearly tripled to 16.1% in April with over 318,000 jobs lost in the market. In May, the unemployment rate improved, dropping to 14.8% as 62,500 jobs were recaptured with the initial Phase 1 and 1.5 reopening of businesses. Total net employment loss currently stands at 254,600 jobs as of the end of May.

Looking ahead, The Puget Sound Economic Forecaster’s 2nd quarter forecast is projecting employment decline of 7.2% for the second half of 2020, but projects positive 4.0% employment increase for 2021 suggesting that the employment picture will be improving. One other economic consideration that has mitigated some of the pandemic impact is that many office firms received PPP (Paycheck Protection Program loan) capital to help keep their businesses going.

The COVID-19 pandemic and its local, national and worldwide societal and economic impacts are being felt in a manner not experienced in recent history. While other commercial market sectors such as retail and lodging are much more significantly impacted, its affects will reach the regional office market as well, but to what extent remains the question.

As businesses and the economy begin to open back up and gain some momentum, we will be able to better measure how the normally fast moving and vibrant Puget Sound marketplace will handle the impact of the pandemic. Sales activity is expected to remain flat in the near-term despite resumption of construction and an uptick in demand for leasing. The 2020 increase in Washington’s real estate excise tax (REET) had already caused a sharp drop in volume and current uncertainty, dramatic fluctuations in the stock market, changes in lending requirements and reduced spending are likely to keep sales activity suppressed.

Real estate investors and real estate capital are mostly patient and focus on longer views that would likely bridge the effects of the current disruptions. This was proven in the Seattle markets in the 2008 recession where there were few forced sales and real estate investment led the recovery. So far, the economic impact of COVID-19 is clearly negative. However, many questions remain to be answered. Perhaps most pressing, if there is another spike in new COVID-19 cases, will Governor Inslee require businesses to close again in order to gain control over the situation? Will vacancy continue to rise and by how much? Will the tech giants continue to lease large blocks of space? Will the Work From Home trend become permanent for some companies? Will proposed projects be put on hold or be scratched?

Businesses in discretionary retail, travel, and leisure are the most immediately affected, with less quantifiable hits on the office and industrial market sectors. Overall, while we have lost jobs, these are largely temporary and our diversified economic base appears capable of weathering the current storm, but time will tell.


At the end of the 2nd quarter 2020, the region has a total office inventory of 213.1 msf. Current regional office vacancy stands at 6.20% with 13.2 msf of total vacant space, including sublet vacancy. Of the total vacant space, just over 13% is from sublet vacancy, compared to 12% last quarter. The current regional vacancy rate is an increase of 15 bps over the 6.05% vacancy last quarter and 33 bps above the 5.87% low vacancy rate at the end of 2019. Three of the region’s five major markets posted increases in vacancy with the Southend vacancy remaining highest in the region at 13.12%. The increase in vacancy is due in part to very lackluster net absorption for the quarter at 301k sf, led by Seattle with 339k sf in net absorption. This compares to 5.76 msf in net absorption for all of 2019.

Markets that posted negative net absorption for the quarter were the Northend at -103k sf and Tacoma at -71k sf. The regional availability rate, tracking space being marketed but not necessarily completed or physically vacant, ended the quarter at 8.94%, up from 8.20% last quarter. The lowest vacancy was the Eastside at 4.02%, a slight decrease from 4.12% from last quarter.


At quarter end, 20 of the 21 major office projects under construction in the region were in the Seattle and Eastside markets. There was only one major delivery over the quarter adding 640k sf new supply with the completion of Apple leased 333 Dexter. Most of the existing construction projects are back underway after a long pause from the “Stay At Home” order. The only new start is in Seattle with Wright Runstad’s 400 University to include 110k sf of speculative office space. There were no new Eastside starts, although Vulcan’s Bellevue Plaza Phase I project (297l sf) should be underway soon.

For existing close-in office projects currently underway, 11 are in Seattle and collectively total 2.72 msf (21% of which is pre-leased). Comparatively, there are nine office projects totaling 3.25 msf underway on the Eastside with the largest being 1001 Office Towers at 714k sf, fully leased to Amazon. The Eastside projects are 96% pre-committed. While there are many more office projects on the horizon in Seattle and Bellevue, it remains to be seen which projects will push through. Fortunately, of the 21 projects under construction, 63% are pre-leased.


The Seattle and Eastside markets in the region posted rental rate decreases while two of three smaller markets posted slight increases over the 2nd quarter. The most notable rent increase was the Southend going from $31.18/s.f./yr last quarter to $31.84/s.f./yr currently, a jump of 2.1%. The rent increase seen in the Tacoma market was more modest. The highest average rent continues to be in Seattle at $41.44/s.f./yr, which is a $0.44/s.f./yr decline from the $41.88/s.f./yr average last quarter. Seattle is followed closely by the Eastside at $40.03/s.f./yr., also down from $40.33/s.f./yr last quarter. The Northend and Tacoma posted the lowest average rents at $27.98/s.f./yr and $26.14/s.f./yr, respectively. At the end of the 2nd quarter, Bellevue CBD had the highest quoted average full-service rent of any regional submarket at $53.01/s.f./yr, due to short supply. The question moving forward into the 3rd and 4th quarters will be “Where Is Market Rent?”.


Carrying on the trend from the 1st quarter, as expected, sales volumes were minimal in the 2nd quarter due to both uncertainties from the novel Covid-19 pandemic and the REET increase which took effect January 1, 2020. In fact, there were only three major office transactions of over $10 mil that closed in 2Q 2020 (not purchased for land or repurposing). The largest sale was the purchase of the Farmers Insurance building (Mercer Park) on Mercer Island by Ryan Companies and HAL Real Estate for $46.45 mil ($296/s.f.). Also trading over the quarter was Building A of I-90 Corporate Campus in Bellevue for $23.57 mil ($316/s.f.) and Microsoft’s acquisition of a former data center building in Redmond for $15.35 mil ($216/s.f.). Total sales volume for the quarter was $194.1 mil (among 66 transactions) compared to $556.7 last quarter and $4,683.3 mil in 4Q 2019. With the REET increase and uncertainty, the slowdown in investment sales should continue.


• 11 major construction projects underway totaling just over 2.7 msf with four projects expected to be delivered in 2020; 21% of the space is pre-committed.
• One major office building delivery (333 Dexter) over the quarter totaling 639k sf that was fully leased to Apple.
• Following strong net absorption of 1.68 msf in 1Q 2020, the 2nd quarter net absorption for Seattle market was a very modest 339k sf, but still the highest quarterly mark for the region.
• Office vacancy in Seattle currently stands at 6.00%, compared to 5.76% last quarter and 4.80% one year ago.
• Availability rate increased over the quarter from 9.40% at the end of the Q1 2020, to 10.80% currently.
• Leasing activity was moderate with CoStar reporting a very nominal 61 total deals at 273k sf. The CBD accounted for over half of the volume with 28 deals totaling 163k sf.
• Asking rates in the Seattle CBD decreased to $47.01/s.f./yr, down from $47.92/s.f./yr last quarter.
• Vacancy in the Seattle CBD ended the quarter at 7.7%, unchanged from last quarter. The CBD availability rate, however, increased from 12.4% last quarter to 13.5% currently.
• Peripheral Seattle submarkets exhibit 2nd quarter vacancy rates of 4.8% in Ballard/U District, 2.4% for Lake Union and 3.7% in N Seattle/Northgate. Vacancy in Queen Anne/Magnolia remains the high mark at 12.4%.
• 21% of new construction (2.7 msf) in the Seattle market is pre-leased with lease negotiations slowed on most projects.
• Current available new construction appears manageable at 2.1 msf, considering the Seattle market has historically absorbed about 2.3 msf annually.
• For the second consecutive quarter, there were no noteworthy office investment sales in Seattle.
• Average rent for Seattle is $41.44/s.f./yr, down $0.44/s.f./year from $41.88/s.f./yr last quarter.


• The current Eastside office inventory stands at 52.15 msf, comprising about a quarter of the region’s office supply.
• Office vacancy at the end of 2Q 2020 is the lowest of all market areas at 4.02%, down slightly from 4.12% last quarter.
• The availability rate remained steady at 5.00%, unchanged from last quarter.
• Net absorption for the quarter was 77k sf, bringing the YTD 2020 net absorption for the Eastside to 351k sf.
• Leasing activity slowed considerably over the 2nd quarter with CoStar reporting 46 deals at 373k sf in total volume.
• Bellevue’s CBD office vacancy increased to 4.1% at the end of the 2nd quarter, compared to 3.8% last quarter. The average CBD rent quote is $53.01/s.f./yr currently, up slightly from $52.94/s.f./yr last quarter.
• The Bellevue CBD availability rate inched up from 5.2% last quarter to 6.0% currently.
• There are currently nine major Eastside office projects under construction (not including expansions at the Microsoft and Costco campuses) which collectively total 3.25 msf; with a healthy 96% pre-committed.
• Amazon committed to 111k sf of office space at Redmond Town Center. It will host tech and engineering teams with capacity for about 600 employees, part of Amazon’s overall vision for 15,000 jobs on the Eastside.
• Vulcan’s first phase of Bellevue Plaza (17 stories; 297k sf) is out for building permit and in queue for development. There are eight proposed major office development projects currently in design review in Bellevue.
• Vacancy rates in peripheral Eastside submarkets remain low at 3.6% and 3.2%, for Kirkland and Redmond respectively.
• Noteworthy sales include the transfers of 15319 NE 45th St (Microsoft) at $15.35 mil ($216/s.f.), Mercer Park for $46.45 mil ($296/s.f.) and I-90 Corporate Plaza (Bldg A) for $19 mil ($433/s.f.).
• The average rent quote for the Eastside is currently $40.03/s.f./yr, down $0.30/s.f./year from $40.33/s.f./yr last quarter.


• Positive net absorption of 58k sf at end of 2Q 2020 which brings the YTD net absorption to 16k sf which compares to 325k sf of net absorption for all of 2019.
• Office vacancy remains the highest of the five market areas at 13.12%, down slightly from 13.40% last quarter, but well above 11.87% at the end of 2018.
• No major deliveries or construction starts occurred this past quarter.
• Alaska Airlines’ headquarters expansion building remains the only significant office project under construction at 129k sf with scheduled delivery in 3Q 2020.
• 24 office lease transactions occurred over the 2nd quarter, totaling 51k sf, or just over 2k sf per average deal size.
• Submarket vacancies for Renton/Tukwila and Federal Way/Auburn remain high at 16.5% and 15.8%, respectively.
• No significant sale transactions.
• High vacancy is expected to continue in the South King County market through the end of 2020.


• The Northend office market is third largest in the region, with a current office inventory of just over 22.5 msf.
• Vacancy increased over the 2nd quarter from 5.15% last quarter to 5.56% currently, a 41 bps jump.
• The availability rate also increased to 6.7% in the 2nd quarter 2020, from 6.3% in the previous quarter.
• Bothell/Kenmore submarket vacancy dropped slightly to 9.5% in the 2nd quarter compared to 9.7% last quarter. The Everett CBD reports a current vacancy of 4.6%, up slightly from 4.2% last quarter.
• The Northend market continues to attract office tenants looking for housing stock proximity and future light rail.
• At an average rent quote of $27.98/s.f./yr, it is $12.05/s.f./yr more affordable than the current average rent on the Eastside and $13.46/s.f./yr more favorable than the Seattle average quote.
• No significant sale transactions.
• The Northend office market should show long-term gradual improvement as businesses get squeezed out of close-in office space and with eventual Sound Transit’s light rail infrastructure.


• Vacancy rate for Pierce County is 5.90%, above last quarter’s mark of 5.31%.
• Pierce County availability rate increased slightly from 5.9% last quarter to 6.0% currently.
• One third of the Pierce County office supply is in the Tacoma CBD which has a current 2nd quarter vacancy rate of 8.7%. The CBD availability rate increased slightly to 7.7% currently from 7.6% last quarter.
• Leasing volume was slow at 20 deals averaging approximately 3k sf in size.
• Negative net absorption of -71k sf in the 2nd quarter, compared to positive 70k sf. in the 1st quarter 2020. This brings the 2020 YTD net absorption to -751 sf compared to 5k sf for all of 2019.
• Submarket vacancy for Puyallup is high at 11.5% while the Dupont submarket currently has no vacant office space.
• Average rent increased slightly to $26.14/s.f./yr from $25.85/s.f./yr last quarter.
• No office projects are currently under construction.

Author: Chris Berger, MAI, Kidder Mathews Valuation Advisory Services
Source: CoStar Data

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