Seattle/Puget Sound’s construction boom began to cool
as costs reach all-time highs to start 2018.
Despite the rise in material costs resulting in a building slowdown, the office market continues its healthy trajectory. The direct vacancy rate remained unchanged from this time last year at 8.4%. Strong regional absorption of 1,613,727 SF due to high tech leasing and fully-occupied deliveries resulted in a 50-basis point decrease in quarter over quarter vacancy. Rental rates for Class A properties rose in both the Seattle and Bellevue CBDs, as growing demand forced tenants to pay more for high-end space. Overall construction costs increased 3.8% from a year ago, according to Mortenson Construction, which also suggested owners plan for a 3.5% to 4.0% increase in 2018. The rapid increase of tenant improvement costs across the market is one symptom of this trend. Tech and e-commerce once again dominated the largest move-ins, as Amazon, Facebook, and Avalara occupied new spaces in the hot Lake Union and Pioneer Square submarkets. On the Eastside, Facebook/Oculus is on a leasing spree, taking over 200,000 SF in Redmond, further increasing its footprint. Sales volume reached $605.8 million in Q1, dipping from last quarter’s total of $1.19 billion. The largest transactions thus far this year included Shidler Group’s acquisition of Microsoft’s Advanta Campus in Bellevue for $224.9 million ($369/SF) and Brickman Associates’ purchase of the Joseph Vance Building in Seattle for $43.3 million ($369/SF).
- Puget Sound saw 555,645 SF of deliveries this quarter, all in Seattle submarkets. Seattle will likely see 1.3 million SF of total deliveries the rest of 2018. Avalara’s 208,000-SF Hawk Tower was completed in Q1, with the tech company occupying a majority of the space in the building. Supply continues to lack on the Eastside— a motivating factor in Hines’ aspiration to break ground this year on Summit III in Bellevue, awaiting a tenant commitment. The Esterra Park and Spring District projects on the Eastside, however, could consider speculative developments as the year moves forward.
- 61% of all under-construction office space has already been pre-leased, about the same as last quarter’s total.
- Puget Sound tenants are currently in the market for 6.9 million SF of space, with several requirements over 100,000 SF. Among those in the market, over 70% are tech companies.
- Seattle—According to a March report by Dodge Data & Analytics, the value of non-residential commercial construction starts fell by 73% in the first two months of the year. This is due in part to the extended time required for permit approval and the rising cost of contractors, who are also in limited supply. However, projects such as the Washington State Convention Center addition, estimated at $1.7 billion, may reverse this trend for the rest of the year.
- Eastside—Off to a positive start to kick off the year, the Eastside market should expect more of the same over the next nine months. Class A rates in the Bellevue CBD rose to over $46/SF in Q1 and are projected to steadily increase. Absorption should remain positive as several large tenants move into new space in the Bellevue CBD. Urban North, the first phase of a highly anticipated office campus development, will deliver 194,000 SF at the end of the year in Kirkland.