Strong sales activity and tenant demand boost Puget Sound’s office market in Q1 despite speedbumps caused by large move-outs.
Market fundamentals remained strong as demand strengthened, rents continued to rise, and significant transactions boosted investment sales volume.
Major move-outs impacted the quarter’s absorption and vacancy, however, with the fallout from Amazon’s abandonment of Rainier Square a shadow on the horizon. After almost nine years of positive absorption, Q1 saw 280,246 SF of negative absorption, largely due to negative absorption of 199,556 SF in Seattle and 304,427 SF in Pierce County. Overall vacancy jumped 30 basis points from the end of 2018 to 7.9%, with Queen Anne the highest rate in the region at 12.8%. The lone submarket to see a significant amount of positive absorption was Pioneer Square/Waterfront, due primarily to WeWork and Avalara’s occupancy of nearly 73,000 SF at Hawk Tower. On the Eastside, tech dominated leasing as Facebook committed to 338,000 SF at The Spring District – Block 16, which it will occupy in early 2020. Ponte Gadea’s massive acquisition of Troy Block brought total sales volume regionwide to more than $2.0 billion for the quarter — an increase of 230% year over year.
- There were no new deliveries in any Puget Sound submarkets in Q1. With more than 5.3 million SF of buildings projected for completion by the end of this year, however, this quarter is clearly an aberration.
- 63% of all under-construction office space in the Puget Sound has been pre-leased.
- As of the end of Q1, tenant requirements had reached 7.8 million SF of space in the Puget Sound: 4.6 million SF in Seattle and 3.2 million SF on the Eastside. This level represents an increase of 24% quarter over quarter. Tech and internet firms continued to drive demand in Seattle and the Eastside, with Amazon, Apple and Oracle the most active tenants.
- Seattle – The Seattle market has few blocks available for large tenants in existing space and more than 76% of the 4.2 million SF under construction is pre-leased. These limitations will likely intensify tenant competition for what remains available, support further rent increases and maintain low vacancy in the future. Even the availability of 720,000 SF of space at Rainier Square — resulting from Amazon’s announcement that it would not occupy the building — may not relieve this pressure when it is delivered in Q3 2020 as rumors abound of a large tech commitment already in negotiation. Coworking has been a huge driver of demand, and this should continue as 2019 progresses.
- Eastside – Class A average asking rents in the Bellevue CBD increased for the sixth straight quarter, reaching $53.87 PSF full service, a 20% jump from a year ago. This trend, along with decreasing vacancy, has resulted in an uptick in lease renewals as tenants look to stay put and avoid joining the frenzy for limited available space. As of the end of Q1, only eight spaces exceeding 50,000 SF were available on the Eastside. All-time high construction costs resulting in pricier tenant improvements and longer lease terms will continue to challenge small and medium-sized tenants looking for flexible leases. Big tech continues to be active as both Facebook and T-Mobile signed large leases in Q1. The market is tracking Amazon with increasing anticipation as the e-commerce giant is rumored to be pursuing over 3.5 million SF of office space in the Bellevue CBD.