Positive momentum continued for the Puget Sound office marketin the first half of 2018.

The Puget Sound Region’s office market continued on a healthy trajectory in the first six months of this year. The direct vacancy rate remained unchanged from June 2017 at 8.2%, but fell 20 basis points from Q1 due to significant leasing, 368,620 SF of positive net absorption and no construction deliveries. Rental rates for Class A properties rose in both the Seattle and Bellevue CBDs, with large blocks of space hard to come by for tenants in each market. Despite the rise in material costs and something of a slowdown in the frantic pace experienced over the past few years, construction activity remained strong in the region, with Amazon Towers III and IV the largest projects area-wide. On the Eastside, large-block availability continued to dwindle. As of the end of the quarter, just three blocks exceeding 100,000 SF were available in that market. New developments expected to break ground next quarter will help ease the stress on tenants with requirements of that size, but not until 2020. Sales volume reached nearly $902.7 million in Q2, greatly surpassing last quarter’s total. The Redmond market emerged as maybe the hottest investment market, with three properties accounting for $564 million of the quarter’s sales at an average of $350/SF. The Blackstone Group was active on both sides of the lake this quarter, selling both the 5th & Bell Building in Seattle’s Belltown and the Daytona Laguna Campus in Redmond.

Regional Supply

  • Puget Sound saw no new deliveries this quarter. However, more than 700,000 SF of new construction is scheduled to hit the market in Q3 2018. On the Eastside, Block 16 in The Spring District is expected to break ground next quarter, adding 311,000 SF to the expanding Bel-Red neighborhood. Kirkland Urban North is expected to deliver by the end of the year, and Urban South at the beginning of 2019. Vulcan Development began the pre-application process to develop 1 million SF of office space at its Bellevue Plaza development downtown, on a spec basis. The organization is also reportedly moving forward with plans to develop its other downtown sites, which could deliver additional space as early as 2023.
  • Sixty-four percent of all under-construction office space has already been pre-leased, a slight increase from last quarter’s total.

Regional Demand

  • Puget Sound tenants are currently in the market for 6.02 million SF of space, with 21% of Eastside requirements in large blocks of at least 50,000 SF.

Regional Outlook

  • Seattle—Even though many construction projects are in the pipeline, a new May report from Turner & Townsend states that construction costs are expected to increase by five percent in 2018, matching the San Francisco market. This is due to rising labor costs, spikes in material fees, and steady tech demand. Rental rates for Class A properties in all submarkets reached $48.00/SF in Q2, the highest ever recorded rate in the area.
  • Eastside – Class A rates in the Bellevue CBD continue to rise and approach unprecedented highs. Overall rents for premium spaces increased to $49.80/SF this quarter but some top-tier downtown offices are asking close to $60/SF full service. Some tenant downsizing has happened as a result of these increases — possibly the beginning of a trend. Several downtown blocks exceeding 50,000 SF are expected to be absorbed before 2019, pushing the vacancy rate even lower and rates even higher.