The Puget Sound office market remained one of the most active in the country
as rents reached record highs.

The Puget Sound Region’s office market continued to shine as strong leasing caused vacancy to drop to 8.1% and absorption to maintain the high level reached last quarter. Amazon remains a primary absorption driver, occupying 157,301 SF at 9th and Thomas in the Lake Union submarket this quarter. WeWork occupied 100,000 SF of its 108,000-SF lease at 1411 4th. Leasing was strong in recently-delivered Seattle properties like Madison Centre, which will lead to higher absorption in future quarters. Class A rental rates increased in both the Seattle and Bellevue CBDs, as full-floor availabilities remained at a premium. Companies and job seekers from San Francisco were major demand drivers as they seek to capitalize on the still-booming tech market and lower cost of living. Oracle, Stripe, and Uber are just a few Bay Area firms that have recently expanded in the Puget Sound. On the Eastside, large-block availability remained low for all submarkets. Google’s rumored purchase of the Kirkland Urban campus would remove the largest remaining block from the market, leaving just one block exceeding 75,000 SF on the Eastside. Sales volume reached $2.0 billion this quarter, more than doubling last quarter’s total. The Metropolitan Park Buildings in Seattle sold for more than $600/SF apiece and 400 Fairview sold to Pembroke RE for $997/SF this quarter. New-to-the-market, California-based Preylock RE Holdings purchased the Willows Creek Corporate Center in Redmond — where Facebook/Oculus recently leased 250,000 SF — for $117 million.

Regional Supply

  • The Puget Sound saw no new deliveries for the second straight quarter. The Eastside saw the most activity as Onni Group and Skanska announced new developments in the Bellevue CBD that will add more than 1 million SF of new supply. Capstone Partners again revised its plans for Esterra Park in Redmond, settling on the development of 235,000 SF of office space.
  • 66% of all under-construction office space has already been pre-leased, up from 64% last quarter.

Regional Demand

  • Tenants are looking for 6.6 million SF of space, 3.7 million in Seattle and 2.9 million on the Eastside. Just over half of these prospects in Seattle and almost 70% on the Eastside are tech companies.

Regional Outlook

  • Seattle – The expansion of the city’s second largest occupier, WeWork, will continue to be a topic of discussion in this market, as the company closes in on occupying more than 1.2 million SF by the end of this year. The overall Class A rental rate rose to $49.51/SF in Q3, driven largely by a 15% increase in Pioneer Square/Waterfront and a 14% increase in Lake Union. Looking ahead, we expect rents to exceed $50.00/SF as the demand for space remains high. The quarter saw no new construction deliveries, but this will likely change over the next few months. The Lake Union submarket may see accelerated leasing from biotech firms as large blocks of biotech space remain in the market. In the Atrium at 1818 Fairview Ave E, scheduled to deliver in November 2018, biotech tenants leased over 140,000 SF, leaving only a third of the building’s space remaining.
  • Eastside – Average asking Class A rents in the Bellevue CBD surpassed $50/SF for the first time in Q3 at $51.06/SF for premium spaces. This increase was due to the significant lack of supply affecting the market; but relief is in sight as Onni Group and Skanska both plan to develop CBD high rises, with even more new construction possible further out. Demand from big tech firms continued to be the story as Google and Amazon expansion in the CBD has made it exceedingly difficult for smaller companies to find full floors. Property owners may begin combining smaller spaces to create larger blocks to meet the demands of tenants in the market.