The Puget Sound office market capped off 2018 by surpassing last year with higher absorption and record-low vacancy.
Tech and co-working will continue to drive demand in the coming year and mostly insulate the local economy from rising interest rates and geopolitical events.
The Puget Sound Region’s office market finished the year as one of the best-performing office markets in the country. Vacancy fell below the 8% barrier to 7.6% as a result of 896,174 SF of net absorption this quarter and an annual total of 3,399,680 SF. Strong leasing in properties such as the recently-delivered Madison Centre, where tenants occupied 346,468 SF in Q4, contributed to this outcome. Average Class A rates broke $50 PSF full service for the first time ever in both the Seattle and Bellevue CBDs, but growth may slow somewhat in 2019 as rising interest rates and reduced global growth signal the tail-end of the economic cycle. Despite concern that Amazon could scale back operations in Seattle following the HQ2 decision, the e-commerce giant continued to expand locally and will likely remain a dominant market driver. Big tech was also the story in the Bellevue CBD as Google occupied 80,000 SF and Amazon leased 280,000 SF at Hines’ Summit III, to begin construction soon. Clarion Partners was a major investment player in Q4, acquiring 500 Yale in Seattle for $52.3 million ($699 PSF) and Plaza at Yarrow Bay in Kirkland for $134 million ($481 PSF).
- The WSECU Building in Ballard/U District (66,800 SF) was the only delivery in Q4, bringing the 2018 total to 641,381 SF, 22% of last year’s total. 2019 will see more action as more than 4 million SF is scheduled to deliver in Seattle. Although the Eastside is still years away from new product entering the market, several developments were issued permits in Q4, including the 2.15 million SF Vulcan has planned in the Bellevue CBD.
- 70% of all under-construction office space in the Puget Sound has been pre-leased, up from 66% in Q3.
- Tenants are looking for 7.1 million SF of space, 3.7 million in Seattle and 3.4 million on the Eastside. Just over 3 million SF of those requirements are from tech tenants.
- Seattle – WeWork, the top occupier of space in Q4, will continue to lease up large blocks of space in 2019 as it looks to further expand its footprint in the area. Full service rates should continue to increase, although at a slower rate, with Madison Centre, Two Union Square, and Russell Investments Center driving the demand. At Skanska’s 2+U, scheduled to deliver in summer 2019, Indeed.com and Regus closed deals for more than 290,000 SF collectively,
leaving only 58% of space in that building available. Tech and co-working will be the prominent tenants leasing space in new construction projects in 2019, with 333 Dexter the next project scheduled for completion in Q1. Facebook, which already has more than 900,000 SF in Seattle alone, will occupy nearly 400,000 SF total in Arbor Blocks East and West early next year, and Google will take up more than 600,000 SF in Lakefront Blocks.
- Eastside – Class A average asking rents in the Bellevue CBD increased 16.3% from Q4 of last year to $52.28 PSF full service. Vacancy is expected to stay low as tech and coworking demand remains strong and Seattle options few. Amazon, Google and Facebook continue to expand on the Eastside, potentially bringing more than 4,000 new jobs downtown. Developers expressed further confidence in the Eastside as the proposed pipeline increased to 8.7 million SF in Q4, more than 5.1 million of which will be in downtown Bellevue. These projects should see strong leasing activity as only one block of space above 30,000 SF was available in the existing CBD inventory as of the end of December. 2019 should shape up to be another prosperous year for the Eastside, although growth likely will not surpass the torrid levels of 2018.