Q1 2017 Seattle Office Market

General Conclusion: Seattle’s office market stayed flat in the beginning of 2017 with vacancy rates increasing slightly to 7.3% in Q1 2017 up from 7.1% in Q4 2016. Year to date Net Absorption for the Downtown Seattle Office Market was negative (201,626) square feet in Q1 with over 6.3 Million square feet under construction. Even with a slight increase in vacancy, the market is still very healthy as there continues to be strong demand for Seattle commercial real estate investment product. Landlords continue to be bullish on rental rates and concession packages across all submarkets and building classes when compared to historical trends in Seattle. Market fundamentals are expected to be in favor of landlords until vacancy crosses the 10% threshold.

 

Economy:  The Seattle/Bellevue/Everett area has continued to see significant Job growth with preliminary seasonally adjusted unemployment decreasing to 3.5% in February of 2017 down from 4.3% in Q4 2016 according to The Washington State Employment Security Department.  The Bureau of Labor Statistics is reporting a slightly higher rate of 3.9% for the Seattle-Tacoma-Bellevue area.

 

Office Construction: While many projects that were under construction last year have delivered, Seattle continues to be at an all-time high construction boom with the following developments all currently under construction:

• Amazon II, and Amazon Phases VI, VII & VIII totaling:~ 2,094,000 square feet (100% preleased)
• Block 20 : ~1,100,000 square feet (100% preleased to Amazon)
• Troy Block :~817,000 square feet (100% preleased to Amazon)
• Madison Centre:~750,00 square feet (23% preleased to Davis, Wright Tremaine & others)
• 333 Dexter:~650,000 square feet
• The Mark:~528,000 square feet

• Tilt 49:~307,296 square feet (100% preleased to Amazon)

• The Alexandria Center: ~288,850 square feet (100% preleased to Juno Therapeutics)
• Hawk Tower:~208,840 square feet (64% preleased to Avalara)
• 15^th & Market:~204,000 square feet
• Arbor Blocks East: ~196,208 square feet

 

Office Developments:  The following office developments are currently being proposed:

Amazon revealed further expansion plans…again. The E Commerce giant has filed permits to build a 17 story office building at 2205 7^th Ave, where the Days Inn currently sits. Amazon recently surpassed 341,000 employees globally and nearly 40,000 in Washington state.

The Seattle City Council unanimously voted to “up zone” the University District neighborhood in Seattle, allowing developers to build much higher than current limits if they contribute to the City’s affordable housing initiatives (HALA).  Several parcels currently zoned between 65-85 feet can now reach heights of 85-320 feet. In addition, several single family parcels are now zoned for low rise multifamily uses. Many community members think that the University District could be the next big “tech hub”, given its proximity to the University of Washington, walkability, and the spur of new developments that will likely follow the upzone vote. Using the same HALA framework, a similar plan is currently in the works for both South Lake Union and the Downtown core. The Seattle City Council will vote in April whether to approve this measure.

Earlier this year it was announced that Big Fish Games will be moving to the renovated Maritime Building on Seattle’s waterfront at 911 Western Ave. The developer has now filed plans showing that the project will be complete for occupancy by mid-2018, just a year before the new waterfront promenade is estimated to be completed.

Unico Properties acquired a 60,000 square foot building at 701 Dexter in South Lake Union a little over a year ago and have just filed plans for a renovation. Due to height restrictions in the area, Unico plans to extend the building envelope over what is currently a surface parking lot to create 40,000 additional square feet of office space. Unico has not released a timeline for construction to begin.

At the corner of Second and Union, crews have begun to demolish several small buildings to make room for Skanska’s 2+U project. The 650,000 square foot office project is expected to be completed in the second quarter of 2019.

 

Office Sales:  In general, building sales in the greater Puget Sound region saw a slight uptick from the fourth quarter of 2016. However, only one building traded hands in the downtown Seattle market during Q1:

• New York based TriStar and RFR Holdings purchased the 290,647 square foot Urban Union building located at 501 Fairview Avenue in South Lake Union and 100% leased by Amazon. Schnitzer was the seller fetching $268.9 million or $925.32 per square foot, setting the new highest per-foot sale record.

 

Office Leases:  Office leasing activity in the first quarter of 2017 increased slightly from Q4 2016, mostly fueled by technology companies.  The following office leases were completed in Q1:

• Once again, Amazon made headlines in office leasing news. The ecommerce giant has just leased all 300,000 square feet of the Tilt 49 office building in South Lake Union. The developer, Touchstone, has been working on the project since 2015 and expects to be complete near the end of this year. It is estimated that Amazon will occupy 12 million square feet in Seattle by 2020.
• Facebook announced in January that they leased the entire 150,621 square foot 1101 Westlake building, which brings their total footprint in the region to nearly 1 million square feet.
• Delta Dental will fill the last remaining vacancy at 400 Fairview in South Lake Union. Delta plans to move from Northgate to the new 61,000 square foot facility this summer.
• Google revealed that they will be taking over the 50,000 square foot former Sound Mind and Body gym that was previously converted to office and occupied by Tableau
• Snap Inc, (better known as Snapchat) leased nearly 50,000 square feet at the Market Place Tower. The space that Snapchat will move into was just recently vacated by Redfin.
• Apple has expanded by approximately 20,000 square feet in downtown Seattle at 601 Union street.
• Kaiser-owned Group Health stated that about 100 employees will be moving from its Westlake Terry building to Two Union square at the expiration of its lease. The remainder of the employees in Seattle will be relocated to a new facility currently under construction in Renton.
• Sound Transit continues to expand in Pioneer Square, adding just under 50,000 square feet at 705 Union Station.
• Finally Local Company Zillow is also expanding. The online real estate company leased the top two floors (38,000 square feet) for expansion at the company’s headquarters in downtown Seattle at 1301 2^nd Avenue.