The end of the 1st quarter 2024 marks the four-year point since the onset of the pandemic and we continue to see the regional office market struggle.
1Q 2024 office data shows another significant quarterly spike in regional vacancy going from 13.97% at year-end 2023 to 15.10% currently, a 113 bp jump. Negative net absorption and lack of demand have caused office vacancy to increase for the ninth quarter in a row. In fact, the regional market has seen vacancy increases in 15 of the last 17 quarters with a collective 931 bp rise in vacancy since the 2nd quarter 2019’s low mark of 5.79%. There have also been nine consecutive quarters of negative net office absorption. Over the 1st quarter, the region posted -1.45M+ s.f in negative net absorption following -2.19M+ s.f. in negative net absorption for all of 2023. This on the heels of -1.44M+ s.f. of negative net absorption in 2022 and -1.53M+ s.f. in 2021. Also over the quarter, Seattle continued its trend of skyrocketing vacancy with a 170 bp spike pushing current vacancy to 18.35%. The Eastside also saw vacancy surge going from 12.13% last quarter to 12.96% currently, an 83 bp spike. Investment sales continue to be stagnant. There are 13 major office projects under construction in the region, 50% pre-committed.
Despite a stable regional job market in 2023, the Seattle economy continues to see high inflation and lackluster job growth projections. Per the Puget Sound Economic Forecaster, regional CPI for 2023 was 5.3% with a moderating inflation forecast of 2.4% for 2024 and 2.2% for 2025. Tech sector growth has slowed considerably resulting in lower regional office demand. Employment growth ended 2023 at 1.6% per the Economic Forecaster which projects negative growth of -0.3% in 2024, increasing to 0.7% for 2025. Staffing shortages also continue to hamper the region.
The regional office market continues to struggle, particularly in the two largest markets of Seattle and now the Eastside which are both experiencing high levels of negative net absorption and surging vacancy. Looking forward, tepid office demand coupled with historically high availability rates and negative net absorption present concern. Office metrics to monitor include work at home/in office employee policies, direct and sublet vacancy levels, future office layout/ density trends, net office absorption, inflation, interest rates, pre-commitment levels for new construction and future lender underwriting policy changes.
VACANT SPACE/RATE
At the end of 1Q 2024, the Puget Sound region has a total office supply of 233.6M+ s.f. Current regional office vacancy now stands at 15.10% compared to 13.97% last quarter and 11.21% a year ago. Regional office vacancy has not exceeded 15% in recent history. Vacancy hit the recent low mark in the 2nd quarter 2019 at 5.79% and has essentially risen ever since increasing by 931 bps to its current mark. Of the vacant inventory, 16% is from sublease space which is below 20% at mid-year 2023. All five regional market areas saw vacancy increase over the 1st quarter. Seattle vacancy increased significantly from 16.65% to 18.35% currently, a 170 bp jump pushing it to the region’s high vacancy mark for a third consecutive quarter. Eastside vacancy also experienced a large rise in vacancy over the quarter going from 12.13% last quarter to 12.96% currently, an 83 bp jump. In addition to significant direct vacancy in the Eastside market, the amount of sublet vacancy has risen to 1.93M+ s.f. Southend vacancy settled the quarter at 17.06%, up from 16.33% last quarter and Tacoma vacancy went from 9.30% last quarter to 9.43% currently. Northend vacancy stands at 9.09% which is the lowest of the major market areas. Rising vacancy has been propelled in no small part by the ongoing negative net regional absorption which totaled -1.45M+ s.f. in 1Q 2024 following year-end 2023 net absorption of -3.32M+ s.f. This is on the heels of -1.44M+ s.f. in negative net regional absorption in 2022 and -1.53M+ s.f. in 2021. Amplifying the affect is historically high regional availability which ended the 1st quarter at 17.88%, up from 17.67% last quarter and 15.93% one year ago.
NEW CONSTRUCTION
At the end of 1Q 2024, there are 13 major office projects under construction in the region with all but one in the Seattle and Eastside markets. Over the quarter, there were four notable regional office deliveries. On the Eastside, the Meta leased Spring District Block 13 project in Bellevue delivered 208K s.f. and Kirkland Urban-South (Google) delivered 300K s.f. In Seattle, Northlake Commons delivered 153,726 s.f. and Washington 1000 added 531,166 s.f. to the current Seattle inventory. There were no notable new office construction starts. Of the office projects under construction, 7 are in Seattle totaling 2.02M+ s.f. (14% pre-committed) with an additional 5 projects on the Eastside adding 2.68M+ s.f. (75% pre-committed). The largest regional office project is the Amazon committed Bellevue 600 (999K+ s.f.) tower in Bellevue. Construction figures exclude Microsoft’s nearly complete 3.0M s.f. campus office expansion and several large life science projects in Seattle. Although there remain a number of proposed office projects in both Seattle and Bellevue, developers have put the brakes on any new construction indefinitely. Collectively for the region, the 13 office projects under construction total 4.80M+ s.f. and are 50% pre-committed.
RENT TRENDS
Despite the continued upward push in regional office vacancy, two of the five market areas saw increases in average office rent quotes over the 1st quarter. The Southend average rent quote increased notably from $32.42/s.f./yr to $33.02/s.f./yr while Northend rents also increased to $29.26/s.f./yr currently, from $29.17/s.f./yr last quarter. The two largest markets, Seattle and the Eastside, both posted declines in average rent quotes. Seattle saw its average rent decrease from $37.74/s.f./yr last quarter to $37.48/s.f./yr currently, a 1% drop. The Eastside, which posts the highest average rent quote in the region at $40.10/s.f./yr, saw rent decline by $0.14/s.f./yr from $40.24/s.f./yr last quarter. The Tacoma average rent quote also dropped nominally from $28.28/s.f./yr last quarter to $28.23/s.f./yr currently. Bellevue CBD continues to post the highest average regional submarket rent quote at $49.57/s.f./yr currently compared to $49.61/s.f./yr last quarter. Comparatively, the average rent quote for the Seattle CBD is $43.24/s.f./yr. Tacoma CBD is at $28.66/s.f./yr, about 58% of the current average Bellevue CBD quote.
INVESTMENT MARKET
For seven straight quarters now, the regional office investment market has been meager. The 1st quarter 2024 was no exception as the region saw only three significant office investment sales. High interest rates, changing economic indices and lingering effects of the 2020 REET increase all continue to take their toll on the office investment market. There is also a disconnect between buyers and sellers. Investors are searching for bargain pricing, while sellers don’t want to sell under current conditions and pricing metrics. One of the significant sales in the 1st quarter was 90 East (Building E) in Issaquah selling to Costco for $61,826,600 ($350/s.f.). The other two sales were in Seattle. 101 Elliott sold to Seattle Housing Authority in March 2024 for $39.5M ($376/s.f.) and 1000 + 1100 Dexter South sold to Palisade Group for $47.5M ($215/s.f.). Cap rates have pushed upward as a result of high interest rates and market uncertainty, but they are difficult to quantify as there is little to no sample size of sales to extract rates. Total office sales volume over the quarter was again very low at $207.3M+ (among 46 transactions), an average sale price of $4.5M+. This compares to $99.2M+ last quarter and $128M+ in the 1st quarter 2023. Comparatively, there was a collective $2,976M+ in office sales volume for the first half of 2022.
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