Positive market fundamentals are slowly returning to the Puget Sound office market as recent indicators suggest tenant demand is gradually increasing, and the regional vacancy rate may be on the verge of stabilization. These trends, coupled with a positive job growth forecast for 2025, especially in the technology sector, are fueling an optimistic mid-term outlook. While work from home and hybrid work policies will persist, there is expected to be a methodical shift to a more balanced workforce. If this trend continues to gain momentum and employees continue to fill office buildings, the office market may begin to shift to recovery and growth sooner than expected.
While leasing activity remains relatively subdued compared to pre-pandemic levels, 2024 recorded the highest level of activity since 2021. Demand in Q1 2025 was slightly above the 2024 average, with 2.2 MSF of leasing activity during the quarter (this includes new leases and renewals). However, market-wide net absorption was negative for the quarter at -322,842. The disparity between leasing activity and net absorption can be partially attributed to the volume of renewals, which accounted for approximately 35% of the total square footage leased during the quarter. While renewals are included in leasing activity, they are excluded from net absorption because there is not a physical change in occupancy. As a result, the Puget Sound office market vacancy rate increased to 21.8%.
Although a full office rebound appears to be a considerable distance away, cautious optimism is already taking shape for 2025 in hopes the market will find solid footing for mid-term future growth. With many new proposed policies being discussed at the national, state and local levels which include tariffs, decreased corporate taxes, and deregulation, it has become difficult to project the impact on commercial real estate in 2025. A few indicators worth monitoring include return to office employee policies, sublease space levels, future space planning and density levels, leasing and net absorption trends, inflation rates, interest rates, impact of tariffs, the potential occupancy impact from Federal downsizing, and future lender underwriting policy changes.
Vacancy Trends
At the end of Q1 2025, the regional office market vacancy rate for multi-tenant office properties over 10,000 SF (excluding owner-user buildings) increased 40 basis points to 21.8%. This was the 13th straight quarterly increase since Q4 2021 when the rate was 12.1%. The direct vacancy rate increased by 0.4 percentage points during the quarter and the market posted its highest overall vacancy rate on record, higher than the previous peak of 14.9% in 2010. Seattle ended the quarter with the highest vacancy rate in the region at 26.1%, followed by South King County at 19.5% and East King County at 19.3%. On the positive side, total sublease availability across the region declined from 6.7M SF last quarter to 6.3M SF this quarter, representing a quarterly decline of -6.0%. Sublease available space currently represents 15.0% of the total available space on the market, down from 16.1% last quarter and 18.7% at the same time last year. Overall, the vacancy rate is expected to remain elevated in 2025 with cautious optimism for stabilization in the near term.
RENT TRENDS
The average asking lease rate continued to decline in Q1 2025, ending the quarter at $34.18 PSF and registering the seventh straight quarterly decrease. Region wide, asking rates fell by -1.1% compared to last quarter and -3.4% compared to the same time last year and -7.1% since the most recent high in early 2023. While the rate of decline may be decelerating compared to the first half of 2024 and 2023, this trend will likely continue in the near term until stabilization occurs. The bulk of the decline over the past five years has been driven by Seattle (-14%) and East King County (-5%). The most expensive submarket remains the Eastside, with an average of $41.32 PSF, followed by Seattle at $36.56 PSF.
NEW CONSTRUCTION
Due to the recent surge in new deliveries over the past few years, the development pipeline fell by 72% compared to last year and by 90% compared to 2023 when the under construction total was just below 7.5 MSF. The total of under construction projects (excluding owner-user projects) was 888,633 SF at the end of Q1 2025. These construction figures exclude two owner-user projects: Microsoft’s nearly complete 3.0 MSF campus expansion in Redmond and Amazon’s 1.0 MSF owner-user build-to-suit in Downtown Bellevue (Bellevue 600). Of the multi-tenant projects under construction, the largest includes Four106 totaling 485,000 SF in the Bellevue CBD, followed by 701 Dexter totaling 266,898 SF in Lake Union. During the quarter, there were three regional office deliveries, led by 1916 Boren totaling 282,741 SF in the Seattle CBD and The Gateway Building totaling 267,000 SF in the Ballard/University District submarket. No notable new office projects began construction this quarter.
INVESTMENT MARKET
The Seattle office investment market started to gain momentum in the second half of 2024 and while it slowed a bit in Q1 2025, respectable numbers were posted for the quarter. More than 31 properties traded hands over $1M in Q1 2025, with total sales volume exceeding $190M. While the number of transactions ended slightly below the 2024 quarterly average of 35 transactions per quarter. Total transaction volume was much lower than the 2024 quarterly average of $370M. SeaTac Office Center was the largest sale of the quarter, The three building project totaling 548,704 SF sold for $111M ($202 PSF). While most sales continue to produce unpublished cap rates, the average cap rate in Q1 2025 was 6.0%. Headwinds will persist with a difficult lending environment, increased assets in distress, upcoming loan maturities and pricing volatility.
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