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Seattle Office Market Report

2nd Quarter 2022

Posted In — Market Research | Market Report

Through the 1st half of 2022, the office data shows another quarterly spike in regional vacancy going from 9.94% last quarter to 10.19% currently. Since the pandemic hit, the regional office market has seen a rise in vacancy 8 out of the last 10 quarters.

The change in vacancy over the past two and half years indicates a 432 bp increase from the 4th quarter 2019 vacancy mark of 5.87%. The office market also continues the ongoing trend of negative net office absorption after posting -1.235M+ s.f. in negative net absorption through the 1st half 2022 on the heels of -1.534M+ s.f. of negative net absorption in 2021. The percentage of sublet vacancy also continues to be historically high at 15% currently, but has declined from the peak about a year ago when it topped out at 22%. The largest office market (Seattle) in the region continues to see rising vacancy levels with a 61 bp increase over the quarter bringing the current vacancy to 12.94%. Conversely, the second largest market (Eastside) continues to post the lowest regional vacancy at a healthy 5.47%. Investment sale volumes slowed over the 2nd quarter 2022 and the amount of new construction totals 17 major regional office projects which are collectively 76% pre-committed.

While there has been improvement in the job market, the regional office market remains highly volatile. Looking ahead into the 2nd half of 2022, eyes will continue to be on job growth, but also the occupancy positioning of companies as offices repopulate which at this point has been at lower levels than pre-Covid with many employees continuing to work from home or adopt hybrid models. Inflation also remains a significant concern with the June 2022 seasonally adjusted annual Seattle CPI forecast at 7.2%, compared to 7.3% nationally. The region has also recovered many of the lost jobs from the pandemic, but staffing shortages remain a significant challenge for the region. Puget Sound Economic Forecaster’s June 2022 report forecasts total employment growth for 2022 at 4.0% compared to the national average forecast of 3.8%.

While the regional office market clearly remains unsettled particularly in Seattle, businesses have been operating without mandated masking requirements for several months. Vacancy has continued to rise and net absorption remains lackluster as regional office market trends continue to be volatile. Looking forward through 2022 will be telling as to how the regional office market transitions out of the pandemic. Indices to monitor will include vacancy levels (including percentage sublease vacancy), net office absorption, inflation and pre-commitment levels of new construction (currently at 76% region wide).

VACANT SPACE / VACANCY RATE

Midway through 2022, the Puget Sound region has a total office supply of 223.1M+ s.f. After two quarters of declining vacancy at the end of 2021, regional office vacancy increased over the past two quarters to 10.19% currently. This is up from 9.94% last quarter and 9.60% at the end of 2021. This is the first-time regional vacancy has exceeded the 10% mark since the end of 2013. Furthermore, current vacancy is 440 bps higher than the ten-year low vacancy mark of 5.79% set three years ago in the 2nd quarter 2019. Of the current vacant inventory, 15% is from sublease space which is a reduction from 16% last quarter and 18% at year-end 2021. Three of the five regional market areas saw a decline in vacancy over the 2nd quarter. Seattle vacancy shot up sharply for the second consecutive quarter by 61 bps from 12.33% last quarter to 12.94% currently. The Southend continues to post the highest vacancy in the region at 14.47%, although decreased by 31 bps from 14.78% last quarter. Eastside remains the lowest regional vacancy decreasing slightly over the quarter to 5.47% from 5.50% last quarter. Tacoma vacancy jumped to 8.31% from 7.82% last quarter and Northend vacancy is 7.11%, declining from 7.23% last quarter. The increase in regional vacancy over the quarter is the result of negative net regional absorption of -1.23K+ s.f. at the halfway point for 2022, following negative regional net absorption of -1.53M+ s.f. in 2021 and continued historical high sublet vacancy levels (3.36M+ s.f.). Over the quarter, Seattle posted the largest negative net absorption of -360K+ s.f. followed by the Northend at -34K+ s.f. The regional availability rate ended the 2nd quarter at 13.24%, up from 13.00% last quarter and well above 8.96% from two years ago.

NEW CONSTRUCTION ACTIVITY

At the end of the 1st half 2022, there are 17 major office projects under construction in the region, all within the Seattle and Eastside markets. There were two notable deliveries over the quarter. In Seattle, 520 Westlake (Google) was completed adding 347K+ s.f. of new office inventory. The Eastside saw delivery of another Google leased office project, the 136K s.f. 503 6th St. building in Kirkland. There was one new construction start in Seattle (Latona at North Lake Union) at 157K+ s.f., excluding several large life sciences projects that also commenced over the quarter. Of the regional office projects under construction, 6 are in Seattle totaling 1.16M+ s.f. (0% pre-committed) and 11 are on the Eastside at 6.13M+ s.f. (90% pre-committed). The three largest regional projects are all Amazon committed towers in Bellevue including Vulcan’s 555 Tower (940K s.f.), West Main (1.02M+ s.f.) and Bellevue 600 (999K+ s.f.). It is also noted that Microsoft is also well underway with their 2.5M s.f. campus office expansion which is not shown in the regional construction stats. Other proposed office projects are planned for both the Eastside and Seattle, but many Seattle developers are waiting to see how market conditions play out. Collectively for the region, of the 17 projects underway, 76% of the space is pre-committed.

RENT FORECAST

Three of the five market areas saw decreases in the average rent quotes for the 2nd quarter 2022. Seattle, the Eastside and Northend all posted lower average rent quotes. Seattle dropped from $38.85/s.f./yr last quarter to $38.17/s.f./yr currently, a 1.8% decline. The Eastside, which has the highest average rent in the region at $39.50/s.f./yr, saw the average quote decrease from $39.78/s.f./yr last quarter, a change of 28 bps. The Northend dropped nominally to $28.65/s.f./yr. Both the Southend and Tacoma increased by a few pennies over the 2nd quarter. The Southend average rent quote went from $32.51/s.f./yr last quarter to $32.54/s.f./yr while Tacoma improved nominally from $27.27/s.f./yr last quarter to $27.31/s.f./yr. Rent quotes are reported on a gross expense basis. The rent floor is currently set by Pierce County ($27.31/s.f./yr). At the end of the first half 2022, the Bellevue CBD continues to have highest quoted average rent of any submarket at $53.68/s.f./yr. Comparatively, the average rent quote for the Seattle CBD is $44.23/s.f./yr. The Tacoma CBD is at $27.49/s.f./yr, nearly half the Bellevue CBD rate.

INVESTMENT MARKET

2021 saw improving regional office investment sale activity which carried through the 1st quarter 2022 despite lasting impacts of the 2020 REET increase and lingering pandemic uncertainties among certain investors. For the 2nd quarter of 2022, investment sale activity slowed. Although trophy office assets remain in high demand, there is reluctance on the part of sellers and many buyers have taken a wait and see approach to evaluate the market over the next few quarters. That said, there has been a flurry of office building purchases for redevelopment and a continued steady flow of smaller investment and owner-user office transactions. During the 2nd quarter, the region saw 4 office sales closing above the $20 million mark. Three of these significant transactions occurred in Seattle and one in the Southend. Seattle sales included the transfer of the Lake Union Building at $67M+ ($739/s.f.), Madison Centre at $730M ($959/s.f. & 4.3% cap rate) and Eleven 01 Westlake at $151.5M ($986/s.f.). For the Southend, the significant sale was the DVA Federal Way Building in Federal Way for $93.5M+ ($583/s.f. & 4.0% cap rate). Overall, cap rates remain low but are likely to push upward with the rise in interest rates. Total office sales volume for the quarter was $1,183M+ (among 89 transactions) compared to $1,667M+ last quarter and $1,443M+ the quarter prior.

 
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