The Puget Sound office market continues to stabilize as market fundamentals begin to find momentum.
Overall, office market fundamentals continued to improve during the second half of the year as positive net absorption and stable vacancy rates helped provide an optimistic outlook in 2025. While leasing activity remains relatively subdued compared to pre-pandemic levels, 2024 recorded the highest level of activity since 2021. With more than 8.6M SF of leasing activity during the year, 2024 totals were 9.5% higher than 2023. Additionally, net absorption recorded two positive quarters in 2024 (including +38,414 SF in Q4), and ended the year with -1.5M SF, Although the figure was negative, it was considerably better than 2023 when the annual total was -3.3M SF. As a result, the Puget Sound office market wide vacancy rate experienced a nominal increase in Q4 as the rate of increase has been decelerating for the past few quarters. Some regional submarkets have even seen slight vacancy rate declines
These recent trends, coupled with a positive job growth forecast for 2025, are fueling optimistic expectations for near-term growth. While work from home and hybrid work policies will persist, there is expected to be a conscious 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 mode sooner than expected. Additionally, the recent presidential administration change will likely bring new policies impacting both the economy and commercial real estate – with potential tax breaks and a notable shift to a business-friendly environment that could spur future growth in the office market. The technology and life science industries are also poised for growth in 2025, a positive driver for future office growth in Seattle and across the Puget Sound region.
While a full office rebound appears to be in the distant future, cautious optimism is already taking shape for 2025 with hopes that the market will find solid footing for future growth. A few indicators will be worth monitoring over the near-term including return to office employee policies, levels of sublease space as a percentage of total available space, future space planning models and density levels, leasing and net absorption trends, inflation rates, interest rates, pre-commitment levels for new construction and future lender underwriting policy changes.
VACANT SPACE/RATE
Once again, the regional office market vacancy rate for all office properties increased in Q4 to 15.8%. This was a modest 10-bps increase compared to last quarter and a 190-bps increase compared to Q4 2023. This was also the 12th straight quarterly increase and considerably higher than the pre-pandemic rate of 5.9%. This marked the highest vacancy rate on record, higher than the previous peak of 13.4% in 2010. While these figures represent all office properties in the region, when reviewing data specifically for: leased office properties over 20,000 SF (excluding owner-user buildings), the vacancy rate was 23%, up from 22% last quarter, 21% last year and 7% pre-pandemic. Seattle ended the quarter with the highest vacancy rate at 19.9% (25.4% for leased properties over 20K SF), followed by East King County at 14.4% (19.2% for leased properties over 20K SF). Total sublease availability across the region declined to 6.5M SF at the end of Q4 2024 (representing 15.2% of the total available space) compared to 7.8M SF last year (18.5% of total available space) and 3M SF pre-covid (18.3% of total available space). Overall, the vacancy rate is expected to remain elevated in the near term until the market experiences higher levels of sustained leasing activity and multiple quarters of back-to-back positive net absorption.
RENT TRENDS
Average asking lease rates continued to decline in Q4 2024, registering the sixth straight quarterly decrease to end the year. Market wide, asking rates fell by -1.4% compared to Q3, -3.4% compared to the same time last year and -7.1% since the most recent high in Q1 2023. While the rate of decline may be decelerating compared to the first half of the year, this trend is expected to continue in the near term with the continued rise in vacancy and subdued levels of demand. Much of the annual decline was driven by Seattle (-7.0%) and East King County (-4.3%), while one submarket, South King County, experienced modest year-over-year rent growth (+2.9%). The most expensive submarket remains the entire Eastside submarket’s average at $38.52 PSF, followed by Seattle at $35.08 PSF.
NEW CONSTRUCTION
More than 3.4M SF of new office projects were delivered in 2024 (414,979 SF in Q4), which comes on the heels of nearly 4.0M SF of completions in 2023. Due to the recent surge of deliveries in the past few years, the total under construction new development pipeline fell by 60% compared to last year and 75% lower than 2022 when total under construction was just under 9.2M SF. At the end of Q4 2024, there were six developments under construction totaling 2.3M SF, approximately 58% of which has been preleased. The bulk of the developments are on the Eastside (1.5M SF, 63% of the total) and Seattle (775,328 SF, 33% of the total) with one project falling outside of those submarkets. The largest project under construction is the Amazon Bellevue 600 Tower in Downtown Bellevue (999K+ SF). Construction figures exclude Microsoft’s nearly complete 3.0M SF campus expansion and several life science projects in Seattle. During the quarter, there were three regional office deliveries, all in Seattle including 222 5th Avenue N (198,075 SF of Life Science space), 35 Stone (108,657 SF, 100% preleased by Brooks Sports, and First Light (108,247 SF). No notable new office projects began construction this quarter.
INVESTMENT MARKET
Overall, the Seattle office investment market continued to make strides in 2024. By year-end, 140 properties traded hands totaling more than 4.0M SF and exceeding $1.478B. This was an increase from 2023 when 100 transactions occurred totaling only $472M. On a price per SF basis, pricing increased from $315 PSF on average to $350 PSF. However, even with these positive trends, headwinds persist including a difficult lending environment, increased assets in distress, upcoming loan maturities and pricing volatility. There also continues to be a disconnect between buyer and seller pricing expectations. A total of 16 properties traded above $10M, five (31%) of which occurred in Q4. The top transaction was the Shorenstein Properties purchase of Block 6 Spring District (329,470 SF) in Bellevue for $270M ($810 PSF), followed by Fairbourne Properties purchase of Redmond Town Center (111,368 SF) for $58M ($520 PSF). While many sales continue to produce unpublished cap rates, cap rates have generally pushed upward as a result of elevated interest rates, continued volatility and market uncertainty.
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