Over the 4th quarter 2021, the regional office market saw continued relief from the trend of rising vacancy and negative absorption since the onset of the pandemic. Regional office vacancy is currently 9.60%, down slightly from 9.61% last quarter and 9.66% at mid-year. While regional vacancy has inched down, the largest office market (Seattle) experienced a 14 bp increase in vacancy going from 11.27% last quarter, to 11.41% currently.
Conversely, the second largest market (Eastside) continues to post the lowest regional vacancy at 5.97%. Overall, the stabilizing to modestly decreasing vacancy over the past two quarters is welcome, as the previous six quarters had seen a 371 bp increase in vacancy, fueled by a rapid increase in sublease vacancy inventory and significant negative net absorption in the region. While the region posted negative net absorption of -3.08M+ s.f. during the first two quarters of 2021, we saw positive net absorption of 668K+ s.f. during the 3rd quarter and 883K+ s.f. in the 4th quarter. Sublet vacancy remains high at 18% of total vacancy inventory, but has dropped from 21% at mid-year 2021. Investment sales volume also strengthened in the second half of 2021 and there is an active owner-user market segment. The amount of new construction totals 16 major regional office projects, which are collectively 80% pre-committed. This is due to continued demand for close-in office space from the likes of Amazon, Google, Facebook and Microsoft.
While there has been improvement in the job market, until we have fully moved on from the pandemic, the regional office market will remain volatile. Looking forward to 2022, all eyes will be on local job growth and companies long-term employee positioning trends to repopulate offices, work from home or adopt a hybrid model. As for jobs, the region added 90,800 jobs, or a 4.3% increase over the past 12 months (November 2020 to November 2021). Total regional employment now stands at 2,180,000. While still not at pre-Covid levels, the region has recovered 204,300 of the 240,600 lost jobs. Puget Sound Economic Forecaster’s December 2021 report forecasts total employment growth for 2021 at 2.6% and projects job growth in 2022 to be much higher at 5.7%.
While the regional office market remains unsettled particularly in Seattle, and the state and counties continue masking requirements due to a resurgence of Covid 19 cases caused by the Omicron and Delta variants, the regional office market will continue to fluctuate. While the initial impacts of the pandemic sparked rising vacancy (particularly sublease) and large amounts of negative net office absorption, vacancy has stabilized and we have seen two quarters of positive net absorption. New construction is 80% pre-committed and sales have been steady through year-end 2021. With expected healthy job growth in 2022 and steady tech demand, recent office metrics look encouraging.
VACANT SPACE / VACANCY RATE
At year-end 2021, regional office inventory totals 221.1M+ s.f. Office vacancy remained essentially unchanged over the quarter, after seeing a modest decline in the 3rd quarter which reversed the upward vacancy trend from the six quarters prior. Current regional vacancy is 9.60%, down 1 bp from 9.61% last quarter. Despite modest improvement over the last two quarters, vacancy remains 190 bps higher than the 7.70% vacancy rate at year-end 2020 and 373 bps above the 5.87% rate at the end of 2019. Of the current vacancy inventory, 18% is from sublease space, well above the 11% mark at year-end 2019, but below 21% from two quarters ago. Three of the five regional market areas saw increases in vacancy over the 4th quarter, with only the Southend and Tacoma markets posting decreases. Seattle vacancy increased modestly from 11.27% last quarter to 11.41% currently. Eastside vacancy increased slightly from 5.96% last quarter to 5.97% currently, setting the regional low mark. The high vacancy is in the Southend at 13.87%. Tacoma vacancy is 8.11% and Northend vacancy is 7.51%. The slight drop in regional vacancy over the quarter is the result of positive net regional absorption in the 4th quarter (883.2K+ s.f.) on the heels of 668.3K+ s.f. last quarter, following -3.08M+ s.f. in negative net absorption the first two quarters of 2021. Regional net absorption for all of 2021 is negative at -1.53M+ s.f. with continued high historical sublet vacancies in Seattle (2.42M+) and the Eastside (724K+). Some independent surveys are tracking sublet inventories at higher levels. Seattle posted the largest year-end negative net absorption in 2021 at -1.51M+ s.f. in contrast to positive net absorption of 842K+ s.f. on the Eastside. The regional availability rate ended the quarter at 12.18%, down from 12.27% last quarter and well above 11.06% a year ago.
NEW CONSTRUCTION ACTIVITY
At year-end 2021, there are 16 major office projects under construction in the region, most in Seattle and the Eastside. There were three notable Eastside office deliveries in the 4th quarter, adding 909.5K+ s.f. of new office inventory to the region’s supply. The largest delivery was the Amazon leased 1001 Office Towers in the Bellevue CBD at 714K s.f. Other smaller Eastside deliveries included Mercer Park and 16225 NE 87th St. Significant new construction starts over the quarter included 701 Dexter in Seattle (226K+ s.f.) and Google’s Kirkland Urban South project (300K s.f.) in Kirkland. Of the regional office projects under construction, 5 are in Seattle totaling 1.47M+ s.f. (36% pre-committed) and 10 are on the Eastside totaling 5.86M+ s.f. (91% pre-committed). There is a small spec office project also underway in Gig Harbor. 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 underway with their 2.5M s.f. campus expansion, which is not shown in the regional construction stats. Other proposed office projects are planned in both the Eastside and Seattle, but it remains to be seen which will push ahead in 2022. Fortunately for the region, the 16 projects underway are collectively 80% pre-committed.
Four of the five market areas saw modest increases in average rent quotes over the 4th quarter. Seattle was the only market that posted a decline in average rent quote going from $40.00/s.f./yr last quarter to $39.55/s.f./yr currently, a 1.1% decrease. The Eastside, which has the highest average rent in the region at $40.97/s.f./yr, saw its average increase from $40.70/s.f./yr last quarter, a 0.7% bump. The Northend rent quote increased from $27.82/s.f./yr last quarter to $28.58/s.f./yr currently, while the Southend improved from $30.48/s.f./yr last quarter to $31.65/s.f./yr currently. Pierce County saw its average rent quote go up nominally from $26.93/s.f./yr to $27.20/s.f./yr, a jump of 1.0%. Rent quotes are reported on a gross basis. The rent floor is set by Pierce County at its current rent quote of $27.20/s.f./yr. At year-end 2021, the Bellevue CBD has the highest quoted average rent of any submarket at $55.68/s.f./yr. The average rent quote for the Seattle CBD is $44.94/s.f./yr with the Tacoma CBD at $27.22/s.f./yr, less than half the Bellevue CBD rate.
The first three quarters of 2021 saw improving regional office investment sale activity. Activity remained steady in the 4th quarter, despite the lasting impacts of the 2020 REET increase and some remaining uncertainties among some market participants. There has also been a steady flow of smaller investments and owner-user office purchases fueled by the repositioning among many local businesses. During the 4th quarter, ten office sales closed above the $15 million mark in the region. Most of the significant transactions occurred in Seattle. These include the transfer of Fifth & Bell at $118.7M+ ($589/s.f.), Norton Building at $147.2M+ ($597/s.f.), NorthEdge at $220M ($1,043/s.f.), Cascadian at $164.5M ($779/s.f.) and Northgate Executive Center at $72.3M ($360/s.f.). For the Eastside, the most significant sale was the tenant purchase of Riot Games on Mercer Island for $114M+ ($733/s.f.). Smaller Eastside sales included the transfers of BioControl Systems, Bellevue Terrace and Twilight Center. North Creek Place in Bothell also sold for $27.3M ($290/s.f.). Reported cap rates remain low. Total office sales volume for the quarter was $1,443M+ (among 128 transactions) compared to $2,598M+ last quarter and $2,747.6M in the 4th quarter of 2020.
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