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Seattle Office Market Report

4th Quarter 2023

Posted In — Market Research | Market Report

At year-end 2023, the regional office market continues to struggle with negative net absorption, rising vacancy and meager investment activity.

For the eighth quarter in a row, office vacancy has increased going from 12.98% last quarter to 13.97% currently, a 99 bp surge. The regional market has seen vacancy increases in 14 of the last 16 quarters with a collective 818 bp rise in vacancy since the 2nd quarter 2019’s low mark of 5.79%. There has also been eight consecutive quarters of negative net office absorption. Over the 4th quarter, the region posted -703.6K+ s.f in negative net absorption bringing the year-end 2023 total to -2.192M+ s.f. This follows -1.442M+ s.f. of negative net absorption in 2022 and -1.534M+ s.f. in 2021. While the percentage of sublet vacancy dropped over the quarter to 17%, direct vacancy surged, impacting the two major market areas. Seattle continued its trend of rising vacancy with a 54 bp spike over the quarter bringing vacancy to 16.65%. The Eastside also saw vacancy surge going from 9.54% last quarter to 12.13% currently, a 259 bp spike. Investment sales remain stagnant. New regional construction includes 17 major office projects, 43% pre-committed.

Despite a strong regional job market in 2023, the Seattle economy continues to face high inflation and lackluster job growth projections. Per the Puget Sound Economic Forecaster, regional CPI for 2022 was 8.9% with forecast inflation of 5.3% for 2023, moderating to 2.5% for 2024. Tech sector growth has slowed considerably resulting in revised construction plans for several regional projects. Employment growth ended 2022 at 4.3% per the Economic Forecaster which projects more moderate growth of 1.4% in 2023, dropping to -0.1% for 2024. Staffing shortages also continue to hamper the region.

The regional office market continues to struggle, particularly in its two largest markets of Seattle and more recently the Eastside which are both experiencing high levels of negative net absorption and surging vacancy rates. Looking forward, tepid office demand coupled with historically high availability rates and negative net absorption present concern. Demand trends will also be impacted by future corporate policy for work at home/in office employee requirements. Other metrics to monitor include 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 2023, the Puget Sound region has a total office supply of 232.2M+ s.f. Currently, office vacancy for the region stands at 13.97% compared to 12.98% last quarter and 10.52% a year ago. Current vacancy sets the recent high mark. The last time regional office vacancy exceeded 13% was in the 3rd quarter 2010 when vacancy was 13.23%. After regional office vacancy hit the recent low mark in the 2nd quarter 2019 at 5.79%, it has essentially risen ever since increasing 818 bps to the current mark. Of the total vacant inventory, 17% is from sublease space which is below 20% last quarter. Four of the five regional market areas saw vacancy increase over the 4th quarter. The exception is the Northend where vacancy decreased a modicum to 8.60% from 8.65%. Seattle vacancy increased from 16.11% to 16.65% currently, a 54 bp jump pushing it to the region’s high vacancy mark for a second consecutive quarter. Eastside vacancy experienced the largest rise over the 4th quarter going from 9.54% last quarter to 12.13% currently, a sizable 259 bp jump. Eastside vacancy propelled by the amount of recent direct vacancy added to the amount of sublet vacancy which stands at 1.86M+ s.f. Southend vacancy settled the quarter at 16.33%, up from 15.47% last quarter and Tacoma vacancy went from 9.09% last quarter to 9.30% currently. Rising vacancy is driven in part by the ongoing negative net regional absorption which totaled -703.6K+ s.f. in 4Q 2023, bringing year-end 2023 net absorption to -2.19M+ 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 4th quarter at 17.67%, up from 17.46% last quarter and from 14.12% one year ago.

NEW CONSTRUCTION

At year-end 2023, there are 17 major office projects under construction in the region with all but one in the Seattle and Eastside markets. During the 4th quarter, there was one notable regional office delivery. It was the Facebook leased Spring District Block 5 project in Bellevue which delivered 325K s.f. As many as six additional regional office projects are scheduled to deliver in the 1st quarter of 2024 adding about 1.64M+ s.f. of new regional office supply. There were no notable new office construction starts. Of the office projects under construction, 9 are in Seattle totaling 2.71M+ s.f. (11% pre-committed) with an additional 7 projects on the Eastside adding 3.24M+ s.f. (68% pre-committed). The largest regional office project is the Amazon committed Bellevue 600 (999K+ s.f.) tower in Bellevue. Amazon has also put the brakes on a few other projects in Bellevue. Construction figures exclude Microsoft’s nearly complete 3.0M s.f. campus office expansion and several large life science projects. Although there remain a number of proposed office projects in both Seattle and the Eastside, developers are reluctant to commence any new speculative projects. Collectively for the region, the 17 office projects under construction total 6.05M+ s.f. and are 43% pre-committed.

RENT TRENDS

With a continued upward trend in office vacancy, four of the five market areas saw decreases in average office rent quotes over the 4th quarter. The two largest markets, Seattle and the Eastside, both posted declines in average rent quotes. Seattle saw its average rent quote decrease from $38.45/s.f./yr last quarter to $37.74/s.f./yr currently, a 2% drop. The Eastside, which posts the highest average rent quote in the region at $40.24/s.f./yr, saw rent decline by $0.30/s.f./yr from $40.54/s.f./yr last quarter. The Southend average rent quote also dropped over the 4th quarter from $32.66/s.f./yr to $32.42/s.f./yr currently, while Tacoma rent also declined dropping to $28.28/s.f./yr currently. Northend rents bucked the trend increasing over the quarter to $29.17/s.f./yr from $29.03/s.f./yr last quarter, a $0.14/s.f./yr jump. The Bellevue CBD continues to post the highest average submarket rent quote at $49.61/s.f./yr currently, despite dropping from $50.68/s.f./yr last quarter. Comparatively, the average rent quote for the Seattle CBD is $43.17/s.f./yr. Tacoma CBD is at $28.06/s.f./yr, about 57% of the current average Bellevue CBD quote.

INVESTMENT MARKET

For six consecutive quarters, the regional office investment market has been meager. Year-end 2023 was no exception as the region saw only one significant office investment sale close above the $10 million mark in the 4th quarter. High interest rates, changing economic indices and lingering effects of the 2020 REET increase all continue to hamper the office investment market. Investors are searching for bargain pricing, while sellers don’t want to sell under current conditions. The one significant 4th quarter sale was First Citizens Bank & Trust’s purchase of the 2606 Building in Bellevue. The sale closed in November 2023 for $18.5M+ ($558/s.f.). The seller was one the tenants and will leaseback a portion of the building. There were no significant office sales in Seattle. In general, cap rates have pushed upward amidst high interest rates and market uncertainty, but they are difficult to quantify as there is little to no sample size of sales to extract. Total office sales volume over the quarter was again very low at $99.2M+ (among 47 transactions), an average sale price of $2.1M+. This compares to $147.7M+ last quarter; $92.5M+ in the 2nd 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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