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Seattle Office Market Report

2nd Quarter 2024

Posted In — Market Research | Market Report

Seattle’s office market continues to struggle amid lackluster tenant demand, rising sublease space, and record-high vacancy rates.

Office market dynamics in the Puget Sound region continue to be suppressed as market fundamentals continue to underperform. As a region, the market-wide vacancy rate increased for the tenth consecutive quarter, net absorption totals were negative 1.5 MSF for the first half of the year, and asking lease rates dropped 4% year-over-year. These trends are especially evident in the region’s largest market, Seat tle, which is being negatively impacted by workforce trends with elevated levels of remote workers and hybrid employees, depressed volumes of foot traffic (50% lower than pre-COVID) and the lowest levels of occupancy in the region.

While Seattle’s regional job market appears to be relatively stable, the overall economy continues to see high inflation and lackluster job growth projections. Per the Puget Sound Economic Forecaster, regional CPI for 2023 was 5.3% with a moderating inflation forecast of 2.4% for 2024 and 2.2% for 2025. According to the U.S. Bureau of Labor Statistics, over the last 12 months, the CPI-U increased 3.8% from June 2023 to June 2024. Tech sector growth has also slowed considerably in recent years, resulting in lower regional office demand. Employment growth ended in 2023 at 1.6% and is projected to be slightly negative in 2024 while increasing to positive 0.7% for 2025.

Similar trends are expected to persist during the back half of 2024 with tepid office demand coupled with historically high vacancy/ availability rates and negative net absorption. Although a full office rebound appears to be in the distant future, it will be worth monitoring a few indicators during the near term including in-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

The regional vacancy rate increased for the 10th straight quarter, ending 2Q 2024 at 15.0%. This was a nominal increase of 4 basis points compared to last quarter, but a 280-basis point jump since last year and a 900-basis point climb since the onset of the pandemic in 2020. This is the highest level of vacancy since 13.4% in 2010, the region’s previous peak before the current upward cycle. Seattle ended the quarter with the highest vacancy rate at 18.7% (up from 18.4% last quarter) followed by South King County at 16.8% (up from 16.4% last quarter) and Pierce County at 10.9% (up from 10.8% last quarter). While three submarkets experienced a rise in vacancy, the remaining two submarkets posted slight declines quarter-over-quarter with Eastside at 12.6% (down from 12.8% last quarter) and Snohomish County at 9.4% (down from 10% last quarter). Contributing to the overall rise in vacancy has been the continued increase in sublease space, totaling 5.4 MSF of vacancy, up 300% compared to pre-COVID and representing 15% of the total vacant space for lease in the region. The availability rate also increased during the quarter to 17.2%, also at a historically high level. The 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.

NEW CONSTRUCTION

With a handful of deliveries over the past year, the development pipeline across the region fell by 35% compared to early 2023. At the end of 2Q 2024, there were 13 projects under construction totaling 4.6 MSF, approximately 40% of which has been preleased. The bulk of the developments are in Seattle (2.5 MSF and 54% of the total) and Eastside (2.0 MSF and 44% of the total) with one property falling outside of those submarkets.

The largest project under construction is the Amazon Bellevue 600 Tower in Bellevue (999K+ SF). Construction figures exclude Microsoft’s nearly complete 3.0 MSF campus expansion and several life science projects in Seattle. During the quarter, there were two regional office completions. On the Eastside, The Artise (605K+ SF) was delivered 100% preleased to Amazon, while the Kirkland Ascent project (56K+ SF) completed at 45% preleased. There were no notable new office construction starts during the quarter and while there remains a decent number of proposed projects in the pipeline, developers are delaying new construction starts until the market and economy see a sustained recovery pattern.

RENT TRENDS

Overall, the region experienced another quarterly decline in asking rents, dropping by 0.7% compared to last quarter and falling 4.1% compared to the same time last year. This was the fourth straight quarterly decline, which is to be expected with the continued rise in vacancy and subdued levels of demand. On the bright side, three of the five major markets experienced a rent increase quarter-over-quarter including Snohomish County (+1.3%), South King County (+0.4%), and Pierce County (+0.1%). Meanwhile, the two largest markets in the region experienced asking rent declines, Seattle (-1.4%) and Eastside (-1.1%). These trends also hold true when looking at year-over-year rent growth with the same three markets experiencing nominal rent growth compared to 2Q 2023. The highest rent can be found on the Eastside with $39.68/SF/YR asking rates, driven by Bellevue CBD at $49.14/SF/YR compared to $$49.57/SF/YR last quarter. The asking rate for Seattle’s CBD dropped from $43.24/SF/YR last quarter to $41.80/SF/YR, while Tacoma CBD ended 2Q 2024 at $28.46/SF/YR.

INVESTMENT MARKET

The office investment market continues to experience various headwinds and challenges. High interest rates, changing economic indices and lingering effects of the 2020 REET increase all continue to take their toll. There also continues to be a notable disconnect in expectations between buyers and sellers. Some assets have been placed on the market in recent quarters with pricing expectations that weren’t realized, so they either didn’t sell or were traded well below expectations. As a result, investors are searching for bargain basement pricing and sellers are reluctant to sell under current conditions and pricing metrics. The region completed 69 sale transactions during the quarter totaling more than $215 million in sales volume. However, many of the properties sold in 2Q 2024 were smaller in size (average of 30K SF) and sold for lower $/SF averages than previous quarters ($260/SF for properties over 10K SF). Two sales exceeded $10 million with Alaska Airlines purchasing Boeing Longacres Park (bldgs. 25-01) in Renton/Tukwila from Unico Properties for $85,750,000 ($238/SF). The next largest sale was the Dexter Horton Building located at 710 2nd Ave in Seattle was purchased by King County for $36.6M ($110/SF). Cap rates have pushed upward as a result of high interest rates and market uncertainty, but they are difficult to quantify as there is little to no sample size of sales to extract rates.

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