A Tale of Two Markets – Office

Posted In — Market Research | Trend Article

Dramatically different commercial real estate markets – that’s what was seen for the first quarter of 2020. Initially, a robust, healthy economy enjoyed by all, but overnight that rosy time was followed by the shock of a disruptive black swan event that virtually halted all market activity as the onset of the COVID-19 pandemic struck in early March.

The impacts were felt immediately, reflected in reports from across key West Coast markets. Here is a glance of the Q1 2020 numbers, how these markets and asset types fared, and an overview of market statistics, including transaction volume, sales, pricing, cap rates, absorption, construction, rental rates, and reported deals.



The first quarter was celebrated with the addition of new cranes and continued rampant construction activity in Seattle and Bellevue, with six new construction starts. Developers continued to push projects through the entitlement process, looking to snag pre-commitments from a tech titan. The quarter ended at the extreme opposite end of the spectrum with a complete regional construction stoppage, permit desks closing, the capital markets virtually coming to a halt due to the Coronavirus pandemic, and Washington Governor Jay Inslee’s statewide call to stay at home.

The Seattle and Eastside markets dominated the under-construction category, with 20 of the 21 major office projects in the region occurring in those two markets, of which 70% is pre-leased. They accounted for five significant deliveries, adding 1.4 million square feet of new supply. The two largest completions were Facebook’s Spring District Block 16 lease at 338,000 square feet in Bellevue, and Skanska’s 2+U Tower at 686,908 square feet.

The Puget Sound regional office market’s first quarter results saw vacancies inch up to 6.05%, from 5.87% last quarter. The first quarter ended showing solid net office absorption of 2,055,484 square feet in the region with delivery of five major office projects boosting the region’s office inventory to just under 211.1 million square feet.

Seattle’s sales activity experienced a significant decline over the first quarter due to the excise tax rate increase that took effect on January 1st. In fact, only three office transactions exceeding $15 million closed so far in 2020. Total sales volume for the quarter was $556.7 million compared to $4,683.3 million last quarter, an 88% decline.

While 2019 will undoubtedly be remembered for its office boom driven by the aggressive footprint expansions of tech firms in the Seattle region, the 2020 chapter has yet to be written. The market will certainly look strikingly different as the year progresses. Based on the early reports from Kidder Mathews professionals and other office market participants, differing views are emerging about the extent to which market conditions will be impacted. Regardless, what is clear is that most deals and business negotiations have been sidelined for now.


Portland’s rising economy spurred large-scale construction projects and drove tenant demand in Q1 2020’s dynamic market. Rental rates have grown consecutively, reporting an average of $28.50 full service, a 7.5% rise year-over-year. Portland’s direct vacancy remained flat from a year ago, posting a 7.4% rate at the end of the first quarter. Leasing activity slowed down posting 898,522 square feet, a 37% decrease from the previous quarter and 38% year-over-year.

Sale volume in the Portland area dipped slightly in the first quarter, finishing at $387 million. The prior quarter stood at a high of $493 million in volume. Meanwhile, volume in the first quarter decreased by nearly 22%. The average price per square foot fell almost 32%. Cap rates rose a mere ten basis points.

The office development pipeline remains steady in Portland, with 3.41 million square feet of product under construction, of which 2.17 million square feet is expected to arrive by year-end. This supply pipeline has been on the radar for some time, but given the negative absorption trends in the past quarters and the COVID-19 pandemic’s impact at the end of the quarter, the market implications could be significant. As a result, some downward rent pressure and an upward trend on concessions, incentives, and sublease inventory are expected, especially near term.

Bay Area

The San Francisco office market experienced a rise in sublease availability and lower leasing activity in the first quarter, partially driven by the COVID-19 crisis. Rental rates averaged $68.67 full service, a slight bump from the previous quarter’s rate of $67.10. Sale activity also fell to $264 million at the end of March, an 84% decrease from the prior quarter and an 80% loss year-over-year.

Steady tenant demand caused direct rental rates to rise minimally, standing at an average of $68.67 full service. This represents a 2% increase from the previous quarter and an 8% rise year-over-year. Leasing activity slowed in the first quarter, recording 1.32 million square feet; a sharp 55% decrease from a year ago, where activity stood at 2.94 million square feet.

The overall San Francisco office market posted a loss of just over 630,000 square feet of direct net absorption by the end of March, significantly down from the previous quarter’s gain of 820,000 square feet.

There were no office deliveries in the first quarter; however, an active development pipeline remains in San Francisco, with over 3.37 million square feet under construction. The largest project is First Street Tower, a massive 1.2-million-square-foot, 61-story office tower in the South Financial District.

Los Angeles

The Los Angeles office market remained robust in the first quarter before the effects of COVID-19 took hold. Healthy demand fundamentals and limited vacancies pushed rental rates past post-recession highs. The live-work-play lifestyle Los Angeles offers continues to attract many tech and entertainment firms into the metro area office market. This caused direct net absorption to progress further as tenant movement throughout the metro market reported positive for the second consecutive quarter.

Asking lease rates in Q1 increased by 3.72% from the prior year. The Los Angeles office market experienced some of the highest average asking lease rates to date, concluding at $3.35 per square foot on a full service basis. Investors have also remained active in the market, recording more than $1.03 billion in sales transactions for the quarter.

At the end of the first quarter, the Los Angeles office market reported 367,250 square feet of direct net absorption. Penske Media Corp. capped the quarter’s leasing activities with a 75,769-square foot deal at 11175 Santa Monica Blvd. in Los Angeles. Many companies and office users are opting to suspend any real estate decisions for the next 30 to 90 days to assess the market. Additionally, many tenants have requested rent breaks or payment deferrals with landlords. It remains uncertain if the pattern will substantially increase, which will depend on the length of the current crisis.

Orange County

The Orange County office market began the quarter on firm footing, as healthy demand fundamentals pushed asking rents further past post-recession highs and vacancy levels remained relatively stagnant. Direct net absorption continued to improve in the first quarter as tenant movement throughout the metro reported positive. In addition, investors have continued to trade trophy properties and office campuses, recording over $268.7 million in sales for the quarter.

The office market improved in the first quarter in terms of tenant movement, posting 247,006 square feet of positive direct net absorption. Asking lease rates remained relatively flat increasing by 1.47% from one year prior. Although rental rate growth has softened and will likely decrease moving forward, average asking lease rates pushed past post-recession highs concluding the first quarter at $2.76 per square foot on a full service basis.

San Diego

While the San Diego office market experienced a record-breaking year in 2019, the first quarter of 2020 ended with an unprecedented sudden disruption to the industry in the form of COVID-19. Prior to the outbreak, San Diego’s robust local economy supported an equally strong local office market.

The San Diego office market experienced the most negative net absorption in a single quarter then in the past five years, posting roughly 458,702 square feet of negative net absorption in the first quarter. Some sizable move-outs before the COVID-19 outbreak were largely to blame.

An uptick was experienced in the office vacancy rate to 10.5% from the previous record low in 2019 of 9.9%. The rise in vacancy had already started before the onset of COVID-19, partly due to the previously mentioned large move-outs. On the other end of the spectrum, asking lease rates soared to an all-time record-breaking rate of $2.91 per square foot on a full service basis. That is a level the San Diego office market has never experienced, further reflecting the vastly competitive nature of the market pre-COVID-19.

On the sales activity side, the office market was already showing signs of deceleration before the COVID-19 outbreak began in mid-March. Sales volume decreased and average price per square foot posted at $275 in the first quarter, coming off the post-recession record high of $363 per square foot at year-end 2019.


The Phoenix office market experienced a record-breaking year in 2019, that featured significant relocations and expansions to the region, which bolstered a strong showing in the first quarter. The office market benefitted from robust demand, fueled by a diverse economy, population growth, and a growing talented labor pool.

The Phoenix office market’s vacancy and availability rate increased slightly in the first quarter to 13.1% and 16.4%, respectively, after coming off a record low for both metrics at the end of 2019. Vacancies are currently at the cyclical low – a factor contributing to the recent vacancy compression.

Robust rent growth has previously been attributed to a relative lack of new spec supply in the development pipeline. However, speculative construction for the office market is starting to ramp up in Phoenix. The first quarter posted nearly 3.5 million square feet of construction volume and roughly 2.5 million is slated to deliver by year’s end. The increase in development is a much needed relief to offset the limited availability, as demand has consistently outpaced new supply.

Average asking rental rates in the first quarter for office properties countywide soared to $27.60 per square foot on a full service basis; a number the market has never experienced previously.

The average sale price for Phoenix office assets peaked at a record high at the end of 2019, at a notable $230.79 per square foot, and then dipped to $177.73 in Q1. Transaction volume also decreased to roughly 1.5 million square feet.


The first quarter commercial real estate office market performance played out against the perplexing health pandemic that inflicted an immense economic and emotional toll on the nation. It will require innovative leaders with a calm head and the vision to see through a time of enormous uncertainty to rise to the challenge. While the remarkable turn of events was unexpected, savvy commercial real estate professionals understand, despite the current uncertainty and damage, that long-term prospects present opportunities. Experts know the disruption caused by stay-at-home orders and the heart-wrenching loss of lives was not brought on by a fundamental market flaw, financial crisis, housing bubble burst, or a dot.com bomb. Thus, markets are expected to rebound since many of the drivers remain. Smart players recognize now is a time to build a strategy that is ready to capture future value.

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