Surging Seattle office market brings towering rent hikes
Originally published August 11, 2015 at 8:00 pm Updated August 12, 2015 at 6:31 am
Owners of office buildings are raising rents at a fast clip in local urban centers, thanks to strong demand led by tech companies. Smaller businesses are feeling squeezed when it comes time to renew leases.
By Sanjay Bhatt
Seattle Times business reporter
Companies are filling up local office space so fast that rents have reached a new high, surpassing the last peak in early 2008, forcing some downtown tenants to look elsewhere for affordable digs.
At the end of June, the rent for premium office space in downtown Seattle was $36.76 a square foot, 7.5 percent higher than a year ago, according to commercial real-estate brokerage CBRE. The vacancy rate was 11.4 percent, down nearly by half from its high of 21 percent five years ago, and is expected to fall further as tenants with new leases move into their space.
The tightening market in Seattle, Bellevue and the suburbs enabled landlords in urban areas of King and Snohomish counties to raise lease rates more rapidly over the past year than in any other metro, including tech and business hotbeds like San Francisco, San Jose, Boston and New York, according to New York-based market research firm Reis.
Metro areas with biggest hikes in office rents
In the second quarter, Seattle — defined as urban areas in King and Snohomish counties — led the nation’s metros in annual growth in asking rent.
1. Seattle, 7.2 percent
2. San Francisco, 6.3
3. San Jose, 5.9
4. Dallas, 5
5. Boston, 4.8
6. New York, 4.8
7. Orange County, 4.8
8. Miami, 3.9
9. Austin, 3.8
10. Philadelphia, 3.7
Source: Reis
As with apartments, downtown Seattle and Bellevue are ground zero for the strong demand. Most of it comes from big technology firms that find the region appealing because its tech labor pool is the largest after Silicon Valley and its rents are still cheaper than in Manhattan, San Francisco or London.
“There’s a lot of confidence that this is a good place for their business to be long term,” said Pat Callahan, CEO of Urban Renaissance Group, which manages a large real-estate portfolio in Seattle, Bellevue and Portland.
Only two years ago, the conventional wisdom was that downtown’s high-rise towers couldn’t land tech tenants, who favored brick-and-beam space in Pioneer Square or midrise modern in South Lake Union or along Elliott Bay.
But in Seattle’s central business district today, a long list of tech firms have set up shop, including Dropbox, Twitter and DocuSign.
San Francisco-based cloud- computing giant Salesforce.com is reportedly in the hunt for around 100,000 square feet in downtown Seattle or Bellevue, brokers say.
Flush with demand for office space, landlords are hiking rents for new leases and renewals. Small tenants, both those in downtown and those trying to get in, are feeling squeezed out.
“With vacancy rates being what they are, the landlords have all the leverage, and I don’t blame them,” said Seattle attorney Jason Newcombe, who plans to move from downtown. “But it does make it difficult for small businesses like myself to maintain a presence here.”
A common gauge of demand, known as net absorption, tracks how much office space is newly taken by tenants. In the first six months this year, tenants absorbed nearly 1.5 million square feet in downtown Seattle — the equivalent of filling up the 76-story Columbia Center.
With six months left, 2015 already ranks as the fifth-biggest year for net absorption in downtown Seattle since 1981, data from brokerage CBRE shows.
Downtown growth
Downtown Seattle accounts for more than three-quarters of the office space newly occupied so far this year in King, Snohomish and Pierce counties, CBRE reports.
Matt Christian, executive director at Cushman & Wakefield Commerce in Seattle, said that a year ago, he represented a client that leased a top floor at 1111 Third Ave. in Seattle for around $30 a square foot. A Canadian investor bought the building in November, leased six floors to Community Health Plan of Washington and now is asking for $36 a square foot — a 20 percent increase — for a lower floor, he said.
“Prices are moving up because new owners are paying huge premiums (for buildings) in Seattle, coupled with large lease transactions that have happened in the last few months,” Christian said. Some brokers believe the new owner will flip the building to capitalize on the growth in rents, he said.
The biggest lease in square feet so far this year is Amazon’s 817,000-square-foot lease of Troy Block, a two-building project in South Lake Union that’s under construction.
And there are plenty of other examples of pre-leases for offices that don’t exist yet:
• Seattle firm Touchstone, which developed Troy Block, also signed Seattle-based Tableau Software to lease a new 210,000-square-foot building north of Gas Works Park that will open in mid-2016.
• Holland America Line, the Seattle-based operator of cruise-ship lines, has leased virtually all of local developer Martin Selig’s new 185,000-square-foot building opening next year at 450 Third Ave. W. in Lower Queen Anne.
• Seattle biotech firm Juno Therapeutics leased about one-third of Alexandia Real Estate Equities’ 287,800-square-foot building under construction at 400 Dexter Ave. N. in South Lake Union.
In the central business district, where vacancies soared during the last recession — nearly 40 percent of Columbia Center, Seattle’s tallest skyscraper, was listed as available at one point — big blocks of space are hard to find now.
“I think it’s become a landlord’s market,” said Stuart Williams, a managing director at commercial real-estate brokerage JLL.
A few big tenants have bought office space: Expedia bought Amgen’s 40-acre campus. Pemco Insurance paid $31.6 million this year for the former Casey Family Foundation headquarters at 1300 Dexter Ave. N. and hopes to move in by mid-November, a spokesman said.
Smaller tenants don’t have that option.
Looking at suburbs
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