The Seattle market is currently experiencing the lowest tenant demand in 30 years. Both early stage companies and strong credit corporations are tightening their belts and are reluctant to commit capital. Large companies with strong credit usually look for cost saving consolidation opportunities, but unfortunately, this requires some up-front capital, which is being frozen by financially savvy executives.
Many new developments commenced 2 to 3 years ago as Seattle was rated one of the top five real estate markets in the nation. Those projects broke ground without the foresight of the recession that followed. There are currently four new vacant office buildings complete or close to completion. Those buildings include West 8th, 1918 Stewart, 2201 Westlake and 1100 Eastlake. All of their anxious landlords and investors are competing for a small pool tenants. Additionally, the downfall of Washington Mutual has brought thousands of additional square feet onto market. JP Morgan Chase refuted most leases through its bankruptcy acquisition of Washington Mutual. This perfect storm of over supply totals more than 6,500,000 square feet of class A and B office space available for lease.
The Eastside markets have been saved from excessive vacancy owing to Microsoft’s expansion last year. However, overall tenant activity is slower than in recent decades. The majority of Bellevue's office space is controlled under ten major corporations. As those groups cut jobs and return office space, Bellevue's previous low vacancy rate of 2 percent is increasing daily.
ShareBuilder has leased new space, subleasing approximately 120,000 square feet from Starbucks, which will be highly cost-effective. Other tenants that are currently showing activity are non-profit organizations looking to access the Government’s stimulus money or other available grant opportunities. An example is the recently announced Letter of Intent between Path, a Global Health Organization, and Vulcan, Paul Allen's real estate company that is developing South Lake Union. Vulcan was the recipient of the region’s largest tenant lease in decades, Amazon's lease for 1.6 million square feet. If Path chooses to move forward, it will take a large space off the market in one of the four vacant buildings outlined above.
Other speculative tenants include Frank Russell, which is rumored to be heading to Seattle from Tacoma. The firm has the financial capabilities to purchase the Washington Mutual Plaza, which JP Morgan Chase obtained when it acquired Washington Mutual's assets. The price, location and visibility of the Washington Mutual Plaza are ideal for Frank Russell.
Rental rates have decreased since the downturn. Only 2 years ago, some Seattle buyers paid more than $400 per square foot. Those owners are trying to outlast the lack of demand and obtain the rents that support their purchase prices. Unfortunately, rents of mid $40’s to mid $50’s per square foot have only been reached in Seattle a few times, where typical rents range from $30 to $40 per square foot for Class A office space.
There were several speculative office buildings being planned and permitted as the office space market began to soften. Examples include Nitze Stagen's Fifth and Columbia, Triad's Civic Plaza Center and Schnitzer's College Club project. Millions have been spent on land acquisition, architectural design and City permits. The permits and design plans for these projects are on hold for 3 to 5 years, until a significant portion of the 6.5 million square feet of available space is leased. Contractors, architects and other service providers to Seattle's real estate market are struggling to make ends meet as a result and this impacts the entire region. Some savvy developers however have chosen to beat the market to the bottom and have dropped rates aggressively in order to secure tenants.
— Bob Mooney is a managing director for Jones Lang LaSalle.