Brighter Times Ahead for Seattle Office Market, Broderick Group Q2 2022 Report Suggests
By Jack Stubbs
As the United States – and, indeed, the entire world – continues to emerge and recover from the COVID-19 pandemic, there may be no better time to assess the state of economy and different national markets.
According to commercial real estate services firm Broderick Group’s Second Quarter 2022 Seattle Office Market Report, Emerald City is no different as it appears to be bouncing back from the long-standing impacts of the pandemic. The newly released report looked at various aspects of Seattle’s commercial real estate sector, including major leases, proposed commercial developments, a historical overview of the city’s CRE sector, and broader trends such as work at home following the pandemic.
“Through [the second quarter]Seattle continues to realize some of the lasting impacts of a combination of macroeconomic downturns, looming concerns around [COVID-19] and the resulting work-from-home movement, as well as public safety concerns,” the report said. “These issues are not specific to Seattle and have instead been seen across the country. History has shown our recurring ability to overcome these external threats to office space… the question is not whether the office market will return but when.
Regarding some of its overall findings, the report notes how rising interest rates not only impacted office valuations, but also increased material and labor costs. , subsequently resulting in increased tenant improvement costs for new leases. Prior to the pandemic, the Broderick Group’s Seattle office calculated approximately 5.5 million square feet of active tenant demand, while the second quarter of this year reflected active tenant demand of approximately 2.2 million square feet. .
Despite several metrics that suggest uncertain times ahead for Seattle, Broderick Group analytics suggest long-term fundamentals that will likely support a strong recovery in the time ahead, due to the Puget area’s strong talent supply. Sound in various sectors (for example, Seattle’s growth is expected to be double the national average over the next few years).
Leasing activity throughout the second quarter reflected an active commercial market in the city, with 380,000 square feet of “significant” leases – a mix of new/existing tenants growing and expanding long-term – across the city. overall market, according to the report. Broderick Group is monitoring approximately 400,000 square feet of pending leases that are expected to close by the end of the year.
In terms of product type, the majority of leases signed in the second quarter focused on Class A buildings near major transit lines and high quality amenities and accommodations which will be increasingly sought after. because of the “flight to quality”. preference of market tenants.
Some of the notable leases included Seattle Housing Authority’s lease of 85,000 square feet at 101 Elliott on the waterfront and Eddie Bauer’s lease at 2201 1st Avenue in the Pioneer Square neighborhood for 50,000 square feet.
The work-from-home vs. office trend has long been a notable topic of attention since the start of the pandemic, with investors, developers and tenants keeping a close eye on how this pattern might take shape. The Broderick Group report notes that while the most severe impacts of the pandemic are in the rear-view mirror, the expected return of workers to the physical workplace has not materialized.
“Overall, office buildings are struggling to achieve an average of over 40% occupancy. As large corporations navigate a changing workplace, they have been caught off guard by the stamina of remote work…most companies are prolonging long-term decisions when it comes to their real estate portfolios. A number are reducing the area leased as leases expire,” the report said.
While a recent Stanford study indicated that employees working from home were 13% more productive than those working in person, it’s probably too early to discern the long-term effects of working from home versus working in person.
Similarly, vacancy rates in Seattle during the second quarter reflected uncertainty about the impact of the above trends: Seattle’s overall direct vacancy rate increased to 13.84 %, while sublet vacancy increased slightly to 4.67%. While Class A assets remain desirable for tenants, Asset Class B/C buildings continue to struggle the most as businesses take advantage of lower Class A rental rates or alternative affordable subletting.
The report also looked at Seattle’s Class A rental rates in its various submarkets. The overall Class A average gross rental rate was $45.95 per square foot. This figure was $48.59 for the Central Business District; $47.73 for Lake Union; and $44.46 in the Denny Regrade submarket.
Looking ahead, the development pipeline suggests little slowdown in activity in Seattle’s commercial real estate market. The second quarter saw the delivery of three new office developments: Dexter Yard and 520 Westlake, both in Lake Union, and 1075 Lenora located in the Denny Regrade/Belltown neighborhood.
Dexter Yard, a 500,000 square foot life sciences and office development, has been delivered 24% pre-leased with approximately 390,000 square feet still vacant. Vulcan’s 372,000 square foot business at 520 Westlake has been fully pre-leased. Holland Partners’ residential/office development 1075 Lenora has been delivered with 100% vacancy in the office portion, the report says. With construction delays in the first half of 2022, Broderick Group expects a number of new office developments currently under construction to be delivered in 2023 and 2024.