The close of 2019 brought the commercial real estate market into historic territory both on the Eastside and the Puget Sound region as a whole, according to an office research forecast report from Colliers International.
Year-end analysis showed never-before-seen absorption totals and ever-decreasing vacancy rates: The region had the highest annual absorption of the century with 5.6 million square feet and the lowest vacancy rate since 2000, dropping to 7 percent to close the year.
The Pre-Leasing Pipeline
This record-breaking trend looks to extend into 2020, with the continuation of a recent theme: Businesses are laying claim to commercial real estate far before projects are complete, and occasionally even before permits are approved.
For example, Summit III, a 17-story, 372,000-square-foot commercial office tower currently under construction in downtown Bellevue, already is full despite being far from completion. Amazon, continuing its growing presence on the Eastside, signed a pre-lease for approximately 75 percent of the space well before construction had begun.
This hot market has attracted new buyers, such as KKR Investments, which has purchased The Summit portfolio from Hines Global REIT for the highest price tag of the quarter, $756 million.
Other examples include Bellevue’s Spring District, a 36-acre, mixed-use center, which is now 100 percent spoken for, following Facebook’s lease approval for remaining available office space. Like Amazon, Facebook has expanded its Eastside presence, signing leases for more than 400,000 square feet across the Eastside.
“It’s a tech-driven market,” said Denin Grcic, the Colliers International research analyst who conducted the report. “There are primarily a few very large movers, and what really drives their growth is the talent we have in the area.”
These tech giants, Grcic explained, show no sign of slowing down, and he foresees them continuing to set up shop in the area. The only potential risk to the trend comes from macro-level factors such as legislative disruption that might restrict operations, including things such as privacy laws.
But can commercial real estate supply keep up with demand?
More than 1.2 million square feet is projected to be delivered to the Eastside in 2020, yet only 313,000 square feet is available for lease, with 87 percent of Eastside projects already pre-leased.
“You would think you would find some relief on the horizon, but it hasn’t been the case,” Grcic said. “We’re seeing entire buildings going out well before they’re scheduled to deliver.”
Large commercial office spaces continue to be in high demand, with more than 45 percent of Eastside customers looking for spaces of 100,000 square feet or more. This demand will continue to create popularity in pre-leasing, with tenants forced to acquire space not yet available for occupancy.
Small businesses that are unable to acquire space may relocate to smaller Eastside cities, such as Issaquah, where 69,000 square feet of Class A space broke ground in the fourth quarter 2019.
Quarter Four Wrapped
The final quarter of the year, for the most part, stayed true to the trends that had been established earlier in 2019. It showed continued low vacancy rates, with the Eastside dropping to 3.9 percent, a 1.1 percent quarter-over-quarter decrease.
Bellevue’s central business district and Kirkland submarkets saw the most significant drops in availability of the quarter, according to the Colliers’ report. This was largely due to increased tech and co-working tenant move-ins.
The Eastside had the second highest rate of absorption in the region, second only to Seattle, making up 727,600 of the region’s 1.6 million square feet. The total for the region was nearly double that of the same quarter in 2018, and the annual absorption was a 64 percent year-over-year increase.
Google and WeWork influenced absorption rates, occupying close to 480,000 square feet of aggregate space on the Eastside, although Grcic said WeWork’s influence is shifting given recent restructuring.
Overall, the Puget Sound saw $3.3 billion in volume transacted over 32 properties during the quarter, more than triple the previous quarter’s volume and six times more than the same quarter last year. Eastside rents saw a slight decline in quarter four, but ongoing low vacancy should keep rates high into 2020.
At the end of quarter four, 6.9 million square feet of office properties were under construction throughout the region. Experts at JLL in Bellevue expressed concerns over heightened construction costs and labor shortages.
JLL reports large office, multifamily, and industrial development projects commanding construction resources and driving up costs for occupiers.
Grcic said he isn’t worried about overbuilding, as there isn’t enough available space now. However, he admitted that major submarkets are reaching or nearing capacity, and smaller submarkets will begin to feel the pressures of development.