For startups and established businesses alike, finding Eastside office space can be challenging.

 

If you think it’s difficult to buy a home on the Eastside, consider the area’s commercial real estate market. Many of the same factors — a competitive marketplace, scant inventory, and a booming economy — present challenges for business owners trying to find a place to house employees.

Local tech heavyweights such as Amazon and Microsoft are competing with middleweights such as Concur, Smartsheet, and Blueprint Consulting for Class A office space on the Eastside. Added to this mix is pressure from Silicon Valley behemoths Facebook, Google, and Oracle, and even Far East tech titans Tencent, Huawei, Alibaba, and Baidu — companies all increasing their Eastside presence. The battle is on, indeed.

Last year, the Urban Land Institute named the greater Seattle metropolitan market (an area that includes the Eastside) the nation’s top market, citing its job opportunities, diverse economy, and educated workforce. Many regions would envy this kind of attention, but it does come with its share of discomfort. Namely, fierce competition for shrinking available office space.

“Very little new product (is) scheduled to be delivered in the next two years … (and) the Eastside, by all accounts, seems to be blowing through any expectations of a slowdown.”

“Very little new product (is) scheduled to be delivered in the next two years . . . (and) the Eastside, by all accounts, seems to be blowing through any expectations of a slowdown,” noted the researchers at the Broderick Group, a commercial real estate company in Bellevue and Seattle that issues quarterly reports on the Eastside’s commercial real estate market.

The last wave of downtown Bellevue high-rise office towers — Lincoln Square South (31 stories, 720,000 square feet), 929 Office Tower (19 stories, 462,000 square feet), and Centre 425 (16 stories, 360,000 square feet) — were completed in 2017.

At one point, concern loomed that those three buildings, with a grand total of nearly 1.6 million square feet of office space coming online at once, might create a surplus of Class A inventory. Fast-forward to today, and that office space is 95 percent leased — Salesforce and AdColony moved into 929 Office Tower; Valve, WeWork, Samsung, and the Ballmer Group moved into Lincoln Square South; and Amazon leased the entire Centre 425 building — and those developers look prescient.

 

“If you look at the last round of buildings developed, most brokers on the market thought the first building completed would hit a home run, the second would meet underwriting expectations, and the third would get killed,” said Jeff Jeremiah, senior associate at commercial real estate firm Colliers International in Bellevue. “Centre 425 was fortunate enough to draw Amazon, which is why you see all three buildings nearing full occupancy.”

Recent data compiled by Colliers International Bellevue pegged the vacancy rate in Bellevue’s Central Business District at 5.2 percent; 4.7 percent throughout the Eastside; and 9.5 percent among 21 Class A office towers in downtown Bellevue (note: the vacancy rate in five of the 21 office towers is 0 percent).

So, where’s the relief?

In Redmond, Microsoft, which leases office space in cities throughout the Eastside, will spend the next seven years — and more than $1 billion — redeveloping its 500-acre corporate headquarters. The project will make room for 8,000 additional employees.

Kirkland Urban North and Central are expected to open this year, adding 380,000 square feet of Class A office space to the Eastside’s portfolio. Tableau Software will occupy 92,000 square feet; Wave Broadband will lease 87,500 square feet. A third phase, Kirkland Urban South, could be completed in 2021 and create 235,000 square feet of Class A space.

“Companies like Vulcan, who possess the knowledge, experience, and ability to build large projects, are becoming more and more active.”

But most of the focus is on Bellevue.

Downtown Bellevue has caught the attention of Paul Allen’s Vulcan Real Estate, the company that owned much of the land in South Lake Union that is now home to the Amazon campus. Between May 2016 and August 2017, Vulcan spent more than $105 million to acquire four underutilized parcels of land in Bellevue’s central business district.

“Companies like Vulcan, who possess the knowledge, experience, and ability to build large projects, are becoming more and more active,” observed Jeremiah. “Vulcan did really, really well on their South Lake Union (properties). They have capital to spend.”

Expedia is expected to break ground this year on a new headquarters campus in Seattle’s Interbay neighborhood, and eventually move most (but not all) of its employees from downtown Bellevue to the new location in late 2019. The good news? The move will free up more than 400,000 square feet of office space. The bad news? Businesses likely will have to act fast to claim it.

Despite the pressure for office space, developers still prefer to have leases in place and deals signed with future tenants before any dirt is turned. Data compiled by the Broderick Group and Colliers International show several Eastside developments are on the horizon and could break ground if deals were inked today: Summit III in Bellevue (370,000 square feet; could be completed as early as 2019), Esterra Park in Redmond (720,000 square feet; could be completed as early as 2019), Talus Corporate Center in Issaquah (610,000 square feet; could be completed as early as 2020), and Canyon Park 18 in Bothell (115,000 square feet; could be completed as early as 2021).

Perhaps the most intriguing and anticipated moves in this chess-like game of commercial real estate development center on Amazon’s presence in downtown Bellevue, according to Jeremiah at Colliers. The company leases Centre 425 in its entirety. A sizeable chunk of the Expedia Tower, located one block away, will be available when the online travel company moves most of its employees to Seattle. Summit III (17 stories; 370,000 square feet), located across the street from the Expedia Tower, could break ground this year and open in 2019. And Vulcan’s parcels are within walking distance to all of these projects.

“(Amazon) could start to create kind of a campus there,” said Jeremiah. “When you evaluate how much space they could potentially lease in Bellevue — and that’s assuming they are going to continue to grow — it will be pretty intriguing to watch.”

 

Eastside office space

Tape-Measure Towers

Revised zoning codes now allow for taller buildings in Bellevue. Will this spur developers to break ground on the next soaring skyscrapers?

Evidence of how history can come full circle is found at the busy intersection of 106th Avenue Northeast and Northeast Fourth Street in downtown Bellevue. In 1956, this was the site of the Puget Power Building — a four-story, 52-foot-tall structure that was the tallest building in Bellevue and elsewhere on the Eastside.

The building was razed in 2006, and Bellevue Towers — a retail-and-residential complex comprised of two shimmering, steel-and-glass, high-rises — was constructed. Tower One topped out at 430 feet; Tower Two topped out at 450 feet, the tallest residential building downtown.

Visit downtown today, and it’s hard to believe a four-story building could be considered tall, especially when the five tallest buildings in downtown Bellevue today stretch more than 400 feet high. These towering totems typify most larger American cities, with taller towers denoting more significance. “Skyscrapers are the pyramids of our civilization, permanent monuments of our existence,” noted The New York Times recently, while reporting on the 61-story, 1,070-foot Salesforce Tower, which opened in San Francisco in January. “They show who is in charge and what they think about themselves.”

Bellevue Towers could soon be dwarfed by newer and taller structures. The City of Bellevue changed its zoning laws in October to allow for taller high-rise buildings in different downtown pockets:

  • Downtown Central Business District: from 450 feet to 600 feet.
  • Bellevue City Hall Eastlink light rail station (Northeast Sixth Street and 110th Avenue Northeast / 112th Avenue Northeast): from 200 feet to 403 feet.
  • East Main Street light rail station (Main Street and 112th Avenue Northeast): from 90 feet to 230 feet.

The impetus for changing Bellevue’s zoning and height allowances was one component of a four-year project called the Downtown Livability Initiative, which aimed to address issues such as transportation, public safety, and land use.

Will taller buildings spur more high-rise office tower development?

“At this time, it’s a little too early to determine the effects of this effort,” said City of Bellevue deputy communications officer Brad Harwood. “Currently, we have one project — The Elan, located north of Northeast Eighth Street, between Bellevue Way Northeast and 102nd Avenue Northeast — in the pre-application stage that is intending to take advantage of the increased heights downtown. Others are in early conversations with the city, but have not submitted formal applications to date.”

For Colliers International Bellevue senior associate Jeff Jeremiah, market demand, more than revised land use codes, will dictate when dirt is turned on the next downtown high-rise. Still, allowing taller buildings is important, he noted, because it means developers can offer more square footage and maximize their returns. “A lot of developers are considering developing and now will have the ability to try and attract larger, single-tenant users like Amazon for their building,” he said.

 

Eastside office space building

Office Space Observations

Kidder Mathews senior vice president Gary B. Guenther shared his thoughts on Eastside commercial real estate during the Bellevue Chamber of Commerce’s Eastside Economic Forecast event in November. Here are three of his observations.

The Amazon Effect

We saw Amazon lease their first space (at Centre 425) in downtown Bellevue. This is going to be a base for further growth in our market. There are rumors of that with the office space they are looking at.

When you talk about Amazon, it’s also important to talk about their effect on brick-and-mortar retail. They have made it ridiculously easy to shop. But the reality is that online retail is only 9 percent of all retail sales in the United States. There are certain retailers (that), for lack of a better term, are struggling.

But we are also seeing certain segments thrive, particularly “experiential” retail. That’s a retail experience or shopping experience you can’t get online. There are great examples of plenty of stores over in the Bellevue Collection that typify this type of retail. Another example is the grocery store that has beer on tap, (or) the new cruise travel store by Triple-A Washington in Bellevue. I challenge you to go in that store and not want to walk out without any kind of a trip or cruise. It’s just such a great retail experience. Expect to see more of those type of retail expanding and doing well.

Bay Area Bounty

We are seeing a tremendous (number) of “cross-market” tenants who have headquarters elsewhere and are expanding into our market to take advantage of our talent and resources.

Google in Kirkland has expanded into 360,000 square feet on their campus, and they have plans to further expand. SpaceX in Redmond is expanding. Oculus, the virtual reality arm of Facebook, is gobbling up lots of space and looking for 500,000 to 800,000 square feet in our market.

Can we expect this cross-market migration to continue? (Here’s) a quick quiz to help answer that question. Building A, Lincoln Square South, is one of the new developments in downtown Bellevue, and (leases for) approximately $60 per square foot. Building B (leases for) $120 per square foot, and (is) located in Palo Alto. We have a lot of room to go before we reach the upper limits of our friends down in the Bay Area.

We are less expensive than the Bay Area. But Portland is a lot less expensive than us. We are $50 (per square foot) average for Class A office space. San Francisco is $75 to $80 on average. Portland is at $26. I think that’s an area of exposure if we don’t address some of these issues of transportation, traffic, and affordability. We could see some leakage to Portland.

Be Speedy, Not Greedy

I expect vacancy rates will stay relatively low. We don’t have much new (inventory) coming on the market. If there’s any simple advice I can give from a commercial real estate standpoint, (it’s this): If you are a tenant or you are a buyer, start the process early, be prepared, do your homework, and talk to somebody like me. When the opportunity presents itself, be ready to move quickly. From a landlord or a seller’s standpoint, enjoy the ride we are on right now. But don’t be too greedy because you know it doesn’t last forever — although right now it seems like it’s going to.

 

Eastside office space buildings

Eastside Commercial Real Estate Data

 

Eastside office space

Blockbuster Commercial Real Estate Sales

Eastside commercial real estate brokers took note in October when Schnitzer West announced it would sell Centre 425 in downtown Bellevue for $313 million. A hefty price tag, for sure, but even more impressive when you consider it set a record for price-per-square-foot: $877. Here is a look at 5 of the biggest Eastside commercial real estate deals in 2017.

#1. Centre 425

Location: Bellevue Central Business District

Square Footage: 356,909

Year Built: 2017

Sale Price: $313M

Price per Square Foot: $876.97

Buyer: Tristar / RFR Holdings

Seller: Schnitzer West

 

#2. 90 East

Location: Coal Creek / Issaquah

Square Footage: 573,000

Year Built: 2000

Sale Price: $153M

Price per Square Foot: $267.02

Buyer: Kennedy Wilson Properties

Seller: Talon Private Capital

 

#3. Willows Commerce Park II

Location: Redmond

Square Footage: 426,548

Year Built: 1999

Sale Price: $75.25M

Price per Square Foot: $176.40

Buyer: Kennedy Wilson Properties

Seller: Blackstone

 

#4. I-90 Commons

Location: I-90 Corridor

Square Footage: 142,156

Year Built: 1988

Sale Price: $46.5M

Price per Square Foot: $327.11

Buyer: Lake Washington Partners

Seller: Clarion Partners

#5. Island Corporate Center

Location: Mercer Island

Square Footage: 105,796

Year Built: 1987

Sale Price: $41M

Price per Square Foot: $387.54

Buyer: Sterling Realty

Seller: Walton Street Capital

 

A California Invasion

Bay Area tech workers aren’t the only ones making inroads on the Eastside. Last year, Beverly Hills, California-based real estate investment company Kennedy Wilson spent nearly $270 million to purchase three commercial real estate properties:

90 East
Issaquah  |  573,000 square feet  |  $153 million

Willows Commerce Park II
Redmond  |  426,548 square feet  |  $75.245 million)

Willows Commerce Park II – Building E
Redmond  |  133,382 square feet  |  $38.9 million

The purchases followed a move made in 2016, when the company purchased Bellevue’s Eastgate Office Park for $74.8 million. In total, Kennedy Wilson Properties has amassed more than 1.4 million square feet of office space in Washington state.

 

Microsoft Hits Refresh

The Eastside company will spend more than $1 billion to revamp its Redmond headquarters.

Microsoft has been linked to Redmond ever since the tech company planted its corporate headquarters on 88 acres there in 1986. Fast-forward 30 years, and the campus has grown to 500 acres with 125 buildings offering nearly 15 million square feet of office space.

But Microsoft’s presence isn’t limited to its Redmond campus. The company also occupies nearly one-third of the entire Eastside commercial real estate market, and its workers fill office buildings in Bellevue, Eastgate, Kirkland, and Issaquah.

This fall, the company will hit refresh on its Redmond headquarters and spend the next five to seven years — and more than a billion dollars — on a campus renovation that will replace 12 existing and aged buildings with 18 new buildings, renovate 6.7 million square feet of existing office space, add 2.5 million square feet of new office space, and accommodate 8,000 additional employees.

In addition, the project will include a two-acre plaza large enough for events that can accommodate up to 12,000 people; a new bridge that will span State Route 520 connecting the company’s East and West Redmond campuses, and serve pedestrians and cyclists; running/walking trails, sports facilities, and green spaces; company store, retail shops, and restaurants; and an underground parking facility.

The goal is to create a campus-like environment much like what is seen at Facebook and Google in Silicon Valley. These amenity-packed environments give employees few reasons to leave the office, and could help Microsoft compete with Google, Amazon, and others for local tech talent.