Bolstered by rising rent and employment figures and some of the tightest office vacancies in major U.S. markets, Seattle’s commercial real estate market is showing impressive strength as we move into a new decade.
That was one takeaway from Jared Kadry, Senior Market Analyst for CoStar, as he stopped by the Kinzer offices to share a Seattle market update and discuss trends with our brokers and analysts. Kadry’s experience reviewing and comparing real estate trends across the U.S. gives him a unique perspective on our area’s comparative performance over the last decade.
Unless otherwise noted, stats and figures apply to the Seattle-Tacoma-Bellevue Metropolitan Statistical Area, (MSA) consisting of King, Pierce and Snohomish counties.
Though it doesn’t classify as “news” at this point, Seattle has a remarkably strong economy. Job growth currently sits just below 3% year-over-year, far outpacing the U.S. average of 1.4%. In October the unemployment rate was 3.3% in the MSA and 2.7% in King County, according to the Bureau of Labor Statistics.
Tech has been a major driver. Amazon, Microsoft, Facebook and Google have hired roughly 55,000 positions in the region since 2014, and plan to add another 25,000 in the next few years, Kadry said. Apple, meanwhile, has more than 500 employees in Seattle and leased all of 333 Dexter with plans to add 2,000 jobs over the next five years.
While technology and construction industries have played an outsize role in local job growth, they are just part of a diversified and healthy economy here.
Job Growth by Sector
Vacancy has trended steadily down in the MSA since 2009, and currently stands at a 10-year low of 5.9%.
Base Case Forecast: Supply, Demand & Vacancy
Despite a robust supply of new buildings over the past 3-4 years, spec office developments in the Seattle CBD are still leasing and pre-leasing at a brisk rate.
“The fact that Seattle has some of the lowest vacancy of any major market in the country, with so much spec development, that is surprising to me,” Kadry said. “There was a lot of spec built – but you’re able to secure very high-end tenants for that space – even before breaking ground. That’s very promising.”
However, with more than 5M SF projected to deliver in 2020, Kadry predicts vacancy rates to spring back up in 2020-2021. Vacancy estimates could go slightly higher than pictured above, depending on what happens with WeWork.
WeWork’s Impact on the Market
For years, WeWork has captivated real estate professionals. At the start of 2019, the question was: What massive lease will they ink next? After its failed IPO, mass layoffs and continuing financial losses, we’re looking at the company’s many long-term leases and wondering how a hypothetical WeWork implosion would impact our market.
Kadry said WeWork’s struggles have put 11M SF of office space at risk worldwide, including 6M on the West Coast. Seattle and Bellevue have roughly 1.3M SF of that. However, even if all the WeWork-leased space were abandoned, our office market would not be greatly impacted, Kadry said. The net impact would be to raise vacancies 0.4% over two years.
“When you think about it, it’s really not that much. It’s significant – but not as much when viewed as a share of total inventory,” Kadry said.
Projected Rise in Vacancy if WeWork Vacates Area Leases
Compared to the base case scenario, vacancies rise 0.4% in the case that WeWork abandons all their 1.3M SF in Seattle and Bellevue. This assumes all 1.3M SF is vacated over a two-year term and no new tenants lease it.
Investment sales in office and multi-family had already hit yearly volume records in the first week of December. Those trends continued throughout the month as buyers looked to make their investments in 2019, before new real estate excise tax (REET) laws change to increase costs of transactions over $1.5M.
Alex Muir, principal in Kinzer’s Capital Markets group, said the brisk rate of sales we’ve grown accustomed to over the year are starkly evident when benchmarked, even against a healthy 2018.
“One thing that stood out to me were the investment numbers. We surpassed office and multifamily records by the first week of December. That’s pretty staggering,” Muir said. “Another thing we know instinctively but is impressive to see on the charts is rent growth. We’re seeing 7.5% year-over-year (in urban submarkets.)”
Office Rent Growth
Average sales price has been trending steadily up across the region as well, with downtown Bellevue, South Lake Union and Seattle’s CBD as top performers. Ponte Gadea’s purchase of the 338,100 SF Arbor Blocks in South Lake Union pushed Seattle beyond the $1,000/SF mark, something Partner Stuart Williams predicted in February.