Big firms are giving up office space in Bellevue, offering tenants a crack at a tight market and putting pressure on developers of spec offices.
Vacancies are multiplying in the Bellevue office market, a boon for companies that want to rent space but a drag for developers hoping to capitalize on one of the region’s tighter submarkets.
Recent decisions by several big tenants will leave substantial holes in Bellevue’s central business district:
• Microsoft is vacating seven floors totaling about 167,000 square feet in Bravern 1, or about two-thirds of the office tower, as part of a broader consolidation of leased space that does not involve layoffs.
• Expedia announced in April it plans to move its headquarters at the end of 2018 to the 40-acre former Amgen campus in Seattle, leaving a 490,000-square-foot void in two Bellevue towers.
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• Zillow Group last month said it would vacate about half of the 70,000 square feet of Bellevue office space it inherited after acquiring Trulia in February.
A listing on the website of brokerage CBRE said the Microsoft space is available for sublease beginning in September. Zillow said its unneeded Trulia space will be subleased by the end of this year.
New and expanding employers will eventually fill those office spaces given the city’s talent pool and lauded school district, brokers say.
“There’s going to be a huge opportunity for tenants that probably do not have a presence here now to take advantage of a very strong labor pool,” said Steve Schwartz, the Bellevue-based managing director for brokerage JLL.
But the rising vacancies mean that “2016 will be a nerve-wracking year for developers of new projects,” according to a recent report by the Broderick Group, a Seattle-based commercial-real-estate brokerage.
Developers are putting up three new towers in downtown Bellevue, collectively adding more than 1.5 million square feet of office space to a central-business district with nearly 8.3 million square feet.
Texas-based developer Trammell Crow said Tuesday that its 929 Office Tower, on 108th Avenue Northeast, has attracted proposals from “several tenants whose combined demand far exceeds our building’s capacity.”
The 19-story, 462,000-square-foot tower, a joint venture with Principal Real Estate Investors, is scheduled to be completed this year. Bellevue-based Kemper Development is expanding Lincoln Square and expects to complete 710,000 square feet of office space by November 2016.
And Seattle-based Schnitzer West has broken ground on Centre 425, a 354,000-square-foot tower scheduled to be completed in fall 2016.
If downtown Bellevue office space fills up at a normal pace, by 2018 the market’s office-vacancy rate could reach the high teens or even surpass 20 percent, Schwartz said.
Developers may have to offer richer concessions to attract big lease deals, he said.
Broderick’s Paul Sweeney says the situation is far healthier than it looks: The vacancy rate could remain below 10 percent — considered an inflection point in the bargaining power of tenants — because there’s no significant construction happening elsewhere in the Eastside suburbs.
Moreover, both the companies vacating their spaces and the opening of new towers are staggered over a long period, which should soften the blow to landlords.
“We’re going to need this space unless something happens to the economy,” Sweeney said. “It’ll bring more diversity to our market.”
And that would be a positive for the Eastside, where Microsoft has occupied more than one-quarter of the office inventory, including its Redmond campus. “Not many markets that have that single dominance by one tenant,” Sweeney said.
Bellevue was a focus of the company’s physical expansion in the last decade, which saw Microsoft’s local head count rise from about 35,000 in 2007 to more than 43,000 last year.
The company scooped up space in The Bravern, Lincoln Square and City Center buildings in downtown Bellevue, as well as the Advanta Office Commons in Eastgate.
A restructuring announced in July 2014 and completed earlier this year resulted in more than 2,700 layoffs in the region, or roughly 6 percent of Microsoft’s workforce in Washington.
Microsoft owns about 10 million square feet of office space at its Redmond campus and leases nearly 5 million square feet elsewhere in King County.
The company’s real-estate footprint is now shrinking to match a smaller head count. Recently it moved many of its employees within Bellevue’s City Center and both Bravern towers, as well as its South Lake Union office space in Seattle, a Microsoft spokesman said in a statement.
Microsoft’s space reduction in Bellevue “signals they’re going to work to consolidate back to the campus to the extent they can,” Schwartz said.