Tech companies and others put the Seattle-Bellevue area ahead of much larger markets like New York City and Chicago in demand for office space during the latest quarter.
The Seattle-Bellevue area led the nation during the third quarter in demand for office space, edging out much larger markets like New York City and Chicago, as local technology firms expanded and newcomers planted their flags, according to a brokerage report.
In the third quarter, Seattle-Bellevue area tenants took occupancy of about 1.3 million net square feet, nearly double the activity in Silicon Valley or San Francisco, reports commercial real-estate brokerage JLL.
Amazon.com was responsible for about half the new office space taken, a demand indicator called “net absorption.” Already the largest private tenant in Seattle’s history, Amazon moved into two 317,000-square-foot buildings developed by Seattle-based Vulcan on Ninth Avenue North in the South Lake Union district.
The biggest office leases for new or expanded space during the third quarter also were signed with tech firms: Tableau Software, for 210,000 square feet; Avvo, 100,000 square feet at 8th & Olive; and Uber, 50,000 square feet at Second & Seneca, according to the Broderick Group, another brokerage.
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With that kind of demand, experts say they don’t see a high risk right now of the local market getting overbuilt, even with 4.5 million square feet available for lease in buildings under construction, most of it in Seattle.
“I don’t think you’re going to have any problems with demand in Seattle so long as the national economy keeps moving forward,” said Pat Callahan, CEO of Urban Renaissance Group, which owns and manages office buildings.
While Seattle’s net absorption led other U.S. markets during the third quarter, it ranks fifth for the first nine months of this year, according to JLL.
The third quarter’s vacancy rate in top-quality, modern office space ranged from 7.8 percent in downtown Seattle to 10.5 percent on the Eastside, reports Broderick Group.
As the market has tightened, rents on new leases have climbed in Seattle, making it harder for some downtown tenants to stay.
At the end of September, the annual average gross rent to lease top-quality office space in downtown Seattle was $38.26 a square foot, up 9.7 percent over a year ago, according to commercial real-estate brokerage CBRE.
Laura Ford, a Seattle office broker with Colliers International, said she expects most of the large blocks of space available in the central business district will be leased by the end of this year.
Once that happens, “a big tenant is going to have to go to the new construction,” Ford said. Tenants needing more than 100,000 square feet will have a tough time finding adjoining floors in existing downtown buildings, she said.
Several new office buildings opened in the third quarter, including Skanska’s 400 Fairview in South Lake Union.
The tight office market bodes well for the 22 buildings under construction in the region, a dozen of them speculative projects with no main tenant signed, brokers say.
Dexter Station, the first spec office building in Seattle coming out of the recession, landed Facebook in February for a 274,000-square-foot lease. The Menlo Park, Calif.-based social-networking service first opened a small engineering office in Seattle four years ago.
929 Office Tower, a spec high-rise in Bellevue, hooked San Francisco-based software firm Salesforce for 85,000 square feet.
Schnitzer West, the Bellevue-based developer of Urban Union, a 278,000-square-foot speculative building in South Lake Union slated to open next year, is in lease negotiations with Amazon.com, according to industry sources.
About half the companies in the market for office space are tech tenants, brokers say, including Seattle-based Redfin.
Office-tower developers, meanwhile, are all hunting for the next “unicorn,” said Dan Dahl, a Colliers International broker in Seattle. Uber is at the top of Fortune’s “Unicorn List.”
“You might not have heard of them 12 months ago, but all because of a funding event now they have a billion dollars and they’re off to the races,” Dahl said.
Seattle’s office market continues to be transformed by the exponential growth of Amazon.com, which began moving its headquarters in 2010 from North Beacon Hill to South Lake Union, just north of the central business district.
Back then, it had leases for about 2.3 million square feet. By the end of this year, Amazon’s footprint of occupied office space in Seattle is expected to exceed 6 million square feet.
In addition to that, under construction is 1.9 million square feet of leased or owned space for Amazon, including Troy Block, a two-tower complex in South Lake Union.
In December, Amazon plans to move into the first of three Denny Triangle high-rise towers it’s developing itself. The second is scheduled to be occupied by next fall.
Real-estate experts admit a major slowdown in Amazon’s growth would be a blow to the Seattle market.
“It’s very highly skewed to one tenant demanding the space,” said Richard Briscoe, a senior vice president at Kidder Mathews in Seattle.
Between 2010 and 2015, Amazon was responsible for half of newly taken Seattle office space. When Amazon’s growth stabilizes, Briscoe said, “we’re going to lose one of the major drivers that has created demand for office space.”
Just as Amazon is building a high-rise campus, other tech firms are moving to high-rise towers downtown. Groupon, now at Union Station in the Chinatown International District, will move to two floors it has leased at 1201 Third Ave., according to people familiar with the matter.
One of the most audacious spec office projects is at Renton’s Southport, on the banks of Lake Washington.
Developer Michael Christ said he plans to move forward in December with foundation work for a three-tower office complex with 725,000 square feet.
Christ’s Seco Development already has built 348 apartments and 20,000 square feet of retail at Southport. Next door to that, the firm is building a 347-room, 12-story Hyatt Regency and 43,000 square feet of convention space that it expects to open in June 2017.
The Southport campus, said Christ, could lure a big tech tenant that wants waterfront views, access to 100 gigabyte-per-second fiber and proximity to residential, retail and hotel rooms.
If fully completed, the office complex in the 2.4 million-square-foot development would expand Renton’s office inventory by more than 20 percent. Renton’s third-quarter vacancy rate was 10.4 percent.
While many tech firms are gravitating to downtown Seattle and Bellevue, other titans like Google and Microsoft still are expanding on their suburban campuses in Kirkland and Redmond, respectively.
The region’s biggest office deal so far this year, by square feet, was in the suburbs: In July, New York-based Blackstone Group bought GE Capital’s local office portfolio — 37 buildings totaling nearly 2.3 million square feet — in Bothell and Redmond for $360 million, according to Broderick Group.