Q1 2021 Greater Seattle Commercial Real Estate Market Update

Office

The headwinds in the aftermath of the pandemic were still evident as vacancy increased to 10.1%, up 310 bp year over year while the region experienced 1M SF of negative absorption. Despite the lingering effects of the pandemic, the potential for growth on the horizon appears to be improving, thanks in large part to the continued appetite for office space from local tech giants. Direct asking rents remained unchanged at $58.44 for full service class A office in the Seattle CBD and $61.40 for the Bellevue CBD.

Development continues to push forward with 19 major projects in the pipeline, 76% of which are pre-committed. The 19 projects represent 9.4M SF under construction, which makes the Puget Sound region the second most active market for office construction in the country behind only Manhattan. The question that still remains is whether or not the implications of the work from home paradigm will be temporary or permanent? While the jury is still out on the final verdict, large tech companies like Amazon have indicated that their intention is to return to the office full-time.

In a recent interview with John Schoettler, VP of Global Real Estate Facilities (GREF), he stated that Amazon plans to occupy all 5M SF of future space in the Bellevue CBD market. Additionally, Amazon signed a lease in Q1 for the Artise building, a 605,000 SF class A office building by Schnitzer West expected to deliver in 2024. Google took delivery of a new development at Kirkland Urban, expanding its current footprint of in the region to 2.5M, with proposed sites underway which would bring their total footprint to 3.5M SF.

The Puget Sound region saw a total of $500M in office product traded in Q1, down $375M or 43% YoY. The majority of the transactions were located on the Eastside, with the Seattle CBD accounting for only 5% of the overall investment activity. The lack of activity in the Seattle CBD is due in part to investor preference towards the Bellevue CBD since the 2021 implementation of the JumpStart payroll tax.

Notable Trades (Property | Seller | Buyer | Price):

Industrial

Q1 was a quarter of records for the industrial asset class in the Puget Sound region. Overall, 3.52M SF of space was absorbed this quarter, the largest amount on record with the Pierce County and Kent Valley submarkets leading the way at 1.78M SF and 1M SF, respectively. Average asking rents increased to $10.30M/SF NNN, up 2.1% for the quarter and 4.5% year over year.

While deliveries were down 56% over the quarter at 595K, the boom in development remained strong with 3.76M SF added to the pipeline, bringing the total SF under construction to 13.32M, surpassing the previous record from last quarter.

Investment sales showed strength with sales eclipsing the $500M mark for the first time since Q4 2019 at $862M. King County accounted for 50% of the price volume at $450M, with Pierce and Snohomish accounting for approximately 25% each at $223M and $207M, respectively. For the Seattle submarket, the year-to-date total of $195.5M in sales already represents the second highest annual total on record.

The primary driver of the record setting activity was e-commerce and third party logistics activity, which accounted for 96% of absorption. Amazon was once again the largest consumer of industrial space, having leased over 2.5M SF in the last two years with plans to develop an additional 3M SF. Throughout the pandemic, Amazon has hired over 400,000 employees globally, including 16,000 in the state of Washington alone. Their expansion plans were fueled by a 44% increase in online consumer spending, which came in at $869B for 2020. Estimates show that Amazon’s market share is nearly one third of all online consumer spending.

Notable activity includes Amazon’s purchase of a 75 AC site in Arlington for $25.9M, with plans to develop it into a 2.8M SF fulfillment center, bringing upwards of 1,000 jobs to the region. Additionally, Elon Musk’s Space X leased 124,907 SF of warehouse at Redmond Ridge Business Park to support the Starlink satellite development, which will provide global broadband internet access via thousands of Starlink satellites.

Notable Trades (Property | Seller | Buyer | Price):

Multifamily/Residential

Leasing activity picked up in Q1 across the region, showing evidence of demand returning to urban core areas with net absorption at 2,261 units. Average effective rents fell to $1,737, down 6.6% YoY as operators have been forced to offer concessions to entice renters. While occupancy rates were down 180 bps YoY to 94.3%, there are preliminary signs that demand for multifamily is returning as 27,300 net jobs were added to the workforce in the first two months of 2021. Another contributing factor is the frustration caused by the intense competition in the single family housing market, where prices have gone up 14.8% YoY.

Construction activity experienced massive delays due to the pandemic in 2020, but activity has bounced back with nearly 21,000 units in the pipeline. Deliveries for the year are expected to be as high as 13,500 units, concentrated primarily in the downtown core and Eastside submarkets.

Investor interest has been increasing in the suburbs due to migration patterns that unfolded throughout the pandemic as well as expansion plans from local tech companies like Amazon and Microsoft. Cap rates for premier assets in King, Pierce and Snohomish counties have been trading in the low 4’s while higher end developments on the Eastside are showing support for mid 3 to 4 percent cap rates.

Notable Trades (Property | Seller | Buyer | Price):