Office

The close of Q4 marks the end of a challenging year for the office sector as vacancy increased to 7.7% (up 1.83% YoY), with overall net absorption for the year at -801,562.  While much of 2020’s results were driven by the pandemic that forced most employees to work from home, increasing adoption of the vaccine should bring employees back into the office environment for the year ahead.

Despite the apparent headwinds, investment activity picked up as $2.61B traded in Q4 2020, making it the 3rd largest volume quarter ever recorded in the region, eclipsed only by Q4 2019 (for which an upcoming tax code change drove an unusually high volume) and Q4 2012 (when Amazon sold a 1.8M SF portfolio for $1.16B).  The strong Q4 performance pushed total office sales for the year to $4.6B, making Puget Sound the third largest office market for transaction volume in the US. 

Construction activity continued to push forward, with 5.5M SF of office product under construction, 72% of which is pre-leased.  While tech companies continued to be the key driver of office demand growth, another sector that has been contributing to the region’s resilience is life sciences.

The Puget Sound region was the third largest market in the US for life sciences growth over the past five years.  Additionally, venture capital activity in this sector increased approximately 120 percent during the same time frame. 

Life sciences in the Puget Sound region has been one of the best-performing sectors since the start of the pandemic.  Vacancy among all Puget Sound life science buildings is roughly 8.0% but it is less than 2.0% in Seattle, (particularly concentrated in the Lake Union submarket).  

Availability for new inventory is scarce, driving asking rents up to $65.00/SF to $75.00/SF NNN for top-tier space.  Increased demand for this product was evidenced by the recent sale of the Lake Union portfolio located at 1201 and 1208 Eastlake Ave for $450M, which achieved the highest valuation ever for this product type in the region.

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

2 + U | Skanska | Hana Financial Group | $704.0M

1918 8th Building – Amazon | JP Morgan | Hudson Pacific Properties | $589.2M

Spring District – Block 16 |  Wright Runstad | Brookfield Asset Management | $365.0M

Eastlake Life Science Campus |  Alexandra Real Estate Equities | Clarion Partners | $315.0M 

Millenium Corporate Park | TPG Global | Vanbarton Group | $217.0M

Yale & Thomas Building – Amazon | Unico JV Goldman Sachs | GI Partners | $121.0M

Overlake 520 |  Swift Real Estate Partners | Innovatus Capital Partners | $63.0M

Terry Thomas Building – Amazon | Hess Callahan and Stephen Grey & Associates | Zurich Alternative Asset Management | $52.1M

Industrial

The Puget Sound region experienced 1.9M SF of net absorption in the fourth quarter, which brought the annual net absorption total to 3.6M SF.  The year ended with approximately $1B in transaction volume, with deliveries for the fourth quarter coming in at 1.2M, the majority of which was in Thurston County.  The growth in the industrial market has been driven by retail and logistics firms seeking to enhance storage and last-mile delivery capabilities, with submarkets located south of Seattle being the most active leasing markets

Construction remains active with 7.6M SF underway (33% of which is pre-leased).  Pierce and Thurston Counties continue to dominate the development pipeline, continuing the expansion trend southward.  The largest project to break ground in Q4 was the Puyallup Nations Logistics Center, a 1.9M SF project by Panattoni, which is expected to deliver in early 2021.

Amazon has been the most active tenant in the region, leasing over 2.5M SF in the last six quarters and signed the region’s largest deal of Q4 with the lease of Panattoni’s 628,640-square-foot Dupont Logistics Center.  A major contributor to the region’s activity beyond real estate, Amazon also hired 16,000 employees in Washington state and over 400,000 employees globally during the pandemic.

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

Monte Villa Farms | Hibbs Family Office | Alexandria Real Estate Equities | $65.0M

Glacier Peak | High Street Logistics Properties | Kohlberg Kravis Roberts | $46.7M

Starlite Distribution Center | AIG Global Asset Management | LBA Realty | $39.5M

Delta Marine Building | Delta | Prologis | $37.1M

Intracorp Seaway II – Bldg A | SLS Enterprises | Elion Partners | $23.1M

Multifamily/Residential

In our recent article, we examined the migration trends of people moving to markets with lower costs of living, specifically in regard to housing costs.  This was evident in the multifamily sector as net absorption ended the year at 3,149, with vacancy at 7.3%, up 1.8% YoY.

The residential market remained strong as a recent study by Redfin showed that out of the top ten most competitive cities for buying a home in the US, six were located in Washington.  In alignment with the migration trends we studied earlier, the top cities were located farther out from the core in more affordable markets.  The average time on market for these homes was 5.3 days with 69% selling above the asking price.

Institutional investors continued to show interest in multifamily assets located in suburban markets as transaction volume remained high in Q4 due to continued commitments by large tech firms for office product.  Multiple $50M+ deals transacted in the suburban markets, where cap rates averaged 5%.

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

Vue 22 | Kennedy Wilson | MG Properties Group | $191.0M

Avana Star Lake | Kennedy Wilson | Greystar | $175.0M

The Bond | Mainstreet Property Group | GW Williams | $66.0M

Seattle Times Printing Plant – Land | Avalon Bay | Seattle Times | $51.0M