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January 12, 2016

In Seattle, office landlords are sitting pretty, but that will change

Puget Sound Business Journal

Marc Stiles

With rents for prime office space soaring 28 percent in one Puget Sound-area neighborhood last year, these are good times for office landlords.

Not surprisingly, the 28-percent increase was in Seattle's Lake Union area, where Amazon.com has been gobbling up space. But rents are increasing elsewhere, too.

Across the region, average asking rents increased 7.5 percent last year, hitting a 10-year peak, according to a report that commercial real estate company JLL issued Monday.

But another new report by a different real estate company, Kidder Mathews, says the gravy train will slow down in Seattle because Amazon's appetite for new space appears to have been sated.

"The increases in the Seattle market are expected to moderate as demand falls off with Amazon identifying most, if not all, of their stabilized space requirement," Richard Briscoe of Kidder wrote in his company's fourth-quarter office report, which also came out Monday.

Two years ago, Amazon real estate director John Schoettler said his company would have 10 million square feet of office space in Seattle in five years. With the space it has leased or is building, the company appears to have what it needs.

That's bad news for the office market because Amazon was responsible for 35 percent of Seattle's total net demand for office space over the last five years.

"The effect of the removal of that tenant from the demand side is expected to be only partially offset by other tenants and, considering the new inventory under construction and forecasted slower job growth starting in 2017, rent growth may be moderate in the Seattle submarket," Briscoe said.

The Eastside office market likely will face headwinds in a couple of years as well, according to the Kidder report, which noted that across the region the office vacancy rate has been declining and should continue to drop in the next couple of years.

"The one potential exception is the Eastside market, where new construction will be added at the same time as space is being given back by Microsoft and Expedia, and where (the pace of) new leasing has been disappointing," the Kidder report states.

With rents rising as much as they have - up nearly 11 percent in downtown Seattle and 8 percent in downtown Bellevue last year - developers are building more new space than they have since the recession. Currently, more than 5.9 million square feet of space are scheduled to open across the region in the next two years, and so far only about a third of the space has been preleased, according to JLL. Click here for more on all the construction currently occurring.

That much new space should shift the balance of power from landlords to tenants. JLL forecasts that will happen next year in Bellevue, and in 2018 in Seattle.

For the full story, go to Puget Sound Business Journal.

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