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January 08, 2014

Brokers say with a few huge exceptions demand has been slow to recover here

Daily Journal of Commerce

Office rents rose last year in Seattle and Bellevue, but not enough to justify speculative construction, according to a report released by Kidder Mathews.

The local office market report is one of several just released by local brokerages.

Kidder Mathews said the hot market in South Lake Union saw Class A rents rise by more than $2.50 per square foot since the first quarter of 2013. Rents for Class A space in downtown Bellevue are up 75 cents per square foot.

"That said, even in the strongest markets, rental rates remain below cost-feasible levels," Kidder Mathews reports.

The brokerage said that outside of Amazon.com and government agencies, demand has been slow to recover in Seattle. Most tenants whose leases expire are still choosing to rent, often at favorable rates, with many upgrading their locations or buildings. But the majority are making due with less space. Vacancy ended the year at 10.42 percent, slightly lower than where it began 2013.

On the Eastside, office vacancy at the end of 2013 was 8.93 percent, slightly higher than at the end of 2012.

Suburban areas were a drag on downtown, Kidder Mathews reports. For instance, T-Mobile and Verizon exited nearly 250,000 square feet along the Interstate 90 corridor.

The brokerage said that in general the regional office market remains oversupplied, but specific areas are short on larger spaces, such as South Lake Union, Pioneer Square and downtown Bellevue.

However, Kidder Mathews said that as vacancy in downtown Seattle, South Lake Union and downtown Bellevue continues to fall, rental rates should rise rapidly to a point where new construction is financially feasible. Developers are already moving forward with office projects in anticipation of the higher rents, it said.

Colliers International reported that in Seattle Hill7, Troy Block and Dexter Station are set to open in April 2015, the fourth quarter of 2016 and January 2015, respectively. They will bring more than 1.47 million square feet of office space to the Lake Union/CBD submarkets, and provide Class A space alternatives for tenants looking to enter or expand into the city's fastest growing areas.

Jones Lang LaSalle reported on this construction activity in Seattle:

  • Stockbridge and Capstone broke ground on Dexter Station in February. This South Lake Union project will total 345,000 square feet of office space and is Seattle's largest spec project in five years.
  • Touchstone recently broke ground on Hill7, an 11-story office building which will add 300,000 square feet to the Seattle central business district. The project will also include a 222-room Hilton Garden hotel.
  • Vulcan is constructing Amazon Phase VI and a new headquarters for the Allen Institute for Brain Science. These single-tenant Class A buildings will deliver about 650,000 square feet of office space to South Lake Union.
  • Skanska broke ground on 400 Fairview in October and preleased 120,000 square feet to Tommy Bahama. The project will be 13 stories and deliver 345,000 square feet of Class A space to South Lake Union in the third quarter of 2015.
  • Amazon.com is building the first of three planned towers in the Denny Triangle. Phase I is scheduled to deliver in 2015. Phase II, including a 38-story office tower and 65,000-square-foot spherical building, recently got design approval from the Seattle Department of Planning and Development. Phase II is scheduled to deliver in 2016. Amazon's 3.3 million-square-foot complex is the largest single project in downtown's history.
  • Daniels Development is slated to break ground on Fifth & Columbia this month. It is scheduled for delivery in 2016. At 660 feet, the tower would be the tallest new building in Seattle in more than 20 years.
  • Urban Visions recently filed plans for a 77-story tower at 816 Second Ave. with 930,000 square feet of office space. It could be the tallest building on the West Coast.

In Bellevue:

  • Kemper Development is progressing with expansion of Lincoln Square, which could total 700,000 square feet of Class A space and be completed by fall 2016.
  • Beacon Capital is proceeding with permits for Bellevue Center. The project will be 24 stories and contain 572,000 square feet of Class A office space It will be the first tower in the Bellevue CBD with operable windows.
  • Trammell Crow recently said it will start construction in April on a 19-story, 462,000-square-foot office building in downtown Bellevue.
  • Schnitzer West recently acquired a site in downtown Bellevue where it plans to break ground on a 16-story, 360,000-square-foot office building late this year.

On another front, Kidder Mathews reported that there were 55 office sales in this region for the fourth quarter of 2013 with an aggregate price of $659 million, bringing the total for 2013 to $2.87 billion in 226 sales.

Last year's marquee sale was the acquisition of 202 Westlake in Seattle by a German investment fund. The buyer paid $745 per square foot, a regional record for this new 130,681-square-foot building. Amazon has a 15-year lease for space there.

December saw two major sales, the brokerage said: Talon/Prudential's flip of the 1800 Ninth Building and Beacon Capital's acquisition of the historic Exchange Building, near Seattle's central business district. That building was 58 percent occupied at the time of the sale.

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