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February 23, 2017
Over the past 25 years, I have seen several strong growth cycles for the Seattle area’s commercial real estate market. The endurance and diversified nature of our current office construction boom rivals those in recent history.
Since climbing out of the Great Recession, the Puget Sound region has been humming on all cylinders for the past several years. According to JLL’s most recent market overview, nearly 50,000 jobs were added over the past 12 months. Employment in the Puget Sound region grew by 3.7 percent last year and is expected to grow by another 2.1 percent in 2017. Meanwhile, the unemployment rate in the Puget Sound region sits at 3.7 percent a full percentage point below the national average.
In looking at the state of the commercial real estate market, JLL reports that a dozen new office buildings were delivered across the region in 2016, adding more than 4 million square feet of Class A inventory. Almost all of that space was leased at the time of completion.
In addition, JLL reports that another 5.9 million square feet of office is under construction across the Puget Sound region.
2016: Many giants
In many respects, Amazon is, of course, the 800-pound gorilla. Amazon now employs more than 25,000 workers in Seattle, and it is the largest private employer in the city. The online retailer occupied more than 1.75 million square feet of new space in two high-rise towers alone in 2016. Construction of the third tower bringing the company’s total footprint across the three buildings to an incredible 2.7 million square feet is expected to be completed this year.
However, Amazon was far from alone in driving the market last year. It was two other high-tech firms Google and Facebook that signed leases for approximately 1 million square feet of office space between the two companies, and that’s not including the 180,000 square feet of space that Google occupied in phase two of its Kirkland campus last year.
When all was said and done, Seattle alone added more than 3.5 million square feet of new office space in 2016. On the Eastside, another 534,000 square feet of new office product was delivered last year all of it leased by year end.
To summarize, 2016 started out with a number of significant leasing deals and project groundbreakings including Seco Development’s Southport office campus on Lake Washington in Renton and the market easily maintained its momentum throughout the year.
Many are left wondering if the office market can continue this pace in 2017.
2017: Strong tailwinds
Looking ahead to the rest of this year, all signs appear to be pointing to a continuation of the performance we saw last year.
It’s been discussed at great length locally in recent years but the fact remains that high-tech firms continue to migrate to the Puget Sound region from the Bay Area. There is little reason to believe this trend will not continue in 2017, helping fuel the office market again this year.
In Seattle, more than a dozen office projects are under construction and expected to deliver this year, with five of those projects already 100 percent pre-leased. Four of those projects have not yet announced any tenants, and two more are less than 50 percent pre-leased. All told, with nearly 4 million square feet of office space under construction in Seattle, just less than half of that space has been pre-leased leaving a little more than 2 million square feet of unleased office space coming on line this year.
On the Eastside, however, very little new office product is expected to deliver in 2017 and much of that space is already pre-leased. This paints a very interesting picture for 2017, but much as was the case last year, I anticipate we’ll start to see lease announcements on several of these projects as they approach completion.
Of course, the most difficult aspect to predict in looking ahead is the role that national and global influences could play locally. At this time, however, these concerns are largely hypothetical in nature:
• What ripple effects could we see from the U.S. walking away from the Trans-Pacific Partnership or renegotiation of the North American Free-Trade Agreement, particularly for a state and region like ours where two out of every five jobs are tied to trade?
• Will foreign investors begin to shy away from the Seattle area and other leading markets in our country?
• How will the steady increase in interest rates impact the start of new projects in the pipeline or existing property sales?
• And what is the future of H-1B visa program that helps many local tech companies fill critical roles for software engineers?
While I maintain an optimistic outlook overall in spite of these causes for concern, I will be monitoring these trends and policy issues closely to better understand how they could impact the office market in our region.
2018: hard to predict
While 2017 looks to be another banner year for the Puget Sound region’s office market, 2018 and beyond become a bit more difficult to forecast. However, aside from perhaps the causes for concern previously mentioned, our region’s office market appears to have a robust future ahead of it.
For instance, while Seattle has about a dozen proposed office projects in the pipeline, there is only one office tower project slated for completion in 2018 the 208,840-square-foot Hawk Tower, of which approximately two-thirds of the space has been pre-leased to Avalara. Although construction has not yet started on Facebook’s space at the Arbor Blocks, the project could be completed by late 2018. It appears we should expect to see 2+U deliver in 2019, and I predict we’ll see one or two more proposed projects start in downtown Seattle that would come on line around the same time.
On the Eastside, the future supply of new construction office space appears to be even more constrained. As it stands, there are but a handful of proposed projects in the pipeline with Southport in Renton as one of the notable Eastside projects slated for completion in 2018.
The fundamentals the continuation of strong tenant demand and constrained supply of new office product, particularly on the Eastside all point to a repeat performance for our market in 2017. Moreover, the impact of any policymaking or larger market forces would likely take some time to hit the Seattle market. For those reasons, I remain bullish overall on the outlook for 2017.
Kip Spencer, a 25-year veteran of the commercial real estate industry, is the director of leasing and marketing at Seco Development. Seco has been recognized as one of most successful mixed-use development companies in the Puget Sound region with over 35 years as a landowner in Seattle, Bellevue, Kirkland and Renton.