January 23, 2023

Big Tech's resolution for the new year? Shed space!

Photo by Deutsche Asset & Wealth Management [enlarge]

Next year, Amazon will leave West 8th, where it’s long been the majority tenant.

The first shoe dropped, appropriately, on Friday the 13th, right before the long Martin Luther King Jr. Day weekend. That's when companies like to bury bad news.

As the Seattle Times first reported, Facebook/Meta will sublease one its two Arbor Blocks in South Lake Union; and the coming new Block 6 at the Spring District in Bellevue. (That's now nearing completion.) The two buildings total about 515,000 square feet. Brokers weren't named.

In the same Times report, less surprising, was the confirmation that Microsoft will not renew its Bellevue lease at City Center Plaza, which expires next year. (It has 561,494 square feet, per Broderick Group.) That move had been widely anticipated, since the company is dramatically expanding its Redmond campus, and retrenching there. Microsoft had already announced plans not to renew leases for another 1.1 million square feet on the Eastside.

And, more generally, all the big tech companies nationwide are shedding staff after their pandemic hiring spree. In tandem, they're shedding leases and office space with the grudging acceptance of work-from-home, reduced office time and hybrid schedules.

All those same market forces inform the Times' second big shoe drop, last week, that Amazon will let its lease expire next year at the West 8th building in the Denny Triangle. (Amazon calls it Port 99.) There, it has about 450,000 square feet, based on broker reports and SEC filings from owner Kilroy Real Estate.

Kilroy can't be happy, having paid $490 million for West 8th about 16 month ago. But since Amazon has a half-dozen new office towers built or nearing completion in Bellevue, chiefly from Vulcan Real Estate and Schnitzer West, it's not a shocking decision to move 2,000-odd employees to other, newer buildings — including its own Bellevue 600, now under construction.

Early in 2021, Amazon had said that its three headquarters regions were “Arlington, Puget Sound and Nashville.” Not Seattle. Puget Sound, which includes Bellevue.

For all three companies, all now cutting staff, that represents over 1.5 million square feet to be vacated on both sides of the lake. And that will only further dampen the office market.

In its recent fourth-quarter report, CBRE puts the Seattle vacancy rate at 17.1%. That's from Pioneer Square up to the U District. Add in the sublease space, about 5 million square feet, and that figure rises to an aggregate 22.3%.

Things are much better in SLU, where Facebook still remains a significant presence. The vacancy rate is a healthy 5.6%, says CBRE.

Working from a different map, Kidder Mathews also says Seattle vacancy rates are rising — along with the inventory of sublease space. Both brokers agree that the absorption rate remains negative.

Things are better for now over in downtown Bellevue, where KM says the asking rents of around $53 per square foot per year are still highest in the region. And the vacancy rate of not quite 5.6% is also best in the region.

But that's likely to rise, Broderick Group warned last fall. It estimates that by 2025, Microsoft will — including the figures above — shed some 1.7 million square feet in downtown Bellevue. Amazon may be simultaneously shifting workers there, but those are empty new buildings. As a result, Broderick estimates that the downtown Bellevue vacancy rate could exceed 10% by the end of next year.