Normandy ParkReal Estate News February 21, 2018

Seattle rents for offices soaring much faster than elsewhere

Despite the higher office rents, many big companies are actually seeking out Central Seattle locations as downtown proves to be a better option for attracting employees. “There’s good and bad” in that situation, says one CEO who just leased new offices at Sixth and Pike.
It’s not just housing prices: Seattle is not the bargain it used to be for companies, either.

Historically, the city was a cheaper place to rent office space than a lot of other cities with advanced economies. That held true through last decade’s economic upswing, and during the recession.

But the city’s recent boom driven by Amazon and other tech companies has propelled Seattle up the ranks of the nation’s most expensive places to rent an office, passing Chicago and Los Angeles just in the last three years.

During that span, Seattle office rents have surged 31 percent, or about 2½ times faster than the national average, according to an analysis by Cushman & Wakefield for The Seattle Times.

And finding office space is getting harder, despite all those cranes putting up new office high-rises.

The vacancy rate has dipped to 5.7 percent, down from a high of over 20 percent during the recession and the previous recent low of 8.8 percent a decade ago.

Seattle now has a smaller share of offices sitting empty than San Francisco or Manhattan, the two most expensive commercial real-estate markets in the country.

In fact, Central Seattle has the lowest vacancy rate among the 10 biggest downtown office markets in the country, according to Colliers International.

The resulting space crunch has given commercial real-estate landlords all the reason they need to raise rents. And more institutional investors abroad and on the East Coast are snatching up office buildings at record prices — sometimes hundreds of millions of dollars — and then raising office rents to make their investment pencil out.

There has been a surge in office construction over the last few years, but it hasn’t been enough to stave off the rent increases for office space.

It’s easy to see why: Demand from companies has grown much more quickly than construction has kept up with.

Consider Amazon, which already occupies far more Class A office space in Seattle than any company has in any other big U.S. city.

The company’s growth has been enough to just about single-handedly offset new office construction.

Seattle has added about 8.8 million square feet of office space this decade, according to the Broderick Group. Over that span, Amazon alone has taken about 8.1 million square feet as of last summer, and its footprint has only grown since then.

That leaves “no space for other tenants to move to,” said Hughes McLaughlin, senior director at Cushman & Wakefield in Seattle.

Adding to the demand, Facebook is moving into 870,000 square feet of space in South Lake Union, while Google is preparing to move into the entire 620,000-square-foot office portion of a project underway next to Lake Union Park.

Overall, tech companies now make up about 75 percent of leasing in Central Seattle, up from about 50 percent two years before, according to JLL.

Commercial real-estate prices are rising at a rate similar to the city’s housing market. But while some people are being priced out of Seattle, brokers say there has been no mass exodus of companies fleeing the city.

Among big companies, the opposite is true: In recent years, Expedia announced its move from Bellevue to Seattle; Weyerhaeuser fled Federal Way for Seattle; and F5 inked a lease to move from the cheaper Interbay area to take over an entire new downtown skyscraper. Big companies based outside Washington also have ramped up expansion in the priciest Seattle business districts, led by Google and Facebook, but also including the likes of Airbnb, Uber and Snap.

Smaller companies haven’t always been able to follow suit, however. Some businesses that don’t make headlines have moved out to cheaper, outlying neighborhoods or towns, while others have struggled to even find the space they need.

“Some folks are saying now is the time to grow” despite the higher rents, said Mark To, executive vice president of JLL in Seattle, who represents companies looking to lease office space. “And there are others that sell to a national outfit or relocate.”

No mass exodus

There are a few reasons that many companies are moving toward — not away from — the higher rents, brokers say. First, the rising economy that has contributed to the rent increases is also benefiting those businesses, helping to offset the higher operating costs with more revenue.

Also, unlike a person who can move to another, more affordable town and commute in a longer distance for work, a business that needs to be in downtown for things like client meetings and employee retention might not have that option.

Vera Whole Health, a 160-person health-care company, faced a decision on new offices recently when it outgrew its old space in the Pioneer Square area.

CEO Ryan Schmid said the firm decided to grow in the heart of downtown and, despite the higher rents there, signed a lease earlier this year for 14,500 square feet at Sixth and Pike, where 70 Vera employees work.

Many of his employees take public transit and want to be downtown, and the tight labor market is a big concern as the company tries to attract and retain employees. Plus, many of the firm’s business partners are within walking distance of the new office.

“Obviously rents are considerably higher in this market than other markets, but that’s also because we have a really strong economy,” Schmid said. “So there’s good and bad. If this were Detroit I wouldn’t feel so good about it.”

Not all companies can afford Seattle rents. But businesses with back-office functions that can operate in cheaper areas like South King County were probably already there before rents started surging recently, McLaughlin said.

Still, if rents continue to rise, more companies may find that being in the economic center is not worth the higher costs.

“We have reached a tipping point where companies downtown are really having to think long and hard as to whether the shift in Seattle is creating more opportunity and therefore worth the cost, or whether the shift is simply just adding to operating cost,” To said.

Then there are startups, which are often ill-equipped to deal with high rents. Nevertheless, the startup scene here hasn’t declined lately.

One reason: Co-working spaces like WeWork have sprouted up quickly to give very small companies and individuals the option to rent workspace by the desk on a short-term basis, which is more flexible than a traditional fixed long-term lease.

Breaking down costs

Office rents are charged by the square foot. Average annual rents citywide have surged past $40 per square foot for the first time, surpassing Chicago (about $38) and Los Angeles ($39), according to the analysis from Cushman and Wakefield. That level is still well behind San Francisco ($70) and Manhattan ($72). Boston and Washington, D.C., remain more expensive than Seattle, as well.

The nationwide average is just over $30.

Across all building types, the average rent in Seattle was $41.16 per square foot at the end of last year, up from $34.67 at the peak of the upswing last decade, and from a low of $26.44 during the recession.

Here’s what that means for companies in practical terms.

Let’s say you need to rent about 50,000 square feet of office — enough for about 250 employees.

Three years ago, that would have cost about $1.57 million a year for the average office. Now, it’ll run you about $2.06 million for new lease, or nearly an extra half a million dollars more.

Rosenberg, Mike “Seattle rents for office soaring much faster than elsewhere” Seattle, Seattle Times 20, Feb. 2018