Compliments of Jason Smith of Kidder Mathews, attached is a Seattle-area office real estate market review for Q2 2013. As the report notes, the second quarter of 2013 continued the trends of the first quarter, although, while leasing continued, absorption activity was slower. Some large leases were inked, including State Farm taking 300,000 s.f in downtown Tacoma and Amazon snapping up Metropolitan Park North, recently vacated by Nordstrom, as the two largest. The region’s quarterly net absorption was 244,161 s.f., with another loss in the suburbs of the Eastside market. The region’s vacancy rate increased slightly to 10.46% from 10.31% last quarter. In general the activity was not sufficient to create much movement in rental rates, but they continue to firm up in the central business districts (CBDs).
The big news in the quarter was the number of new construction starts announced. Beacon Capital has committed to start a tower in downtown Bellevue before the end of the year and Vulcan and Touchstone also have four towers scheduled for this year. Vulcan’s are pre-leased, but the others are moving ahead on a speculative basis. This indicates developers expect rental rates to increase strongly in these micromarkets at least enough to make the projects pencil out. Investment activity trended well in the second quarter, with $717 million in the top three sales alone. The Seattle CBD again had the largest sale; the Wells Fargo Center at just under $390 million. Redmond snagged the second place sale, showing that the suburbs are not totally off-limits to institutional investors. The number of sales was larger this quarter, including more smaller owner/user acquisitions. Capitalization rates were generally unchanged from the previous quarter, indicating that the equity rate absorbed the increase in lending rates, further solidifying the market’s attraction to investors. The expected return is still disparate with Class A properties dipping down to the 5% level while the rest of the market is perched at 7-8% rates.