By Gavin Curtis
As we approach the end of the third quarter, we are continuing to see an uptick in market rates along with construction costs. The usual suspects continue to grow, however, this quarter there is a heavy emphasis in Bellevue. Amazon, Facebook and Google all took large blocks of space on the Eastside to fuel their seemingly never-ending need for additional office space.
Despite the Puget Sound office market being in the longest recovery its ever seen, we have yet to see indicators of a slowdown. Vacancy in the Puget Sound is down to 6.8% and high-rises being built on a speculative basis are continuing to pre-lease space at rates north of $60.00 per square foot. Because of all the new construction projects on both sides of Lake Washington, construction costs have become a major concern for many office users. Those costs are up 6% from last year and placing a significant strain on many tenants looking to modify their current or future office.
This past quarter, one of the largest leases to be signed in 2018 took place at the, soon-to-be former, Expedia Building in downtown Bellevue. The 400,000 square foot building, which Amazon signed a 16-year lease, will further cement their presence on the Eastside. Last year Amazon leased the entirety of Centre 425 just down the street. Amazon plans to occupy the Expedia Building next year and projects having 4,500 employees in Bellevue by 2020. As demand for office space increases in Bellevue, developers such as Wright Runstad, Vulcan and Hines are all planning new projects to help relieve some of the pressure Bellevue is facing with its lack of supply.
Bellevue continues to outpace Seattle with Class A rates averaging $47.70 per square foot; increasing $1.50 per square foot from last quarter. Many anticipate this growth to continue through the end of the year as developers continue to buy future development sites in preparation for additional growth by both large and small technology firms.
Google has faced such a high demand for growth options that it is entertaining the idea of paying current tenants at the new construction site, Kirkland Urban, to terminate leases early to make way for a 440,000 square foot opening. If successful in buying out Wave Broadband and Tableau from their leases currently in place at Kirkland Urban, Google would further secure its position as the largest office user in the Kirkland submarket.
Although many tenants are placing a heavy emphasis on growing in Bellevue, developers in Seattle are continuing to deliver new product on a speculative basis. Martin Selig announced he will begin construction by the end of the year on 400 Westlake. The 220,000 square feet of office space will be the most sustainable project of its size in the world; using 40% less energy than comparable buildings. Additionally, Kilroy Realty is building 650,000 square feet of speculative office in South Lake Union at 333 Dexter which is set to deliver Q1 of next year. Both Facebook and Google have shown a significant interest in this development due to the proximity to their South Lake Union presence. Skanska, is also in the process of building 680,000 square feet at 2+U and close to securing its first sizable tenants (Indeed.com and Spaces) since it broke ground 18 months ago. It’s evident from the speculative construction taking place on both sides of Lake Washington that developers don’t anticipate a market correction anytime in the near future. Stay tuned next quarter on an update on the dynamic market.
Gavin Curtis is a vice president at Hughes Marino, an award-winning commercial real estate company with offices across the nation. Contact Gavin at 1-844-662-6635 or firstname.lastname@example.org to learn more.