By Gavin Curtis

Amazon, WeWork and Bank of America. Interestingly, the three companies are all attached to the iconic Rainier Square mixed-use development at Fourth and Union in the Central Business District (CBD). In fact, the project may be the thermometer that measures the office temperature and condition of Greater Seattle as we begin the new decade.

How so? Let’s take a look at the current metro fundamentals as a starting point. As 2019 closed out and 2020 begins, there continues to be a strong growth dynamic. The data indicates 1.6 million square feet of absorption across the Puget Sound region in the fourth quarter; and a vacancy rate hitting 7 percent in Greater Seattle.

More numbers you ask? How about the CBD adding 1 million square feet to inventory, and Class A asking rates hit north of $70.00 square foot. Demand continues to be strong for premium office space, as Greater Seattle companies added 55,000 jobs year-over-year, with an unemployment rate of 2.2 percent in the Seattle-Bellevue-Everett locale, as measured by the U.S. Bureau of Labor Statistics.

Amazing numbers—which is sure to mean full speed ahead.

But not so fast. If we dig a little deeper, there is reason to take a pause and reflect on how far this cycle has come in 10-plus years.

Here are some points to consider:

• Rate increases are occurring, but the pace of that growth is definitely slowing.
• Spec building, which is a property where the developer does not have a tenant pre-committed prior to construction, is noticeably weaker as developers are proposing construction, but are not breaking ground until they secure a commitment from an anchor tenant.
• Lease affordability, employee costs, parking and the prospect of higher taxes (the proposed head tax, as an example) are forcing business owners to consider markets north and south of the City of Seattle.
• On the tax front, the massive amounts of purchase and sale activity ($3.3 billion in the fourth quarter) was largely fueled by stakeholders getting in under the deadline to mitigate paying taxes under the new Washington real estate excise tax (REET).
• The REET, beginning in 2020, taxes transactions under a new layered architecture, as opposed to the previous 1.28 percent flat rate.
• The new structure is as follows:
  • 1.1% of the selling price up to $500,000;
  • 1.28% of the selling price above $500,000 and up to $1,500,000;
  • 2.75% of the selling price above $1,500,000 and up to $3,000,000; and
  • 3.0% of the selling price above $3,000,000

Which brings the discussion back to the starting point and Rainier Square.

Set to open in August 2020, the dazzling 58-story structure houses 722,000 square feet of office space, which was originally leased by Amazon in 2017. Just one year ago however, Amazon reversed course and is now subleasing the entirety of the building.

Arguably the finest new office space in the metro, only Bank of America has taken interest, signing a 150,000 square foot lease in the fourth quarter.

If demand is weak for this premium space, is there room for concern about the cycle’s longevity?

Perhaps. WeWork was widely expected to gobble up a large portion of the footprint; however, after their initial public offering debacle, the company backed away.

Undoubtedly the space will be filled over the coming quarters, but the WeWork episode may have been a blessing in disguise. Had the company continued to feed its appetite for square footage; the feverish demand may have continued unabated with negative effects for tenants.

As it is, sentiment on the state of the office market is more muted and not quite as bullish. And that reality is an okay one at this juncture.

There is no question that life is left in the cycle. That said, in this market, keep a close eye on the Greater Seattle thermometer.