Seattle-Bellevue office space market remains red hot

Despite 17-year high in new space coming on the market, more than half has already been leased.

You’d have to go all the way back to the heady days of the dot-com boom in 2000 to match the amount of new office space coming on to the Seattle-Bellevue market this year. 

It’s been 17 years since this much office space – 4.6 million square feet total –has been set to be delivered, according to a Q4 2016 report from the Chicago-based real estate services firm Jones Lang LaSalle. Just over half of that space, 51.2 percent, has been preleased.

Last year marked the fourth consecutive year that the Seattle-Bellevue office market was able to absorb more than 2 million square feet of additional space. Much of the current leasing activity comes from companies growing rather than relocating their offices, according to JLL research manager Alex Muir. That will soften the impact on vacancy rates. “You could see some second generation space struggle but the bulk of the major deals is expansion,” says Muir.

 Much of the demand for space is coming from tech companies, which accounted for roughly 60 percent of the leasing activity for 2016. The strong demand for office space, said Muir, “is coming from local companies growing and increasingly from Bay Area companies migrating to the region.”

The attraction: The Seattle area offers outsiders a robust cadre of tech workers and rents that are substantially cheaper than office rents in California. New office space in appealing downtown neighborhoods has proven itself a valuable recruiting tool for tech firms such as Amazon, Google and Facebook, which are going toe to toe for local tech workers. (Tech Firms Continue to Establish and Expand Engineering Centers.)

At the end of 2016, total office vacancies stood at 9.2 percent, with average asking rents up 2.7 percent year over year to $34.90 per square foot fully serviced. The downtown Seattle and Bellevue office markets are roughly midway through a peaking real estate market cycle, according to the JLL report.  JLJ senior vice president Daniel Seger describes the market as “still incredibly strong” and anticipates continued rent growth this year.

The continued demand for space is helping transform downtown Seattle and Bellevue. In Seattle, it’s helping revitalize the area around City Hall where two new office developments -- The Mark, a $400 million, 528,000–square-foot office project by Seattle’s Daniels Real Estate and Madison Centre, a $157 million mixed use project with 746,000 square feet of office space and 8,000 square feet of retail space by Bellevue’s Schnitzer West LLC -- will be completed this year.

Meanwhile, recent leasing activity has made Bellevue a more balanced market says JLL managing director Chris Hughes. “Moving forward Bellevue will be a little more broad a marketplace with a better balance of tenants than in the last cycle,” Hughes said. “That will be a benefit moving forward.”

Building the Future at SolTerra

Building the Future at SolTerra

Brian Heather believes sustainability in commercial and residential development should be within the economic reach of everyone.
In Seattle and Portland, there’s a new kind of apartment building taking shape. With green roofs, living walls, solar panels and energy efficiency built into every corner, the projects from Portland-based SolTerra represent what company founder and President Brian Heather sees as the future of design and construction. 
SolTerra is founded on the idea that building green isn’t just a lifestyle choice, but a smart financial move. Heather started the company in 2008, when he was 25 and the United States was entering a massive recession. He came from a background in solar systems, and at first the company focused only on solar design and installation. “Some people thought I was crazy because I opened an office in Portland in July 2009,” Heather says. “But there were a lot of good things going on with solar at that time.” 
His insight on the market paid off. SolTerra grew between 60 and 65 percent in the first year, and for the next five years that growth rate didn’t waver. Heather developed a living wall design that used less water and weighed significantly less than other systems on the market, and received a patent in 2013. 
The business built a strong reputation as a favored provider for projects seeking green certification or net zero energy use. But Heather was frustrated by too many projects whose developers weren’t willing to invest in his company’s ambitious designs. “We didn’t really have full control and responsibility,” Heather explains. “So we would get to the end of a project and they would run out of money.” 
His solution was to include every step of building sustainable residential housing under SolTerra’s umbrella, creating a branch of the company called SolTerra Cities that brings in investments, acquires a property, and handles the design, construction and leasing from start to finish. 
Heather wants to prove that building sustainably can be a successful business strategy. So far, it’s working. SolTerra posted $30.5 million in revenue in 2015. The company guarantees its investors an 8 percent return, a promise it has exceeded with every project.
Solterra’s first design-build endeavor, the Woodlawn in Portland, won an award from the U.S. Green Building Council for “outstanding leadership and innovation in the residential green building marketplace.” The company now has more than a dozen buildings either completed or in progress, and in August 2016 it acquired a 10,000-square-foot lot at 1208 Pine Street in Seattle for $7.5 million. The plan is to develop a seven-story apartment building with a green roof, ground-floor retail and a rooftop restaurant space.
A SolTerra mixed-use project being built at 1208 Pine Street on Capitol Hill will feature "living wall" terraces,
a green roof, solar panels and a rainwater-collection cistern.
That building, like all that SolTerra puts up, will be LEED Platinum certified, the highest possible certification from the Green Building Council and a standard the company feels strongly about. “Buildings represent a ton of energy use,” Heather says, “and we aren’t moving as quickly as we should be.”
LEED stands for Leadership in Energy and Environmental Design and was developed to encourage sustainable building and encourage a green building market. The Green Building Council says LEED-certified homes are designed to use 30 to 60 percent less energy than a traditional structure. In 2015, U.S. Energy Information Administration data showed that residential and commercial buildings accounted for 40 percent of U.S. energy consumption. 
LEED certifications require sustainable practices at all stages of the building process. Projects receive points for a range of measures, including using reclaimed materials instead of new, reducing emissions, and providing high indoor air quality and water efficiency. Because SolTerra is vertically integrated, Heather explains, it’s able to experiment with different building and design strategies to figure out the best approach for the environment and for investors. 
One example is an awning the company designed for the Woodlawn. The building had to have awnings because of its location in a historic district. SolTerra decided to make them solar, using glass-on-glass panels manufactured in Washington. After the tax credit, Heather says, the solar awnings cost less than traditional glass ones. 
“In the building industry, there really is such a disconnect between control and responsibility,” Heather notes. “Everybody’s trying to protect themselves from risk.” He sees this caution as a limiting factor in adoption of innovative green building practices and hopes SolTerra can push others in the industry to consider change. 
“What we’re trying to figure out is how to take the information we’ve learned up until today and help other people use that to develop and build good buildings,” he says. “When you have a vision, you really have to have a group of people that are all totally aligned. That’s hard to do with too many companies involved. Once you get there, once you have that recipe defined, then you have something that becomes a little bit more scalable.”
The residential green construction market in the United States is expected to grow from $55 million in 2015 to $100.4 million in 2018, according to the 2015 Green Building Economic Impact study prepared by Booz Allen Hamilton.
SolTerra's signature touches include Washington-made solar awnings at the Woodlawn in Portland, left, a green roof
on a Ballard residence, top right, and reclaimed-wood siding at Portland's Brooklyn Yard.
But Heather and SolTerra are dreaming bigger. “We’ll definitely be involved in more international projects,” Heather says of his business plan for the next five years. “We’ve spent so much time building this brand into something that people can really identify and connect with, we would like to be involved in not just sustainable buildings but whole communities.” 
Heather also thinks SolTerra can help build policies that will make it easier for green design to spread. He’s particularly interested in pushing for better zoning incentives for green development. And he says the company could have a role in financing sustainable projects in the future, potentially by creating loans that allow developers to think long term. 
Residents of Seattle will soon have the opportunity to live in a building designed by SolTerra. The company has three local projects in the works: one in West Seattle’s Alki neighborhood and two on Capitol Hill in the Pike/Pine corridor. They’re designed, Heather says, not just for energy efficiency but to promote community.
“It’s not just about putting up a box that doesn’t use very much energy or water,” he explains. “It’s about making sure these are really healthy places to live.”
The rent varies by neighborhood, but Heather says SolTerra has been matching market rates and successfully leasing every one of its buildings so far.
“The first way we do it is not necessarily the best way,” Heather points out. “So we figure out new ways to get there. But we aren’t changing the destination at all.”