Commercial Real Estate

The Race for Office Space

By Jeanne Lang Jones April 29, 2015

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This article originally appeared in the May 2015 issue of Seattle Magazine.

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Companies headquartered outside Washington are beating a path to Seattle in a rush to open satellite offices here. To Googles large campuses in Kirkland and Seattles Fremont neighborhood you can add Elon Musks recent announcement that he could hire up to 1,000 people for a local office of SpaceX. Facebook leased enough space in South Lake Union to house 2,000 employees. Apple, Cisco, Uber, Dropbox and Groupon are also reportedly looking for more space here.

Clearly, these companies want to tap into the wealth of Seattle talent, whether its for data scientists at Amazon or aerospace engineers at Boeing. But theyre also part of a far broader expansion in the local economy that is causing unprecedented demand for office space. This demand is driving down vacancy rates and driving up rents while spurring developers to accelerate plans to put up new buildings.

Among the companies looking for more space in Seattle are diverse local tech firms like Tableau Software in data visualization, Trupanion in pet insurance, DocuSign in electronic signatures and Juno Therapeutics in biotech. Non-tech companies like Holland America Line, Group Health Cooperative, Safeco Insurance and NBBJ are also on the hunt for more space.

The Los Angeles-based global real estate services firm CBRE has identified demand for 8.7 million square feet of space among the companies it tracks in the Puget Sound region. These businesses currently occupy 5.1 million square feet of space, according to John Miller, managing director of CBREs brokerage services in the Puget Sound region. They will need an additional 3.6 million square feet in coming years to handle their growth.

And its no flash in the pan. Were years away from seeing any kind of pullback, says Miller.

Unlike previous surges in demand, this one doesnt depend on the usual suspects like Amazon and Microsoft. Rather, a large and diverse range of companies is seeking significant space. In February, for example, Facebook signed one of the largest office leases completed by a company headquartered outside the Puget Sound area for space in Seattle. It agreed to lease 274,000 square feet of space in Dexter Station, a speculative office project developed by Seattle-based Capstone Partners and Stockbridge Capital Group of San Francisco. Bellevue-based Expedia announced in April that it will buy the 750,000-square-foot campus formerly occupied by Amgen alongside Elliott Bay in Seattle and move its 3,000 local employees there by 2018. Meanwhile, Safeco Insurance needs as much as 400,000 square feet, Tableau Software up to 280,000 square feet and Holland America Line as much as 225,000 square feet. DocuSign and Juno both want up to 150,000 square feet.

Whats also notable about this surge in demand is that its occurring largely in urban areas at the expense of suburban office parks. It would seem to be a tacit recognition that an urban presence helps recruit younger, millennial workers. Companies also desire a broader range of amenities to attract younger employees, pressuring landlords of older buildings to undertake expensive renovations.

Responding to the demand for new office space wont be as easy as it has been in previous booms because those planning to develop office space are facing unusually intense competition from residential builders. This competition is driving up land costs.

Much of the demand comes from the fast-growing tech sector, which accounts for 44 percent of the current interest in office space in the Seattle area, according to the Chicago-based real estate services firm Jones Lang LaSalle. (The firm tracks 139 Seattle area tenants, which are in the market for just over 6 million square feet of space.) Insurance companies rank second, at just under 10 percent of total demand, or 597,000 square feet with Safeco accounting for the bulk of that requirement. The professional services category ranks third, at 8.1 percent of demand (503,500 square feet), and health care and social assistance firms are a close fourth, at 8 percent (496,000 square feet).

Many existing companies here have been very conservative coming out of the recession and they just now are starting to emerge as significant reacquirers of space, says Bill Pollard, a founding principal at Talon Private Capital LLC in Seattle.

The diversity among the prospective tenants offers a sharp contrast to prior years when Amazon alone accounted for 60 percent of the demand in Seattle. Amazon recently agreed to lease 817,000 square feet of space in the Troy Block buildings in South Lake Union. The online retailer already owns or leases 4.2 million square feet of space and is building or proposing to build an additional 4.7 million square feet, which together would be enough to house more than 60,000 employees. That includes the two 38-story buildings and a 5-story, bubble-shaped building going up at its new downtown campus.

Amazons astonishing growth has expanded Seattles central business district northward, encouraged residential development downtown and helped turn South Lake Union into a vibrant urban neighborhood.

Another prominent name not among those hankering for more office space is Microsoft. During the last strong leasing market between 2006 and 2008, Microsoft consumed most of the new development on the Eastside, filling nearly 2.3 million square feet of office space in four new projects in downtown Bellevue and along the I-90 corridor.

A recent change in leadership plus the largest layoffs in Microsofts history have left the company, which occupies fully a quarter of the office space on the Eastside, with little appetite for new space beyond a planned expansion of its Redmond headquarters. Construction is underway on Building 83, a four-story, 313,790-square-foot building that will be completed by early 2016.

Microsofts reorganization also brought substantial cuts in vendor contracts, so these firms are not seeking as much space as in past leasing markets, says Paul Sweeney, a principal at the Broderick Group, a real estate services firm with offices in Seattle and Bellevue.

In the 28 years that Sweeney has been in the brokerage business, Microsoft and its vendors have always led the Eastside leasing market, he points out. The fact that were having a relatively good market and demand without Microsoft is sort of extraordinary, he adds.

Most of the growth on the Eastside will come from other existing tech tenants and the professional services firms that work with these companies, explains Chris Hughes, a managing director in the Eastside office of Jones Lang LaSalle. Six of the largest office tenants in the market are in high tech, says Hughes, [and] four are either located on the Eastside or have a significant footprint on the Eastside.

Some think that as Microsoft moves through its reorganization, it may re-enter the leasing market later in the cycle. Regardless, the boom in demand has pushed office vacancies in Seattle and Bellevue under 11 percent, down sharply from 2009.

The tightening office market here has spurred a new round of commercial office development in Seattle and Bellevue. Only about a fourth of the 5.1 million square feet now under construction has been pre-leased. The remainder is being built on a speculative basis without any tenants in hand. That indicates developers are confident the market will support the higher rents they need to cover their construction costs.

Developers are betting on the continued growth of a cadre of younger tech companies such as Tableau Software, Concur Technologies, DocuSign and Trupanion. Tableau has more than 2,000 employees and now occupies five buildings in Fremont. It helps that the younger tech companies such as Tableau have a track record of performance. You can understand their growth pattern and landlords are better ready to underwrite them as a tenancy than in the last cycle, says Colliers SVP Mike Schreck.

These companies want to be situated in urban neighborhoods where employees can live, work and play all within walking distance. Tableau, for instance, is headquartered in Seattles Fremont neighborhood (with an Eastside office in downtown Kirkland). Fremont has a vibrant urban energy and creative feel we love, says Tableau VP of Human Resources Brett Thompson. It helps energize our people and their work. We dont want to work in an isolated campus or office park.

Developers also count on the continued expansion of satellite tech offices. In recent years, this region has become a place where leading Silicon Valley tech firms feel they need to be. Google, Facebook, Twitter, eBay, Apple and Oracle have offices here. So does Alibaba, the Chinese online shopping juggernaut, which recently opened a small office in downtown Seattle.

Billionaire Elon Musk says he plans to hire as many as 1,000 workers during the next three or four years to help develop satellites at a new engineering center in Redmond for his company, SpaceX. Musk plans to draw on the engineering talent at Boeing and nearby Microsoft. SpaceX is certain to need more space as it expands.

To better compete for tech-intensive tenants, the owners of older buildings are renovating lobbies and adding amenities such as workout facilities, bike lockers and showers, says Dan Flinn, a principal at the tenant representative firm Flinn Ferguson Corporate Real Estate in Seattle. Tenants also prefer buildings that are energy efficient and environmentally friendly, says Rob Nielsen, a VP in the Seattle office of Jones Lang LaSalle who specializes in representing tenants.

Since companies are also putting more people in less space, building owners must often provide more restrooms, more efficient elevators and more powerful heating and cooling systems. Nielsen believes these sorts of upgrades may shift attention away from bustling South Lake Union and back to the older central business district, which benefits from its proximity to the Third Avenue mass-transit corridor and tunnel system.

In some cases, the difference in cost between leasing second-generation space and new construction can be more than $10 per square foot, according to real estate expert Kip Spencer. Tenants can expect rents to keep rising this year because of high demand and a strong investment market. A large number of trophy office buildings is expected to change hands in 2015, Spencer says, with new owners likely to push up rents to recover their costs.

With rents rising steadily and developers drafting plans for new buildings, there are naturally murmurs of a bubble developing in the office market. But with an unusually diverse group of tenants clamoring for ever more space, theres no sign the demand will let up anytime soon.

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