SEATTLE—The Puget Sound office market remained one of the most active in the country as rents reached record highs. Strong leasing caused vacancy to drop to 8.1% and absorption maintained the high level reached last quarter, according to a Colliers International third-quarter office report.

Tech and co-working dominated the market in the first and third demand positions, with Amazon and WeWork expanding further. A second source of demand is coming from finance, insurance and real estate companies, likely making up the next tranche of leasing, GlobeSt.com learns.

Indeed, Amazon remains a primary absorption driver, occupying 157,301 square feet at 9th and Thomas in the Lake Union submarket this quarter. The city's second largest occupier, WeWork, occupied 100,000 square feet of its 108,000-square-foot lease at 1411 4th. WeWork will continue to be a topic of discussion in this market, as the company closes in on occupying more than 1.2 million square feet by the end of this year.

Demand from large tech firms continued to be the story as not only Amazon but Google both expanded in the CBD, making it exceedingly difficult for smaller companies to find full floors. Property owners may begin combining smaller spaces to create larger blocks to meet the demands of tenants in the market.

Tenants are looking for 6.6 million square feet of space, 3.7 million in Seattle and 2.9 million on the Eastside. Slightly more than half of these prospects in Seattle and almost 70% on the Eastside are tech companies.

“The Puget Sound region is active on both sides of the lake with tech still being the dominate source of leasing activity,” Sam Ziemba, senior vice president of Colliers International, tells GlobeSt.com. “If you look at the region as a whole, there has been 7.2 million square feet in leasing activity this year so far, which contrasts with last year at 5 million square feet for the whole year.”

Ziemba says that Amazon accounts for 32% of leasing demand in Seattle and 11% in the Eastside, while WeWork accounts for 10% of leasing demand in Seattle and 5% in the Eastside. He indicates that co-working will continue to grow and those footprints will expand in the market.

As full-floor availabilities remained at a premium, class-A rental rates increased in both the Seattle and Bellevue CBDs. Leasing was strong in recently delivered Seattle properties such as Madison Centre, which will lead to higher absorption in future quarters.

Companies and job seekers from San Francisco were major demand drivers, capitalizing on the still-booming tech market and lower cost of living. Oracle, Stripe and Uber are just a few Bay Area firms that have recently expanded in the Puget Sound, making up about 25% of the tech space in the region, GlobeSt.com learns.

On the Eastside, large-block availability remained low for all submarkets. Google's rumored purchase of the Kirkland Urban campus would remove the largest remaining block from the market, leaving just one block exceeding 75,000 square feet on the Eastside.

“There will be more growth on the Eastside,” Denin Grcic, Colliers research associate, tells GlobeSt.com. “And, Seattle is the top relocation spot from other cities, including San Francisco and Denver. This is due to its tech job market, outdoor activities, quality of life and lower cost of living.”

Sales volume reached $2 billion this quarter, more than doubling last quarter's total. The Metropolitan Park buildings in Seattle each sold for more than $600 per square foot and 400 Fairview sold to Pembroke RE for $997 per square foot this quarter. New to the market, California-based Preylock RE Holdings purchased the Willows Creek Corporate Center in Redmond, where Facebook/Oculus recently leased 250,000 square feet, for $117 million. On the Eastside, 110 Atrium in the Bellevue CBD sold for $500 per square foot, the highest-value downtown sale in 2018. The Eastside will likely take center stage for future sales activity as several buildings in the 520 Corridor are projected to trade, including Kennedy Wilson-owned Corporate Campus East.

Seattle vacancy declined to 7.6% this quarter from 7.9% in second quarter, with vacancy in the CBD dropping to 10.6% from 11.2%. Eastside vacancy rose slightly to 5.8% due to move-outs in the Bellevue CBD, with space leased and eventually occupied by large tech and co-working companies.

Seattle submarkets recorded an aggregate 518,462 square feet of net absorption, largely due to Amazon's occupancy of 9th and Thomas, and Big Fish Games' move into 186,974 square feet at the Maritime Building. Eastside absorption dropped to negative 159,552 square feet for the quarter, as tenants moved out of large spaces in Bellevue in preparation for new lease commitments from WeWork, Google and Facebook.

Construction activity lagged across the region amid rising costs and little developable land. Block 16 of The Spring District in Bellevue was the only property to break ground in third quarter. Kilroy Realty's 333 Dexter is the most notable Seattle project under construction, with an expected delivery in early 2019. Skanska's 2 & U development in the Seattle CBD is progressing and should begin pre-leasing soon.

The region had 29 office sale transactions averaging $403 per square foot, up 15.1% from $350 per square foot in second quarter. For example, 400 Fairview in the Lake Union submarket drew a huge price tag at $997 per square foot.

The Puget Sound had no new deliveries for the second straight quarter but this will likely change during the next few months. The Eastside had the most activity as Onni Group and Skanska announced new developments in the Bellevue CBD that will add more than 1 million square feet of new supply. Capstone Partners again revised its plans for Esterra Park in Redmond, settling on the development of 235,000 square feet of office space. However, 66% of all under-construction office space has already been pre-leased, up from 64% last quarter.

The Lake Union submarket may have accelerated leasing from biotech firms as large blocks of biotech space remain in the market. In the Atrium at 1818 Fairview Ave. E, scheduled to deliver in November 2018, biotech tenants leased more than 140,000 square feet, leaving only a third of the building's space remaining.

The overall class-A rental rate rose to $49.51 per square foot in third quarter, driven largely by a 15% increase in Pioneer Square/Waterfront and a 14% increase in Lake Union. Looking ahead, rents are expected to exceed $50 per square foot as the demand for space remains high. Average asking class-A rents in the Bellevue CBD surpassed $50 per square foot for the first time during the third quarter at $51.06 per square foot for premium spaces. This increase was due to the significant lack of supply affecting the market, but relief is in sight as Onni Group and Skanska both plan to develop CBD high rises, with even more new construction possible further out.

Instant Insights /

Tech, Finance and Co-Working Lead Office Charge

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