Office Landlords are Taking Longer to Break Even on Investments in This City

Office landlords in downtown Seattle have had to accept a significant discrepancy between the base lease rates they negotiate with tenants and the adjusted rents they actually agree to after accounting for concessions. As a result, it is often taking longer than in the past for their investments to reach break-even point.

While negotiated base rents of at least 10,000 SF have been stable since 2019 at around $40 to $45 a year in triple-net (NNN) terms, they fell about $5 per SF between Q1 and Q3 2023 compared to the average for 2022, according to a break-even analysis by CBRE’s Puget Sound office. Triple-net leases are agreements by which the tenant commits to paying all costs associated with the property including real estate taxes, insurance and maintenance in exchange for lower rent. The adjusted rents CBRE computed also factored in free months of rent, tenant improvement allowances and operating expenses.

CBRE’s analysis of the Seattle market included leases for at least 10,000 SF from 2019 to Q3 2023. However, no deals over 10,000 SF were signed since 2019 for buildings constructed in 2018, 2019 and 2022. Subleases were excluded from the study.

The analysis revealed a tenants’ market. It showed a clear downward-sloping trendline for average adjusted rents during this period. “2023 witnessed the largest year-over-year decline, with the average NNN adjusted rent metric falling more than 20% to $28.20 per SF per year,” CBRE reported, even though Seattle continued to show economic resilience. Landlords waiting for a strong return-to-office movement that has not yet arrived have been forced to offer tenants more concessions.

“Essentially, the 2023 Seattle office market has been characterized by shorter leases with much lower rents and tenant improvement allowances, but more months of free rent,” the report summed up. The average lease term has slipped from almost nine years to about six and a half years.

CBRE data for the first three quarters of 2023 showed average adjusted annual rent (NNN) of $27.33, tenant improvement allowances of $49.79, five months of free rent and annual escalation of 2.7%. The average break-even point rose as well. In 2020, the average break-even point was 0.9 years, and the average lease was for 95 months. In 2023, it takes 1.7 years to reach break-even and average leases are only for 77 months. The time lag applies even to newer office spaces that usually achieve higher base rents.

Only one of Seattle’s seven office markets, the Lower Queen Anne district, has seen the break-even point shorten. It accounts for just 5.4% of the total downtown office inventory.