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SEATTLE-A minor growth in employment projected for 2003, less new product being delivered to market by developers, and an expected bottoming out of effective rents by the end of the year are positive signs that the market for office space may be turning the corner next year, according to the most recent Office Research Report just released by Marcus & Millichap.

“Seattle’s office market is not expected to experience a marked rebound over the next 12 months, yet the worst seems to be over,” said Gregory S. Wendelken, regional manager of the firm’s Seattle office. “Some submarkets will begin to recover prior to others, including Central Seattle and Kirland/Redmond/Bothell, as they were not significantly overbuilt in anticipation of the growth in the high-tech industry that failed to come to fruition.”

The report notes that total employment in the market declined by 2.4% in 2002 with manufacturing and the service sectors being the hardest hit, losing 29,000 jobs. Still, the report forecasts a 0.1% increase in employment by the end of 2003.

After the building craze of 2001, when 4.9 million sf of office space was delivered in anticipation of the up-coming high-tech boom that didn’t materialize, developers slowed down in 2002, delivering only 1.6 million sf. This year they will deliver only 1.7 million sf since developers are opting to either defer or abandon many projects. Still, some developers remain optimistic of a recovery like in Bellevue, where plans are being made for a mixed-use project with one million sf of office space, a hotel, and 2 million sf of retail, with no office product being delivered before 2006.

Building owners have been increasing concessions to retain or attract new tenants in the face of increasing vacancies and effective rents that have declined 12.8%. Bellevue was the area hardest hit, when Boeing vacated 650,000 sf of office space in the region. Then another big hit was taken when the firm vacated another 235,000 sf in the Northend/Snohomish County submarket. The double-digit vacancy rate currently being seen throughout the greater Seattle area is expected to continue at least until 2007.

Private owners of small Class B and C properties who have been trying to hold on, may tire of waiting and decide to sell this year, thereby increasing the available inventory on the market. However, the bid/price spread is narrowing, so low mortgage rates may entice some Class B or C tenants to purchase the buildings they now occupy, particularly in outlying areas where the prices are more affordable. Therefore, sales prices are expected to decline by 5% in 2003.

In addition, the Insurance Services Office has placed Seattle in the list of second-tier cities in terms of risk, along with Los Angeles, Houston, Boston and Philadelphia, which means that property owners will most likely be affected by the increased cost of terrorism insurance, and thus should plan accordingly.

One last positive note in the report is that the in-city Class A market, which has been in a lull since 2000, may finally be heating up if a rumored deal for the 20-story Millennium Tower in downtown Seattle actually happens. If it does, it would be the only Class A building to trade since the new millennium began.

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