Cliff Avoided but Winding Road Ahead

Transcription

1 Q OFFICE PUGET SOUND REGION RESEARCH & FORECAST REPORT Cliff Avoided but Winding Road Ahead PUGET SOUND MARKET INDICATORS VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATES SALES VOLUME SALE PRICE Q UPDATE Puget Sound and s 2012 OVERVIEW The Puget Sound office market maintained steady growth as the US economy continued to expand, at a 2.2% annualized rate, according to the Puget Sound Economic Forecaster. The regulatory uncertainty caused by the November elections has been put to rest as the American people chose their leaders. While the economy has been growing and the Great Recession seems to be over, there is a fear of the looming Budget Ceiling debate and the question of whether or not America will default on its debt and, if so, will the potential credit downgrade destroy the recovery? After witnessing the political posturing over the fiscal cliff and Congress inability to solve that issue, there is still uncertainty in the market. The real estate industry will likely have to wait until the fiscal issues, resolved through tax cuts and deepening of our debt, or tax hikes and a lowering of our debt mixed with a squeeze on the consumer will be resolved before business confidence increases resulting in more robust economic growth. Stronger than the average US market, the Puget Sound continues to grow at a moderate, but by no means, extraordinary rate. The Puget Sound economy ended out the year with unemployment at 7.8% better than the US average of 8.2%. The public sector shed jobs while the private sector grew, albeit at a slower rate, which mirrors a national trend that has stalled a wider spread economic recovery. Economic growth has been constrained by state and local governments reigning in deficits and cutting jobs. Leasing stayed moderately strong in the fourth quarter as the Seattle Office market accounted for 285,000 SF of absorption. When compared to the 1,028,000 SF the Seattle Office market absorbed during the first half of the year, fueled by Amazon.com, and given the uncertainty in the market, the general consensus is that vacancy will continue to drop, albeit, at a slower place, in the coming quarter. The South King County office market did not have a repeat of the absorption surge experienced during the third quarter but it stayed on the positive side as a net of 31,100 SF was leased. The Seattle Close-In office market saw the largest amount of absorption, 285,000, SF and the Bellevue CBD performed strongly in the Eastside market absorbing 184,000 SF of space. The Northend office market retracted by 1,143 SF but Pierce County did well, absorbing 98,000 SF. 2,000, % 1,500, % 1,000, % 12.00% 500, % % 500, % 1,000, % 1,500, % 2,000, % Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10 '10 '11 '11 '12 '12 EFFECTIVE RENTAL RATE QUARTERLY COMPARISON Q3 '12 Overall Direct Sublease Overall % Change *Seattle CBD: Class A $ $ $ $ % Net Vacancy *Seattle CBD: Class B $ $ $ $ % *Bellevue CBD: Class A $ $ $ $ % *Bellevue CBD: Class B $ $ $ $ % *weighted average asking rents

2 Amazon.com is planning 3.3 million SF of new development in Seattle. This would be one of the largest development projects in Seattle history. According to a recent article in The Seattle Times, the largest Internet retailer, based in Seattle, agreed to buy three contiguous blocks from Clise Properties Inc. and has options to buy additional significant sites nearby, said Chairman Al Clise, the fourth-generation head of the family- owned developer. In anticipation of continued rental rate growth, tenant expansion (especially by technology firms), and investor appetite, developers have started to plan their projects for the next wave of construction in the techdriven submarkets of South Lake Union, the Denny Triangle and Downtown Bellevue. The Puget Sound region continues to attract interest from institutional investors, especially in central business districts and tech-driven submarkets. In the recent ULI Emerging Trends report, one investor said, Seattle belongs in the primary category, which can be attributed to its status as one of the brain power centers. ABSORPTION The Puget Sound office market s total absorption for the fourth quarter was 596,861 SF. For the year, the Puget Sound office market absorbed a total 2,372,611 SF with the Seattle market accounting for a little over 50% of that number. Amazon.com drove absorption during the first half of the year, and moved into their pre-leased completed building Amazon Phase V, during the fourth quarter, making them indisputably the biggest driver of the market. Technology is still the catalyst of the improving Seattle office market as out of town and local technology companies seek to capitalize on the talent abundantly available in the area. Recent quarters have increasingly seen more Bay Area technology companies establish Seattle satellite offices searching for local talent, lower rents and a lower cost of living. Expect this trend continue. VACANCY Vacancy continues to decrease steadily in the Puget Sound. Overall the Seattle CBD vacancy rate dropped 51 basis points for the quarter and 196 basis points since December Eastside vacancy was down 49 basis points for the quarter and after a bumpy first part of the year, ended up 3 basis points lower than at the end of The Seattle and Eastside markets posted the lowest vacancy rates at 11.98% and 7.97% respectively while the Northend, South King County and Pierce County posted vacancy rates at 13.31%, 14.53% and 15.83% respectively. Though a fairly strong drop from last quarter, these three markets still lag behind the Seattle and Eastside market. With the recovery on track, and a large amount of available space in the south end of the Seattle CBD sub-market, expect to see vacancy rates slowly decline in the following quarters. RENTS Rental rate growth skewed towards tech-driven submarkets and Class A space. While some submarkets like South Lake Union and Bellevue CBD saw good sized upticks in rents this quarter, there are still submarkets that remain stagnant. Overall, average rental rates increased 4-5% in the Puget Sound market from $27.85 to $28.95 (full service). The limited supply of available space in class A buildings in popular submarkets such as the north CBD of Seattle and South Lake Union continue to push rates there higher. These increased rates will encourage tenants to expand their search for office space into other submarkets. Commodity space remains available in all submarkets, although large blocks of class A space are limited. UPDATE Lease and Investment Transactions SIGNIFICANT LEASES Q PROPERTY ADDRESS TENANT SIZE Submarket Type CLASS East Building Overlake's Outpatient Rehab Center 57,003 Bellevue CBD Office A Safeco Plaza Federal Home Loan Bank 54,348 Seattle CBD Office A One Bellevue Center N/A 53,130 Bellevue CBD Office A 3100 Northup Bldg University of Washington 33,492 Kirkland Office B 705 Union Station Avvo 24,446 Pioneer Square Office A Plaza Yarrow Bay Bldg 3 INRIX, Inc. 23,902 Kirkland Office B Century Square DNV Renewables 23,683 Seattle CBD Office A NE 8th St Apptio 62,278 Bellevue CBD Office A Willows Rd NE Astronics Advanced Electronic Systems 46,350 Mill Creek/Woodinville Office B SIGNIFICANT SALES Q Property Name SELLER BUYER SQ. FT. SALE DATE CLASS SALE PRICE Amazon Corporate Office Vulcan Inc. Amazon.com, Inc. 1,801,876 12/21/2012 A $1,154,269,079 $ rd Avenue Building Beacon Capital Partners MetLife Real Estate Investments 1,190,000 10/25/2012 A $548,784,720 $ City Center Plaza Cole Credit Property Trust III, Inc CommonWealth Partners 583,179 11/2/2012 A $374,650,000 $ West 8th Prudential Real Estate Investors AEW Capital Management 497,798 11/28/2012 A $278,680,000 $ PRICE PER SF P. 2 COLLIERS INTERNATIONAL

3 INVESTMENTS Puget Sound investment activity continued during the quarter. Investment sales totaled $1.5 billion during the quarter compared to $577 million during Q3. Moderate absorption, a strong and expanding employment base and limited inventory are attracting institutional investors seeking to deploy capital in a market with positive economic fundamentals. Aggressive assumptions and the underwriting of Class A well-located product from a wide array of institutional investors have kept capitalization rates, a measure of investors return, low. Premier Class A CBD locations are now trading between 4.25% and 5.75%. Further significant cap rate compression for trophy properties is difficult to foresee without additional rental rate growth, as interest rates cannot move significantly lower. SEATTLE OFFICE The Seattle office market posted strong growth, driven by Amazon.com, during Q The market as a whole realized 284,959 SF of net positive absorption. Vacancy for Seattle now sits at 11.98%, which is down from 13.92% during this same time last year. Seattle has continued to recover from its high vacancy rates at the end of Technology remains the catalyst of the Seattle office market recovery as out of town and local technology companies seek to capitalize on the talent abundantly available in the area. Recent quarters have seen Bay Area technology companies establishing Seattle satellite offices in search of local talent, lower rents and a lower cost of living. Expect this trend to continue. Amazon.com was the big story of the year in the Seattle market. After starting the year announcing their intent to purchase and develop three parcels of land in the Denny Triangle from the Clise family, Amazon purchased their 1.8 million-square-foot leased campus in South Lake Union for $1.15 billion from developer Vulcan Real Estate. Amazon s commitment to develop a new 3.3 million square foot campus as well as purchase their existing campus is further proof of their intent on keeping Seattle their home for the foreseeable future. This in turn has led to a massive development in housing and apartment units, with rampant speculation that the growth of Amazon will lead to an influx of young, urban, techsavvy individuals seeking residences. Seattle now ranks as one of the top markets for new apartment development. In recent history, Amazon has accounted for a significant portion of the growth in the Seattle office market, and over half of this year s absorption, alone. With the vacancy rate in Seattle at 11.98% and continuing to decrease, landlords are gaining Existing Properties New Supply U/C & Proposed Class # of Buildings Total Inventory Direct Vacant Direct Sublease Vacant Sublease Vacancy Rate Total Vacant Occupied Space Current Period Prior Period Current Net YTD Net Net New Supply Current Net New Supply YTD Under Construction Proposed Seattle Office: A ,531,336 4,123, % 301, % 4,425,088 28,106, % 14.92% 428,837 1,278, , , ,271 6,283,710 B ,339,147 1,986, % 95, % 2,082,261 18,256, % 9.51% (148,434) 55,431 24, ,620 C 144 3,346, , % 8, % 226,945 3,119, % 6.92% 4,556 42,947 Total ,216,928 6,328, % 405, % 6,734,294 49,482, % 12.49% 284,959 1,376, , , ,271 6,903,330 Eastside Office: A ,237,332 1,190, % 72, % 1,262,788 16,974, % 7.61% 125, ,015 1,489,385 B ,506,563 1,575, % 65, % 1,641,486 15,865, % 9.64% 45, ,769 2,252,170 C 76 1,444,667 54, % % 55,257 1,389, % 4.63% 11,641 16,484 Total ,188,562 2,820, % 139, % 2,959,531 34,229, % 8.45% 183, ,268 3,741,555 Northend Office: A 13 1,461, , % 7, % 220,146 1,241, % 15.45% 5,567 7,700 76,059 B 211 8,377,102 1,060, % 42, % 1,102,676 7,274, % 13.36% 16,545 56,874 55, ,800 C 61 1,091, , % 0.00% 123, , % 12.27% 10,046 29,252 Total ,930,173 1,396, % 49, % 1,446,709 9,483, % 13.53% 32,158 93,826 55, ,859 South King County Office: A 70 6,046,490 1,277, % 217, % 1,495,215 4,551, % 25.54% 49, , , , , ,662 B 42 8,267, , % 6, % 933,231 7,334, % 11.26% (2,218) 80,184 C 6 1,758, , % 5, % 135,890 1,622, % 6.83% (15,697) (22,268) Total ,072,971 2,335, % 228, % 2,564,336 13,508, % 16.15% 31, , , , , ,662 Pierce County Office: A 5 1,008,465 68, % 218, % 287, , % 28.67% 1,450 48, ,099 B 169 5,581, , % 13, % 869,212 4,712, % 16.89% 73, , ,449 C 97 2,007, , % 0.00% 203,988 1,803, % 10.58% 8,273 (21,323) Total 271 8,596,888 1,128, % 231, % 1,360,858 7,236, % 16.80% 83,306 27,765 15, ,548 QUARTERLY TOTALS Q3 12 1, ,005,522 14,009, % 1,055, % 15,065, ,939, % 12.15% 614,672 2,372, , , ,872 13,088,954 Q2 12 2, ,813,797 15,071, % 1,160, % 16,232, ,581, % 12.98% 484,499 1,165, , ,344 1,110,981 9,808,139 P. 3 COLLIERS INTERNATIONAL

4 negotiating power not seen since before the recession. This is welcome news to property owners who for years have slashed rates in order to compete for tenancy. These increasing rental rates may cause some tenants to start looking at available space in less competitive sub-markets. EASTSIDE OFFICE The Eastside office ended the year with positive net absorption, as the market continues to transition from a tenants market to a landlords market, especially in the Bellevue CBD. in the Eastside totaled 183,000 SF for the quarter. The vacancy rate for Eastside office is down to 7.96% compared to 8.45% at the start of the previous quarter. The Bellevue CBD again was the best performing submarket with 184,000 SF of absorption during the quarter. The I-90 Corridor lagged behind the rest of the eastside with negative absorption of 58,000 SF. The Bellevue CBD continues to outperform other submarkets in the area, as technology tenants are still driving the market for space. Apptio signed a 62,000 SF lease at Plaza East and Ascentis leased 12,417 SF. Expect tenant demand for CBD space to remain strong going into A tighter market for space in the CBD has led to rental rate growth, especially for premium space and larger contiguous blocks. Smaller blocks of commodity are becoming harder to find. Average Class A CBD rental rates rose $.20 quarter over quarter and have now grown $2.87 during 2012 up to $ Developers are working to entitle their new projects and market them for prelease as moderate job growth and climbing rental rates increasingly favor new development. Wright Runstand & Company proposed two buildings in the Spring District totaling 492,400 SF of Class A office space that will break ground during Q3 of The robust leasing market in the CBD has also fueled investment sale activity. Cole Real Estate Investments sold City Center Plaza to Commonwealth Partners for approximately $375 million or $642/SF for one of the largest sales of The asset is 100% leased to Microsoft. In the suburbs, Smart Cremation leased 52,000 SF at Quadrant Willows Building C, Solutions IQ leased 16,681 SF at the NW Tech Center and UW Medicine signed a 31,000 SF at the 3100 Northup Building. There has been considerably less activity in suburban submarkets than the CBD, but expect activity to slowly pick up as tenants seek less expensive space outside the CBD. With financing rates at an all-time low there was a flurry of user driven sales activity outside of the CBD in the fourth quarter of Notable sales included the Lott Family s $13,650,000 purchase of the Brookside Office Center building adjacent to the building they own. In addition, Menlo Equities purchased the Universal Avionics Building for $12,250,000 or $194 per square foot. Finally, GJR Reih LLC purchased buildings A & C at the Kirkland 405 Corporate Center for $13,850,000. PIERCE COUNTY OFFICE The Pierce County office market ended the year on a positive note, as demand for office space increased during the fourth quarter. The market absorbed 83,306 SF overall, which dropped the vacancy rate 97 basis points from 16.80% to 15.83%. The best performing submarket was Tacoma Suburban with 21,871 SF of net absorption. This lowered the vacancy rate ninety nine basis points from 9.00% to 8.01%. Notable signings during the quarter were Americas Credit Union occupying 21,807 SF in DuPont and Centennial leasing 10,000 SF in Tacoma. The Gig Harbor/W Pierce County submarket performed poorly at the end of the year accounting for a majority of the negative of absorption in Pierce County. It posted negative absorption of 1,437 SF, which raised the vacancy rate to 15.91% from 15.63%. Spanaway also struggled, giving back 900 SF of space. The Pierce County office market will likely continue to struggle in 2013 as it does not have the same strong and expanding base of technology companies that are located in the King County office markets. With high vacancy rates and Pierce County s high unemployment rate, rental rates will remain flat as there is not much demand in the area. P. 4 COLLIERS INTERNATIONAL

5 NORTHEND OFFICE Northend Office endured another difficult quarter, as the market remains stagnant in comparison to the Seattle and Eastside markets. There was 1,143 SF of negative absorption during the quarter, which moved the vacancy rate from 13.30% to 13.31%. The Mill Creek-Woodinville submarket performed the best with absorption of 32,158 SF which decreased the vacancy rate to 8.63% down from 15.01%. Demand for space was again weak in South Everett, as the market gave back 27,267 SF raising the vacancy rate to 8.54% up from 6.73% Tenant movement and new leases signed were limited during Q4. The only major moves were made by Astronics Advanced Electronic Systems who moved into Sammamish Ridge Tech Center Buildings A & B which they purchased last quarter and now occupy all 46,350 SF of Class B office space. Tenant activity and market depth are still shallow on the Northend. Tenants still have a variety of cheap alternatives available in suburban markets closer to the Bellevue CBD and Seattle. Investment sales have attracted limited interest compared to the Bellevue and Seattle central business districts. The largest transaction to take place during the quarter was David Stern Management Corp. s purchase of the Frontier Communications building in Everett for $19,000,000 from Frontier Communications Corporation. Other notable sales included HR Acquisition I Corporation s purchase of the 47,225 SF Stevens Professional Building in Edmonds from Stevens Medical, LLC for $9,426,067 and in Mill Creek CEP II Mill Creek 12, LLC purchased the 26,304 SF Mill Creek Pavilion building for $6.7 million or $ per square foot. Expect investment sales to remain limited, as tenant demand remains limited in the Northend. SOUTH KING COUNTY OFFICE The South King County office market continued to grow, though not to the same extent as last quarter. The market posted 31,000 SF of net positive absorption from Oct-December. The vacancy rate fell to 15.95% during Q from 16.72% during the previous quarter. Since the beginning of the recession, the office market in South King County has been sluggish at best. Federal Center South, Building 1202 in South Seattle is now complete. The US Army Corps of Engineers began their occupancy of this 208,000 SF, Class A office building two years ago. Although technically within the Seattle city limits, buildings that are south of Southwest Spokane St (West Seattle Bridge) have more in common with office buildings in the Kent Valley and typically compete with them. With the strengthening Seattle Office market, South King County should expect to see an uptick in absorption as tenants who want Class A space, but are not willing to spend as much as they would in the Seattle market, move to South King County. Currently, South King County also offers concessions and free rent that are starting to disappear from the Seattle Office market. The South King County market is expected to remain weaker than the Close-In Seattle market in the near future. However, as rental rates in the downtown markets continue to increase, tenants that are able to operate outside of the downtown cores will potentially look at South King County as a more viable option. 522 offices in 62 countries on 6 continents $1.8 billion in annual revenue 1.25 billion square feet under management Over 12,000 professionals SEATTLE: Bill Condon Managing Director 601 Union Street, Suite 5300 Seattle, WA BELLEVUE: Bret Jordan Managing Director SE 6th Street, Suite 240 Bellevue, WA RESEARCHER: Andrew Cramer Seattle Research Analyst andrew.cramer@colliers.com TEL Taylor Hudson Bellevue Research Analyst taylor.hudson@colliers.com TEL This document/ has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. Colliers International is a worldwide affiliation of independently owned and operated companies. Accelerating success. P. 5 COLLIERS INTERNATIONAL