Colliers releases first quarter Puget Sound office real estate report

The Puget Sound Office market is starting the year off on the right foot, according to a First Quarter 2005 report on office real estate released by Colliers International, the global partnership of commercial real estate firms.
Vacancy fell below 15% to 14.94% and absorption was positive 255,787 square feet. Leading the charge was the South County market with 185,977 square feet of net absorption. The Eastside continued chipping away at the vacant space with 101,113 square feet net absorption. Activity is up across the region, according to the report.

Asking rates continue to trend downward with one exception, the Eastside. With the considerable amount of leasing done in 2004, Landlords are pushing rents up on the Eastside. Construction plans that were ground to a halt three years ago are now being reconsidered. The biggest project under construction is still the Washington Mutual headquarters building of 890,000 square feet in downtown Seattle. 2005 could see more ground broken as leasing picks up.

The office investment market saw an unprecedented demand for quality product and set records for price per square foot in 2004. With the market continuing to improve those records could be surpassed, especially considering the rumored price per square foot for Civica Office Commons in Bellevue.

Overall statistics for the Puget Sound region including King, Snohomish and Pierce Counties:


Inventory: 87,600,050 square feet; Direct Vacancy: 11,987,913 square feet; Direct Vacant: 13.67%; Vacant Sublease: 1,104,412 square feet; Total Vacancy (including Sublease): 14.94%; Absorption First Quarter: 255,787 square feet; Absorption YTD 2005: 255,787 square feet


— Pierce County’s office market started the year off right, with the total vacancy rate decreasing below 10% to 9.74%.

— Absorption continued to be positive into the first quarter, though only 6,833 square feet was recorded.

— Two buildings scheduled for completion this quarter, Allenmore Medical Office Phase II and Wynstone Professional building, won’t be completed until the second quarter. Allenmore Medical is located in Tacoma’s Central market and is 45,956 square feet. The Wynstone Professional building is located in Puyallup and is 12,918 square feet.

Significant office sales closed this quarter:

— Multicare Health System purchased Allenmore Medical Center Bldg A, located at 1901 S Union Avenue in Tacoma, from Allenmore Medical Center LLC for $7,200,000. The building is 48,228 square feet and is 100% leased.

— Unico Medical Properties II LLC purchased Allenmore Medical Center Bldg B, also located at 1901 S Union Avenue in Tacoma, from Allenmore Medical Center LLC for $10,800,000. Building B is 62,559 square feet and is 100% leased.


— The South King County office market had a solid start to the year with a vacancy rate drop from 28.56% to 26.46%.

— Absorption for the quarter was 185,977 square feet. The absorption is fairly evenly divided among the submarkets. Federal Way had nearly 45,000 square feet of net absorption; Renton had 46,000 square feet; and Tukwila had over 68,000 square feet. This is very refreshing news in a market where absorption has been flat or negative for the past five years.

— HAL Real Estate Investments just signed a 75,000 square foot lease for their Blackriver 800 Building in Renton with Puget Sound Educational Service District. The education agency is coming out of downtown Burien, where their old building is set to be demolished to make way for major redevelopment. This results in pure absorption for Renton, which won’t be counted until they actually move into the space in the second or third quarter.

— Maplewood Office Building, a development of Celebration LLC, in now under construction in Federal Way. The 35,500 square foot building is 52% pre-leased to ESM Engineers, who also has an ownership interest in the project. The completion date is set for third quarter 2005.

Significant office sales closed this quarter:

— The Diane Foreman Trust sold Campus Square in Federal Way to Transpacific Investments for $5,075,000 or $100.94 per square foot. The three buildings total 50,277 square feet.

— Airport Place LLC sold the 36,724 square foot Airport Place Building in SeaTac for $4,786,250 or $130.33 per square foot to SeaTac Commercial LLC.

— Unlimited Technology Group LLC sold the 13,409 square foot building at 304 Main Avenue South in Renton for $1,425,000 or $106.27 per square foot to 304 Main Street Associates LLC.


— The Seattle Office vacancy rate dropped this quarter from 15.25% to 15.07%. Absorption ended the quarter with 20,588 square feet.

— DHL vacated 131,000 square feet in the Denny Regrade submarket, but other buildings in the same area had enough positive absorption to completely counteract it. Similar situations occurred in nearly all of the submarkets. So the lackluster amount of end-of-quarter absorption does not reflect tenant inactivity, rather a balancing of positive and negative absorption.

— Lease rates have continued to remain flat with concessions starting to lessen.

— Tommy Bahama moved into their new headquarters at 428 Westlake this quarter giving the Lake Union submarket over 87,000 square feet of positive absorption.

Significant office sales closed this quarter:

— Pine Street Development sold the 149,900 square foot Fifth & Pine Building for $55,100,000 to Metzler North America, who bought it on behalf of DIFA Deutsche Immobilien Fonds AG of Hamburg, Germany. The price per square foot is $367.58.

— Walton Exchange Investors sold the 384,302 square foot Exchange Building for $52,000,000 or $135.31 per square foot to Crescent Real Estate Equities Company. This was Crescent’s first purchase in the Northwest.

— Harbormaster Building Marina LLC sold three small office buildings totaling 51,960 square feet to Columbia West Properties for $18,206,357 or $350.39 per square foot. The buildings are located on Westlake Avenue. Included in the sale were 108 boat slips.

— East-west Investment sold a 32,000 square foot building at 300 West Harrison to the Church of Scientology for $3,700,000 or $115.63 per square foot.


— During the first quarter of the year, leasing activity in the Eastside office market continued to be strong. New and growing tenants moved into over 100,000 square feet of office space during the quarter, pulling the total vacancy rate down to 12.3%.

— Downtown Bellevue remains the epicenter of the Eastside’s turnaround. Over 25% vacant just two and a half years ago, the vacancy rate in the Bellevue CBD is now just 11.6%. The submarket’s vacant sublease space, once totaling an astounding 625,000 square feet, is now nearly non-existent, with just 7,000 square feet available for sublease.

— Developers are responding to this dramatic change by preparing for new construction. The first new office project in Bellevue will likely be constructed at Lincoln Square: Kemper Development’s massive mixed-use project under construction across the street from the Bellevue Square mall. Kemper Development recently announced plans to go ahead with the construction of the project’s long-delayed 500,000 square foot office component.

Significant leases this quarter:

— Champions Centre Church leased 61,000 square feet at Benaroya I-90 Center North. The church will occupy 40,000 square feet previously leased by Verizon, along with an additional 18,000 square feet that will be added to the building.

— In Redmond, SolutionsIQ leased 38,000 square feet at CarrAmerica’s Willow Creek Corporate Center.

— In South Bellevue, Life Center Northwest leased 21,000 square feet at Broadreach Capital Partners’ Lincoln Plaza.

— Also at Lincoln Plaza, Square Enix, Inc. leased 17,000 square feet.
Significant office sales closed this quarter:

— In Kirkland, Hines purchased the Linbrook Office Park from the Yett Family Partnership for a reported $20.5 million. The buyer will likely redevelop the property, which consists of 24 office buildings on over nine acres.

— In Issaquah, J.A.R Investments purchased the Jordan Creek Office Center for $5.5 million. The price works out to about $278 per square foot for the 19,800-square-foot building.


— After two quarters of positive growth, the Northend office market slipped a bit during the first quarter. The market posted a negative net absorption, with tenants shedding a total of 44,000 square feet during the quarter.

— The market finished the quarter with total vacancy at 15.7%, up about one percentage point from the previous quarter.

— The first quarter notwithstanding, the Northend office market has been experiencing a general increase in activity, and this trend is expected to continue in the coming quarters.