- Derek Hermsen
Remote Controls Seattle
Downtown Seattle's office space market is in trouble, but why haven't office "asking rents" fallen off a cliff ? It's because even if office spaces were free, long term leases wouldn't get signed. No company wants to commit to years of lease term or force their employees to be downtown right now. Since no "real leases" are being done, no "real rents" have to be demonstrated; just suggestions or "asks". Short term leases (periods of less than 2 years) are seeing dramatically reduced rents. That is the only way to get a deal done today.
It's more than the pandemic. Drug addicts are lurking, yelling, vandalizing, stealing, shooting up, destructing, and ruining life on the sidewalks of the city. Retailers struggle to be open. The streets don't feel safe. Who wants to be downtown in that? Let's hope that the new Mayor will turn this city around.
Many feel that working and shopping from home is safer and easier. The pandemic showed us that remote working works for a lot of service and technology companies. Technology continues to improve our effectiveness to work while away from a physical office. Commute downtown? "No thanks" the people say. New COVID variant? "Sweet!" they shout. "We can delay having to go back to the office." If people can work from home, the office space market is now competing with the residential market to some degree, which adds a lot of inventory/supply that wasn't previously there.
Landlords of downtown multi-tenanted office buildings need to be worried. The data proves it.
Check out this chunk of the city; from lower Queen Anne down to the stadiums.
Filters: 20ksf +, multi-tenanted office buildings.
What does the data show?
The most recent peak of the office market was about Q1 2019 and it has only gotten worse since then.
The "availability rate" of space has increased from 9% up to 19.7%. This means that there was 5.5mm square feet of space available at the peak, but now it has more than doubled to 12.9mm square feet of available space. The worst "availability rate" in the past 15 years was Q4 2009, which got to 20% (but back then that was 10.9mm square feet; 2mm square feet less than today!). That occurred about 2 years after the main impacts of the mortgage crisis. Here we are almost 2 years since the onset of COVID and we're still adding to "availability". We might beat the percentage of inventory record next quarter.
Tenants below 25,000sf, which would be the size of the majority of tenants in most multi-tenanted buildings, traditionally would normally have an average lease term of about 5 years. That means the market "turns over" about 20% of its leases (expire) each year. We're almost 2 years into this pandemic so only about a third of tenants have had a chance to really assess their current office leasing needs; and those that have, have mostly just kicked the can down the road with short-term leases. Some were able to give back their space. Some tried to sublet their space. The market hasn't had time to demonstrate the true "bottom" yet or the true effects of remote working. 2022 is going to be a telling year. Landlords can't hold their "asking rents" forever. Someone is going to be left holding the bag. Office tenants have a choice of how to operate now; and it includes the living room couch.
The office leasing world of Meta, Google, and other technology users of 100k+ square feet is different than what is being demonstrated here. Those office tenants ironically still elect to pay too much for empty office space as they build their own virtual worlds.
Office tenants downtown have massive leverage now in their lease negotiations. The past is history as they say. It is important to be "present" in assessing office space needs. If the "present" doesn't include using your cubicles, but does include happy and productive employees at home, don't be afraid to reduce your footprint or even to let the office space go. It doesn't have to be permanent.
Let's all continue to hope for a restored and revitalized downtown Seattle by our newest additions to city leadership. If the streets get cleaned up, this city will be back to being one of the best places to work and live in the world.