Office Forecast: Puget Sound Investment to Remain Robust

SEATTLE-Office properties here will continue to attract significant investment dollars throughout the rest of the year, according to the latest office forecast from Marcus & Millichap Real Estate Investment Brokerage Co. Indeed, with concessions dropping off along with vacancies and construction still subdued on the heels of a record year for office investment, Seattle is one of the better markets for investment this year, according to the report.Despite stagnant fundamentals in 2004, institutional investors purchased approximately $1 billion in Puget Sound office properties, setting a new record for total dollar volume in the area. With conditions poised to be more attractive in 2005, M&M pushed the Seattle market up 20 spots to No. 15 in its 2005 ranking of the nation’s top office markets. The Index ranks 42 office markets based on a series of 12-month forward-looking supply and demand indicators. At the heart of the improved conditions are more jobs. Seattle employers are forecast to add approximately 52,000 jobs in 2005, a gain of 2.9%. Professional and business services firms alone are projected to drive growth by adding over 10,000 jobs. Overall, office-using sectors are expected to expand by almost 11,200 positions, according to the report, which should help drop overall vacancy in the region by about 100 basis points to 14.8%, the lowest rate since 2001.That combined with subdued construction–700,000 sf of competitive space is expected this year–has M&M predicting that effective rents this year to climb for the first time in five years. The expected 1.9% increase will lift the average effective rent to $20.75 per sf per year.The report states that the bulk of the institutional investment activity is taking place in downtown Seattle, where city efforts to encourage business expansion and relocation are ongoing. As well, investors in search of stability are looking in the Kirkland/Redmond/Bothell submarket, where vacancies are among the lowest in the region and strong rent growth has ensued. The area boasts a wide variety of office buildings and a median price of under $200 per sf, according to the report.”Investors interested in assets measuring less than 50,000 sf should consider properties in Pierce County, particularly in Tacoma, where the median price per square foot is often less than $100,” states the report. “While vacancies in the area have increased over the past few years, investors willing to take on occupancy challenged assets will find that cap rates are based more on actual numbers than pro forma operations.