Office Report: Bellevue Hot, Seattle Stagnant

SEATTLE-Downtown Bellevue continues to improve more rapidly than Downtown Seattle, according to brokers with Cushman & Wakefield, which just released its first quarter report on the office market. Over the first three months of the year, overall vacancy in the Bellevue CBD fell 140 basis points to a pleasant 8.5% while vacancy in the Seattle CBD dropped 90 basis points to 14.2%.The situation in Bellevue has rents on the rise. Gross annual class A lease rates have jumped by $1.40 over the past three quarters and now average $24.39, according to the report. “If you look at Downtown Bellevue one year ago, it was not difficult to get a $20-gross deal,” C&W’s director of Eastside office leasing Tom Bohman tells GlobeSt.com. “Today it’s difficult to keep it below $26-$28.”In Seattle, meanwhile, class A rental rates have been around the $27 level for the past three quarters, and it will likely stay that way for the time being, C&W associate broker Wende Sauvage tells GlobeSt.com. It will stay that way because vacancy is expected to rise again next year, she says, after Washington Mutual completes its new headquarters and vacates a goodly portion of its 1.2 million sf of leased space. “(Equity Office Properties), the landlord for much of Washington Mutual’s leased space, has been able to backfill some of that space with preleases by being aggressive in this flat market,” says Sauvage. “But that will leave gaps in other Downtown properties.”Although they are not able to push rates now, Sauvage says owners in the Seattle CBD are optimistic about the longer-term future. They have been moving away from the typical 10-year deal and toward five- to seven-year deals, she says, expecting that they will be able to achieve significantly higher rents beginning in 2008 or 2009.On the investment side, things continue to rage. With the copious amount of investment capital looking for a home, C&W’s senior managing director for the region, John Miller, tells GlobeSt.com there has been a feeding frenzy on what little product has come to market. A prime example is 1001 Fourth Avenue, a 707,000-sf value-add play in Downtown Seattle that reportedly attracted more than 60 proposals and is expected to change hands in the next few weeks.With the limited amount of product available for sale, investors also seem willing to pay much more for each investment, betting that rents will rise in the coming years and allow them to push their cap rates. “Including this week’s sale of Civica Office Commons in Bellevue at $462 per foot and the December sale of the IDX Tower in Downtown Seattle at $404 per foot, buildings are being bought and sold at record high rates,” says Miller. “It’s hard to imagine that the current modest rental rates can justify these high sale prices.”