Commercial Real Estate

August Market Reports for Seattle Commercial Real Estate (post 2)

The following article was written by two real estate investment brokers at Kidder Matthews. Jason Rosauer and Rob Anderson (collectively Team Rosauer) lead an investment brokerage team that specializes in property sales of office, industrial, and retail buildings, as well as land development sites throughout the West Coast. They also publish monthly market reports that detail the commercial real estate market in the greater Seattle area. The report offers an inside look at the current real estate trends around Seattle’s neighborhoods and projections for future trends. We’ve broken up the Team Rosauer August Market Report into three posts; the first looked at the trends in Interbay and Issaquah, the second will explore trends in Lake Union and Mercer Island.

How will 3 million square fee of new development impact Lake Union?

In 2013 Amazon will begin developing the first phase of its 3.3 million square foot project in South Lake Union. Amazon’s ambitious plans will change the face of the Seattle sky line and dramatically impact the real estate market around Lake Union. With a new supply of office and retail space—3.3 million square feet of new space is almost exactly equal to the current supply of office space around the entire lake—the question for many current landlords should be whether demand for current space will drop.

The answer: not around Lake Union. Builders and developers have utilized the space immediately around the lake since the early 20th century, and their buildings remain full. In fact, of the 32 buildings constructed before 1949 around the lake, all but one building is 100% leased. A decade by decade picture shows that construction of buildings has not significantly changed the vacancy rates, which suggest that demand for space in the area is even across building ages (buildings constructed prior to 1960 = 96.9% leased; 1960s = 95% leased; 1970s = 77.22% leased; 1980s = 91.47% leased; 1990s = 96.06% leased; 2000s and later = 96.03% leased). Aside from the unusual dip in vacancy for buildings constructed in the 1970s (can you blame the style?), vacancy rates are relatively flat regardless of the age of the building.

The reason for the flat vacancy rates for buildings of all ages is the same reason that Amazon’s new buildings will not affect the demand for space on Lake Union. Employers still want to be on the lake, and every inch of waterfront space or space with a view is prime realty. Amazon’s developments, although beautiful and innovative in design, are not on the water. South Lake Union has spread a mile to the south to encompass the Denny Triangle, the location for the planned 3.3 million new feet of office and retail. Far enough removed from the water to affect a tenant’s desire to stray from the lakeside.

A view of Lake Union will always be highly desirable. Even if you own a Class C office building of wood frame construction that was around before the 3.5 million square feet of space that currently surrounds the lake. Amazon’s new developments will change the face of Seattle and the demand for space in Seattle, but it will not negatively affect the demand for space around Lake Union.

Mercer Island: How Does Parking Impact the Demand for Space?

Mercer Island will always have difficulty attracting the same type of tenants that office in the Seattle or Bellevue CBDs. Nevertheless, it has created a small, healthy market between the two cities with relatively high, but competitive market rents that result in higher market values of property.

The Seattle and Bellevue CBDs dwarf Mercer Island in size with the Seattle CBD containing over 32 million square feet and the Bellevue CBD containing over 13 million square feet of space. Mercer Island has just over 1.2 million square feet of space. Despite the size differences, Mercer Island has similar vacancy rates in its buildings and only slightly lower lease rates. How have property owners on Mercer Island created this competition?

By playing to its advantages and its market. Mercer Island offers a focus on adequate and often boutique amenities that attract tenants looking for less hassle with traffic and ease of commute.  This market also appeals to many business leaders who reside on Mercer Island and prefer to office near their homes.

Another huge advantage is available parking and lower costs to park. Parking costs in the Seattle CBD can be as high as $400/month and Bellevue is not much different. Mercer Island, however, generally offers free parking. The parking ratio per building in Mercer Island on average is over 4 spaces per 1000 square feet of building. Seattle, on the other hand, has an average parking ratio per building of 1.17 spaces per 1000 square feet of building. Bellevue has an average of less than 3.45 parking spaces per 1000 square feet of space, but that number is shrinking as the space in the CBD becomes more and more limited.

Mercer Island will continue to grow as more investors look to the area to develop. As the price per foot of space rises, which it already has been doing over the past few years (transactions over the past few years show around $100/SF), look for developers and property owners to begin charging for the space. But in the meantime, tenants and employees will celebrate the extra parking spaces, the fewer headaches associated with paying for parking, and the extra several thousand dollars per year (per employee working on Mercer Island) saved by avoiding Seattle and Bellevue’s CBDs.

But free parking will not last. Land on Mercer Island is becoming too valuable, and existing landlords are positioned to reap the benefits of paid parking within the next 5 years, further raising property values and net operating incomes.

More to come
Stay tuned for the rest of the August market reports with details about Mill Creek, Northgate, and the University District. All of these reports are brought to you by Team Rosauer at Kidder Matthews.


Gavin Johnson

Gavin enjoys craft beer and is learning the art of brewing.

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