Office rents drop, vacancy rates rise in Seattle, Bellevue

The predictions are coming true.

Nearly a year ago, some commercial real-estate brokers began warning that unless all the new, speculative office buildings under construction in downtown Seattle found tenants in a hurry, their completion could only push vacancy rates higher and lease rates lower.

Second-quarter market updates from two brokerages show that's just what's happening.

The total vacancy rate in greater downtown hit 14.7 percent this quarter, Cushman & Wakefield reported — up from 12.6 percent last quarter and 8.3 percent a year ago.

Vacant, leasable downtown office space increased more than 850,000 square feet during the quarter, the Cushman report released Monday indicates — and more than half of that resulted from the addition of 500,000-square-foot West 8th to the downtown inventory.

Touchstone completed the 28-story tower at Westlake Avenue and Eighth Avenue earlier this month. All its office space remains unleased.

Brokerage Colliers International, which uses different geographic boundaries and, unlike Cushman, includes owner-occupied buildings in its calculations, said the vacancy rate in Central and North Seattle rose from 9.3 to 10.7 percent during the quarter.

Unlike Cushman, Colliers included another new, empty building, 275,000-square-foot Fifth & Yesler, in its base in addition to West 8th. The two had a major impact on vacancy rates, the brokerage said.

There's still more coming: 2 million square feet of new office space scheduled for delivery in the next few months, almost all still unleased.

"It's going to get worse before it gets better," said Michael Dash, a Cushman & Wakefield executive director. "The buildings you'll see delivered over the next eight to 12 months are byproducts of a totally different point in time."

Touchstone President Douglas Howe reflected on his plight and that of other downtown developers during remarks to an industry gathering earlier this month.

When Touchstone started building West 8th without tenant commitments in early 2007, the local economy was booming and real-estate fundamentals were strong. "It looked like all the stars were lined up," Howe said.

But by the end of 2008's third quarter, he said, that perfect scenario had morphed into something different. Washington Mutual — downtown's biggest office tenant — had collapsed. The global economy had imploded from the credit crises.

And today? "We're now in a very difficult situation," Howe admitted.

Twenty years passed between downtown's last round of speculative office-building construction and the crop coming to market, the developer said. Considering what's happening now, he added, it may be another 20 years before any developer takes such a leap again.

Martin Selig, Fifth & Yesler's developer, has said he has lined up some tenants but has not identified them.

The federal General Services Administration said Monday it has leased about 11,000 square feet in the building for the Department of Homeland Security, effective Aug. 1.

The Cushman & Wakefield report says average lease rates that landlords sought for top-tier space in greater downtown dropped more than $1 per square foot per year during the quarter, from $34.27 to $33.23.

That's after a drop of more than $4 during the first quarter.

Downtown Bellevue, while also down, fared somewhat better, according to Cushman & Wakefield: Its vacancy rate rose from 12.1 to 12.7 percent during the quarter, while average "Class A" lease rates slid from $38.63 to $38.11 per square foot annually.

But Gary Guenther, senior vice president with GVA Kidder Mathews, told the Bellevue Downtown Association last week that the vacancy rate is likely to increase 2 to 4 more percentage points over the next year while lease rates drop an additional 15 to 20 percent.

What's more, he added, 3.2 million square feet of proposed new office space in Bellevue's central business district is on indefinite hold.

"Development is dead for now," Guenther said.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com