Seattle's office towers stop getting emptier

The worst may be over for downtown Seattle's office landlords, recent reports from several commercial real-estate brokerages suggest.

After steep, recession-fueled increases each quarter last year, the total office-vacancy rate in greater downtown rose only fractionally during the first three months of 2010, according to brokerages CB Richard Ellis and Grubb & Ellis.

A third firm, Colliers International, said vacancies actually dropped a hair.

"We are moving along the bottom," said Peter Truex, Colliers' senior managing director.

No one keeps official real-estate statistics for downtown, or any other market. Each brokerage calculates office vacancy, average rents and other measures differently.

But the first-quarter market reports from these three brokerages all reflect the same trend.

CB Richard Ellis, for instance, said that after climbing from 12.79 percent to 19.94 percent in the last three quarters of 2009, the total vacancy rate in greater downtown only rose to 20.23 percent in this year's first quarter.

That's a record. But the quarterly increase was less than one-third of a percentage point.

Grubb & Ellis said the vacancy rate rose just 0.2 percent, to 19.1 percent, between December and March. That followed an increase of 7 full percent points during the last nine months of 2009.

Colliers' numbers show the rate declining from 17.67 to 17.66 percent, after a total increase of more than 4 percentage points over the previous three quarters.

Brokers differ on whether the vacancy rate will drop over the rest of the year or keep inching higher. But at the least, "the rate of increase has certainly slowed," said Richard Wieneke, senior vice president at Grubb & Ellis.

Changes in both supply and demand are responsible, he and others said.

The spike in vacancy rates last year was fueled, in part, by the completion of more than 2 million square feet of new downtown office buildings, conceived during the real-estate boom on the hope that if developers built it, tenants would come.

Their timing couldn't have been worse. Most of the space still hasn't been leased.

But now, "pretty much everything that's going to be built has been built," said Jim Bowles, senior managing director at CB Richard Ellis. His firm's database shows just two small new or remodeled projects, totaling less than 100,000 square feet, were added to downtown's office inventory last quarter.

One large, still-unleased building, the 288,000-square-foot 505 1st Ave. S., is nearing completion. But the only other significant office projects under construction are the buildings Vulcan Real Estate is building for Amazon.com in South Lake Union — and they're all locked up with long-term leases.

No new buildings will break ground until at least 2012, said Grubb & Ellis' Wieneke, because there's no financing: "The banks are shut down."

While supply is leveling off, demand — once moribund — is starting to perk up, brokers said. First-quarter numbers were boosted by global health nonprofit PATH's move into 112,000 square feet at Vulcan's new 2201 Westlake building.

Tenants who have been on the sidelines are moving to sign long-term leases because rents have dropped, brokers said. Businesses in outlying neighborhoods are considering downtown now for the same reason: PATH, for instance, moved from Ballard.

But some of the increased leasing activity downtown represents real growth rather than tenants just moving from one building to another, Bowles said.

Colliers' Truex agreed. "The 8,000-square-foot tenant is taking 9,500 square feet now. That's what we didn't see in 2009."

Some growth is coming in larger chunks. F5 Networks last week announced it has signed a long-term lease for up to 300,000 square feet in the Elliott West complex on the waterfront — nearly twice as much space as it occupies there now.

Amazon is relocating to South Lake Union from offices in several other buildings. But brokers say the online retail giant will occupy at least several hundred thousand more square feet when the move is done.

Lease rates in Class A downtown-area buildings continued to slide last quarter, however. Grubb & Ellis said the average rent per square foot per year was $32.51, down from $32.90 in the fourth quarter. CB Richard Ellis pegged the average rent at $29.40, down from $29.45.

Even so, "there's a lot more optimism now," Wieneke said.

The Dow Jones industrial average is up, Truex noted. Boeing's prospects for building a new military tanker seem bright.

"Space can fill up if the market heats up," said Bowles, "and we suspect it probably will."

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