The Eastside office market is still very much recovering, and is still considered a “Tenant’s” market. While it may be hard to believe, the time is now to initiate new construction on the Eastside.

The overall vacancy rate at the close of 2011 was 14.8% and conservative projections have the Eastside vacancy rate at 8.4% by year end 2015 (see related data and graphs). However, within this vacancy, there are only three (3) options that can accommodate a 100,000 RSF tenant on the Eastside, and none that can accommodate a 150,000 RSF requirement. As tech tenants again start to expand on the Eastside, the larger blocks of space (2 contiguous floors or more) will be gone, setting into motion rental rate spikes for Class A quality contiguous space.

In past years suburban office building construction with surface parking could be brought to market quickly (18 to 24 months) to meet office demand. Today, with few quality suburban construction sites available and expensive land prices that require subterranean parking, the bulk of future development will occur in downtown Bellevue where there is plenty of underutilized land waiting to be developed. Additionally, the typical Eastside office tenant has matured and places a higher value on quality construction, proximity to mass transit, and immediate access to retail and restaurants for employees. Based on a three (3) year average construction time to permit, excavate a multi-level subterranean garage, and then go up 30 stories, now is the time to initiate new construction on two to three high-rises for downtown Bellevue to meet future tenant demand.

In the interim, Summitt III (Bentall) in downtown Bellevue sits in the catbird seat as the only quality office project that can deliver any significant space (320,000 RSF) in the next two to three years.

Historically the Eastside market has trailed the greater San Francisco market by one to two years. If this remains true, the Eastside can expect sharp rental rate increases and competition for the best spaces in 2013-2015. Competition will be heightened by Bay Area tenants looking to relocate to the greater Seattle market for office space that offers a new hiring pool of educated employees and less expensive space (examples Facebook, Ebay, VMware, ServiceNow).

Expect a steady recovery in the Eastside Office Market in 2012, and coupled with a constrained supply, expect rental rates spiking in 2013-2016 until enough new construction is delivered to meet demand.

Please click here for Broderick Group’s Year End Market Report for 2011.

CURRENT STATE OF THE MARKET:
The market saw continued positive net absorption in the third quarter, bringing the year to date number to 698,598 SF. Vacancy rates, however, increased very slightly due to the addition of the recently completed Overlake Medical Building (160,000 RSF vacant) to the market. The Eastside Office Market saw average rental rates decrease from the previous quarter. That being said, leasing activity from tenants 10,000 RSF and larger remains extremely slow and until there is a considerable increase, rental rates will not spike upwards anytime soon.
SUMMARY:
• Vacancy has increased slightly from 15.2% to 15.3% across the Eastside Office Market.
• Net absorption was again positive, with 134,717 square feet absorbed in the third quarter, putting year to date absorption at 698,598 SF.
• Average asking rates decreased in the previous quarter to $27.52/SF, gross.

Click here for complete Third Quarter Real Report 2011

More good news in the Eastside office market. Attached please find the market numbers and graphs for current vacancies, absorption, and new construction for the Eastside Office Market.

A quick summary follows:

-Net Absorption was 136,355 SF for the third quarter, putting the year to date total at 698,598 SF. Following are the main deals that have contributed to YTD absorption, most of which were signed some time ago:

135,000 RSF: Eastpointe CC/Sanmar (sale to owner/user occupant)
67,000: Sunset North/ArenaNet
58,000: Valley View Kirkland/Silicon Designs (sale to owner/user occupant)
55,000: Skyline Tower/Expedia
35,000: Laguna South/HCL
20,000: Lake Washington Park/iSoftStone
21,000: 112th @ 12th/Coca-Cola
19,000: Plaza Center/Penn Mutual (expansion/renewal)
18,000: 200 Building/GLY

-Class A and B vacancy on the Eastside is 15.3% (excludes owner user and buildings under 10k RSF), a slight increase from 15.2% vacancy the prior quarter. The recent completion of Overlake Medical Pavilion is largely responsible for this increase, adding 190,000 SF of near-vacant product to the Eastside market.

-Bellevue CBD vacancy stands at 14.7%, up from 14.1% the prior quarter.

-Redmond is the softest Eastside Submarket at 20.6% vacancy.

-Contiguous Blocks of Space- Per CoStar, there are only 3 spaces that can provide a 100k RSF or more contiguous on the Eastside, this statistic alone will encourage many developers to re-focus on when to deliver their next office development

-Leasing Activity has not been dramatic, it continues to slowly improve and with very little construction (see projected Construction Supply statistics per attached), vacancy will steadily decline over the coming years as expected, and noted in our attached projections. The only sizable project that can add space as you know, before 2015 is Summit III (320,000 RSF). Given their short time to delivery with garage already complete, pre-leasing would likely be a pre-requisite (if they did move forward so should not negatively impact the market when Summit III does deliver

-Finally Evidence of Market Reversal- While there continues to be caution from tenants in the market, the statistics seem to be finally in place to provide strong evidence to tenants that the market is reversing and tenants need to get deals done, and be prepared for increasing rents over the next 3 years.

Please click here for Broderick Group’s 3rd Quarter Eastside Office Market Report.

Finally some good news in the Eastside office market, attached please find the market numbers and graphs for current vacancies, absorption, and new construction for the Eastside Office Market. While overall activity still slower than we would like, the numbers reflect our best quarter of absorption in years. A quick summary follows:

-Net Absorption as previously discussed was huge, approximately 500k RSF this past quarter (by way of comparison from 2006 to 2010, we averaged about 407,000 RSF ANNUALLY), a lot of this was space in Totem Lk (Kirkland) and Bothell, but also Bellevue CBD recovered from a bad first quarter. Following are the main deals that have contributed to YTD absorption, most of which were signed some time ago:
135,000 RSF: Eastpointe CC/Sanmar (sale to owner/user occupant)
67,000: Sunset North/ArenaNet
58,000: Valley View Kirkland/Silicon Designs (sale to owner/user occupant)
55,000: Skyline Tower/Expedia
35,000: Laguna South/HCL
20,000: Lake Washington Park/iSoftStone
19,000: Plaza Center/Penn Mutual (expansion/renewal)
18,000: 200 Building/GLY

-Class A and B vacancy on the Eastside is 15.2% (excludes owner user and buildings under 10k RSF), a very large drop from 16.7% vacancy the prior quarter

-Bellevue CBD vacancy stands at 14.1% (drop from 14.8%) the prior quarter

-Redmond is the softest Eastside Submarket at 20% vacancy.

-Contiguous Blocks of Space- Per CoStar, there are only 2 spaces that can provide a 100k RSF or more contiguous on the Eastside, this statistic alone will encourage many developers to re-focus on when to deliver their next office development

-Leasing Activity has not been dramatic, it continues to slowly improve and with very little construction (see projected Construction Supply statistics per attached), vacancy will steadily decline over the coming years as expected, and noted in our attached projections. The only sizable project that can add space as you know, before 2015 is Summit III (320,000 RSF). Given their short time to delivery with garage already complete, pre-leasing would likely be a pre-requisite (if they did move forward so should not negatively impact the market when Summit III does deliver

-Finally Evidence of Market Reversal-While there continues to be caution from tenants in the market, the statistics seem to be finally in place to provide strong evidence to tenants that the market is reversing and tenants need to get deals done, and be prepared for increasing rents over the next 3 years.

Please click here for Broderick Group’s Eastside office market report through 2011 second quarter end.

CURRENT STATE OF THE MARKET:
With the Bothell and I-90 Corridor submarkets leading the way due to large leases by Google, ArenaNet, RH2 Engineering and the sale of Eastpointe Corporate Center to SanMar, the Eastside office market saw a dramatic increase in absorption during the second quarter. With 504,161 square feet of space absorbed during the second quarter, it was the most positive quarter of absorption in nearly three years. This growth, in addition to the positive absorption of 58,082 square feet during the first quarter, leaves the year-to-date absorption at 562,243 square feet for the market as a whole (nearly equal to the end of year numbers for 2009 and 2010 combined). As Tenants have taken more space, vacancy has dropped 140 basis points from the end of Q1, finishing the 2nd quarter at 14.2% overall. Significant market data points experienced by the Eastside this quarter include:
• Vacancy has dropped 140 basis points from the end of Q1, finishing the 2nd quarter at 14.2% overall.
• Net absorption was positive, finishing the quarter at 562,243 square feet absorbed.
• Average asking rates dipped slightly, but are down only $0.27/SF from Q1 (indicating we may be near bottom in terms of rental rates).

Click here for complete Second Quarter Real Report 2011

Please click here for Broderick Group’s Eastside office market report through 2011 first quarter end.

CURRENT STATE OF THE MARKET:
Though demand for office and high-tech space has remained stagnant over the last several quarters, general sentiments on the overall economy have turned positive. The Eastside market has yet to benefit from any major activity, but that will change as there are a number of deals close to being completed in the Bellevue CBD. Furthermore, there is a lack of large contiguous spaces available to any large user in the market, particularly the Bellevue CBD. With a lower level of supply, and no significant new construction expected for up to three (3) years, rents will finally reverse course, and we expect by the Fourth Quarter of this year that rents will finally start to grow again. While tenant activity overall is still sorely lacking on the Eastside, there is strong evidence to indicate a turn in the market.
• The overall Eastside Office Market vacancy rate remained the same, ending at 16.6%.
• Net absorption in the first quarter was positive, ending the quarter with 58,082 square feet of net absorption.
• Average asking rates decreased slightly, but it was the smallest drop in over 2 and a half years, ending the first quarter at $27.35/SF Full Service.

Click here for complete First Quarter Real Report 2011

Current Vacancy Broderick vacancy numbers are based on just Class A and B space, excluding owner user buildings which do not impact the leasing market, and excluding 10,000 RSF and less buildings; we also include the Bothell markets of Canyon Park and Northcreek because they are in the Eastside submarket and therefore have a direct impact although Costar and others exclude Bothell). While Costar vacancies are 11.3% for the Eastside, our numbers show a year end vacancy of 16.8% which is more in line with the kind of market we are actually feeling (ie significant competition for tenants and an environment where rates have fallen each year for the past 3 years). I-90 vacancies are 17.5%, downtown Bellevue is 15.4% (1.275 million square feet available, mostly in smaller spaces 2500-20,000 RSF).

Contiguous Block Study/Available Spaces (see attached) For a market that has been very competitive for tenants there is an extremely rare absence of large contiguous blocks of space with only 3 contiguous blocks (in one building) on the Eastside currently that accommodate a 100k RSF tenant (Legacy Redmond, now being sold by Key Bank-103k RSF, Newport Tower 112k RSF, and Eastpointe in Issaquah 109K RSF). On the flip side, there is a huge surplus of spaces 2500 to 20,000 RSF which represents the bulk of our available space. So we don’t have the advantage of a quicker recovery that could be spurred by big takedowns from companies like Microsoft because we simply don’t have large blocks of space on the eastside, and it will continue to be a tenant’s market in these size ranges.

2011 Projections / Tenant Activity Extremely Slow but Positive Signs While corporate America is starting to become active again (ie Google’s recent announcement to hire 6000 people across all their markets-their biggest hiring spree ever, T-Mobile and AT&T Wireless recently leasing larger blocks of space on the eastside, Amazon’s large Seattle leases), the overall tenant demand continues to be very, very quiet , especially relative to the smaller users (4,000 RSF -20,000 RSF), the bulk of our vacancy on the Eastside as noted above. On the positive side, the amount of tenant defaults and sublease/give back spaces has diminished greatly over the last year, which usually signals the end of a falling market. Additionally there is no new construction scheduled to come on line in 2011 (as well as 2012 and 2013, see supply statistics attached). As corporate America loosens their purse strings smaller space users should reap the benefits through corporate contracts and the overall trickle down effect. As such, we expect smaller users will follow suit and again begin to consider hiring/expansion, upgrading space, or both. 2011 should see a bottoming out of this market and although not dramatic, by year end the start of a healthy reversal in rental rates.

2012-2014 As a country we are still recovering, and not from a 10 year cycle, but a 40 year cycle that significantly affected and still is draining business resources. As such, unlike past booms we expect this recovery to be slow and steady but by no means do we expect a boom in demand. Unless Microsoft (which occupies approximately 26% of all office space on the Eastside) makes some dramatic space grabs, per the attached graphs it will be 2014/2015 before we see sub 10% vacancies which is typically the point at which the pendulum swings to a Landlord market and rental rates spike upward. That being said, if a large user like Microsoft needs space, their only choice will be aggregating small blocks which could speed recovery, or building new ( the parking garage capped Summit II, 332k RSF with only 18 months to deliver is a logical for Microsoft in downtown Bellevue). Due to the lack of large blocks of space on the Eastside, new construction is viable in 2 to 3 years despite the fact the overall market may not yet be sub-ten percent vacancies, as large tenants will simply have to pay the freight if they want to secure larger spaces on the Eastside.

Please click the link below for Broderick Group’s Eastside office market report through 2010 year end.
Eastside Office Market Overview – Q4 2010

SUMMARY OF THE CURRENT STATE OF THE MARKET:
After several consecutive quarters of rising vacancy rates and negative absorption, the Eastside Office
Market has finally changed course. The demand for office space remains mild, with most of the leasing activity involving mid-sized spaces (including sublease availabilities) in the 5,000 to 20,000 square foot range.
• The Eastside Office Market vacancy rate remained relatively stagnant at 16.8%, up 0.8%
from the previous quarter, but slightly higher than the 16.1% vacancy at this time last year.
• Net absorption in the fourth quarter amounted to 62,674 square feet, continuing the positive
absorption from last quarter.
• Average asking rates stayed at $27.61/SF Full Service, roughly $0.68/SF less than the same
time last year.

Click here for complete Fourth Quarter Real Report 2010

Eastside Office Market Overview – Q3 2010