Office space grows tighter

Some Seattle landlords were so desperate three years ago to fill their office buildings that they turned to the unthinkable: They offered six months or more free rent in exchange for a five-year commitment from a new or expanding business.

Now, Puget Sound area landlords wield leverage over businesses amid an ever-tightening commercial real-estate market.

Freebies and other concessions are no more. Rental rates, up significantly from a year ago, are expected to rise to levels not seen since the late 1990s.

Commercial real-estate brokers say it's all due to a strong local job market. As businesses hire more workers, they require more space.

Microsoft, for example, recently claimed the top 15 floors of Lincoln Square office tower under construction in downtown Bellevue.

A report released Thursday by brokerage Cushman & Wakefield underscored the emergence of a tightening office market. Average annual rental rates for all classes of office space in downtown Seattle rose to $26.19 a square foot in the third quarter, up $1.57 from the second quarter.

The increase also was notable in Bellevue — up $1.67 to $28.11, according to Cushman & Wakefield.

As rents rise, real-estate investors are seeing the benefit of owning office buildings here.

Last month, Seattle-based Wright Runstad paid $107.5 million for the Seattle Trade & Technology Center, which has RealNetworks as its major tenant, in a joint venture with Shorenstein Properties of San Francisco.

The 335,154-square-foot building in downtown's waterfront district was for sale less than 18 months earlier for $70 million, said Wende Sauvage, an associate with Cushman & Wakefield.

Currently, the Civica Office Commons in Bellevue is rumored to be under contract for more than $500 a square foot, after selling last year for $462 a square foot, said John Miller, senior managing director of Cushman & Wakefield's Northwest region.

Office-sales activity appears on track to surpass last year, when the Puget Sound area saw deals worth about $2 billion. The total so far this year: $1.75 billion, according to Cushman & Wakefield.

Even so, most of the new construction in downtown Seattle is for condominiums and apartments, not offices. David Gurry, a broker at CB Richard Ellis in Seattle, expects four new office buildings to go up over the next several years, adding about 1.3 million square feet.

Given the rising rents, developers would like to build more but not until securing a major tenant, Gurry said.

In contrast, nearly 3 million square feet of office space is being built on the Eastside. Of that, about 900,000 square feet is preleased or under negotiation, said Tom Bohman, a broker with Cushman & Wakefield in Bellevue.

CB Richard Ellis also released its quarterly report Thursday showing similar market conditions.

But don't expect rents to come down anytime soon, Bohman said. Most of the additional office space on the Eastside won't be ready until the end of next year or well into 2008.

"You can't find large blocks of space of 20,000 square feet and above," Bohman said. "Now what you get is sort of the leftovers. It's not the easy or the good space."

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com