Tight Seattle office space now landlord's market

Seattle's commercial real-estate market tightened in the final three months of this year, a sign that leverage in lease negotiations is shifting from businesses that rent office space to those that own it.

The office vacancy rate in downtown Seattle fell to 9.8 percent in the fourth quarter, a report released Wednesday by the Grubb & Ellis brokerage firm showed.

That was down from 13.4 percent a year ago.

A vacancy rate below 10 percent marks the point at which it becomes a landlord's market and developers begin discussing plans for new buildings, said Nick Papa, a research analyst at Grubb & Ellis.

Landlords are now able to raise rents as leases come up for renewal.

The average asking annual rent for premium Class A office space in downtown Seattle increased to $29.46 a square foot from $26.39 a year ago, according to the Grubb & Ellis report.

The vacancy rate is down dramatically in the Bellevue central business district, where only 4.4 percent of office space sat vacant in the fourth quarter, compared with 10.2 a year ago.

Office vacancy rates in the region soared after the 2000 dot-com bust and have yet to return to pre-recession levels as measured by Grubb & Ellis.

Brokers say the current demand for office space is driven by job growth across a broad range of business sectors and reflects a more thoughtful approach.

"Back in 1999 and 2000, it was kind of a race to take up space, and businesses took more than they needed," said Tim Smith, an Eastside broker at Grubb & Ellis.

"Now, businesses are taking up exactly what they need," he said.

The report, however, did raise a cautionary note about the amount of speculative office space under construction.

Developers in downtown Bellevue are proceeding with three projects totaling 1.7 million square feet, despite having no tenants signed.

At least three speculative office buildings are planned for the downtown Seattle area.

Paul Allen's Vulcan Real Estate began work last month on 2201 Westlake, which will include 300,000 square feet of office space in the South Lake Union neighborhood.

Early next year, Schnitzer Northwest plans to start construction on a 233,000 square-foot building at Ninth Avenue and Stewart Street, while Touchstone is set to begin work on a 510,000-square-foot building in the Denny Triangle.

The report predicts that downtown Seattle's office vacancy rate could drop to 5 percent in the next two years.

But if there's no "significant preleasing activity" at the three buildings, the rate could rise a few percentage points, the report noted.

Touchstone President Douglas Howe said he believes demand for office space in downtown Seattle will be enough to fill the new buildings.

"We're honestly confident that there's not a large supply coming online in late 2008, 2009, compared with what demand will be," Howe said.

Developers of speculative office buildings in Bellevue also remain confident, said Oscar Oliveira, a broker at Colliers International.

"They're all hungry, but they're not scared yet," Oliveira said.

"There's still plenty of time, and our economy is strong. I think if there were any signs that our fundamentals were going in the wrong direction, there'd be more concern," Oliveira said.

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