Office landlords sit pretty as demand pushes up rents

A year ago, a business renting 5,000 square feet of premium office space in downtown Bellevue could expect to pay $11,230 a month.

Today, a business needing the same space could expect to pay $13,950, a new report by commercial real-estate brokerage Grubb & Ellis shows.

That means a new, typical lease in downtown Bellevue — the Seattle area's most expensive office market — costs about $32,640 more a year.

"Businesses are experiencing sticker shock," said Tim Smith, a broker at Grubb & Ellis, which released the report Tuesday. "And it doesn't look like it's getting much better."

Landlords are jacking up rents as office vacancy rates decline to levels not seen since the 2001 recession. And it's likely rents will continue to rise because the majority of office space under construction won't be completed for at least a year and many buildings are being sold for top dollar.

In downtown Bellevue, the average annual asking rate for Class A, or premium, office space during the first quarter shot up 24 percent to $33.48 a square foot, its biggest year-over-year increase in at least a decade, according to Grubb & Ellis.

In downtown Seattle, rents aren't much more affordable. The average annual asking rent for premium space rose to $30.49 a square foot during the quarter.

It's been 4-½ years since downtown Seattle's asking rate was above $30 a square foot, Grubb & Ellis said.

"Businesses that are renewing leases or looking for new space are finding that it's more expensive everywhere they look," said Thomas Bohman, a broker with Cushman & Wakefield in Bellevue.

"If I'm a tenant, I'm probably frustrated," he said. "I used to be able to go out and play several alternatives off each other to get a favorable deal. Now, there are fewer options, and virtually all landlords are looking at raising rates."

Low vacancy rates in the Seattle area signify it's a landlord's market.

Downtown Seattle's rate has dropped to 9.7 percent from 11.6 percent a year ago, while downtown Bellevue's is down to 4.5 percent from 7.5 percent, according to Cushman & Wakefield, which released its own report Tuesday with similar findings.

Ownership changes at many of the area's largest office buildings also are a factor. Equity Office Properties Trust (EOP), of Chicago, owned about 10 million square feet of office space locally before its purchase last month by New York-based Blackstone Group for $39 billion.

Now, Blackstone Group is selling Equity Office's Seattle-area portfolio, including the 76-story Columbia Center, to Beacon Capital of Boston, which in turn plans to sell 15 of the 29 properties to Texas-based Archon Group, brokers say.

They say the new owners already are raising rents to help pay for their purchases.

"The rates that EOP had out to the market just six weeks ago were several dollars a square foot lower than what the new building owners are asking," said Oscar Oliveira, a broker with Colliers International. "And other landlords are starting to follow suit."

Even so, rental rates are still below pre-recession record levels of about $37 a square foot in downtown Bellevue and $40 in downtown Seattle. Landlords see that as proof the area can support higher rents, Bohman said.

Businesses seeking less expensive offices may want to consider moving north or south. The average annual asking rate for premium office space is $21.69 in the South End, which includes Renton and Tukwila; and $23.02 in the North End, according to Grubb & Ellis.

"You've got about 30 percent savings to go to your Lynnwoods, your Rentons or your Tukwilas," said Smith, who focuses on the Eastside and North End. "The nice thing, too, about Tukwila is you can still get a Seattle address."

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