Area office vacancies and rents climb

When supply outpaces demand, prices are supposed to drop. It's a fundamental economic principle.

So what's up with the office market in Seattle and Bellevue?

This summer, as the economy sank, vacancy rates in the region's two biggest office centers climbed to their highest levels in two years or more, according to statistics released Thursday by commercial brokerage Cushman & Wakefield.

But the lease rates landlords are asking for space in their Class A buildings edged up as well.

It does seem counterintuitive, brokers acknowledge — but rents don't tell the whole story.

Rather than reduce lease rates, they say, many building owners are offering prospective tenants concessions unheard of a year ago: several months of free rent, for instance, or a bigger "tenant improvement" allowance to custom-finish the space.

Why take that route? "They're looking at the other end," said Wende Sauvage, a tenant representative with brokerage Flinn Ferguson.

She and other brokers say the large institutional investors who now own much of the region's office inventory intend to sell their buildings in a few years — and higher lease rates make the properties more appealing to prospective buyers.

So the landlords are willing to forgo some money now in hopes of making more money later.

Greater downtown Seattle's vacancy rate climbed to 10 percent in the third quarter, according to Cushman & Wakefield, up from 8.3 percent the previous quarter.

In downtown Bellevue, the vacancy rate increased to 9.5 percent, more than doubling in a year. For the overall Eastside market it rose to 11.1 percent, the highest it's been since early 2005.

The increase was a consequence of both more supply and less demand. In Seattle, for instance, two new buildings were completed.

Starbucks put two buildings it had occupied up for lease or sublease. Another troubled company, Washington Mutual, also put some leased space back on the market.

Matt Christian, a Cushman & Wakefield senior director, predicted Seattle's vacancy rate will climb to 13 or 14 percent by the end of next year as buildings under construction are finished and more companies downsize.

Any vacancy rate over 10 percent is considered a tenants' market, he said.

But the average weighted lease rate landlords were asking for Class A space in downtown Seattle rose to $39.85 per square foot per year, Cushman & Wakefield said, up from $38.88 in the second quarter.

In downtown Bellevue it edged up slightly, from $39.69 to $39.91.

"The new [building] owners are very sensitive to having their face [lease] rate be a certain number, and they won't compromise on it," said Sean Barnes, a vice president in the Seattle office of brokerage Jones Lang LaSalle.

Tom Bohman, a senior director in Cushman & Wakefield's Bellevue office, agreed.

"It's all about repositioning the buildings to eventually sell them again," he said.

So, as the market softens, landlords are giving ground at the front end of deals.

In Seattle, Barnes said, owners who may have offered prospective tenants one month of free rent on a five-year lease a year ago now are offering three or four months.

On the Eastside, Bohman said, some landlords are negotiating deals that provide space to tenants in "turnkey" condition, finished to their specifications and ready to move in.

A year ago, he said, they would have offered tenant-improvement allowances that fell far short of build-out costs.

Some landlords also are offering free parking, Sauvage said.

There are some bright spots in the region's office market, said John Miller, manager of Cushman & Wakefield's Seattle office.

Microsoft is widely expected to ink a deal soon for 300,000 square feet in a new downtown Seattle building. Other companies reportedly are interested as well.

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