Seattle office-lease rates dropped 10-12 percent this quarter

After holding the line for months, owners of downtown Seattle office buildings are starting to accept lower rents as they compete for increasingly scarce tenants, commercial real-estate brokers say.

Asking rents for Class A space in the downtown area in the first quarter plummeted to an average $34.27 per square foot per year, down more than 11 percent from the fourth quarter of 2008, brokerage Cushman & Wakefield said in a report Tuesday.

The quarterly drop was the downtown market's largest since at least 1997, according to Cushman & Wakefield's records.

"That's what they're asking," said Matt Christian, a senior director in the firm's Seattle office. "The deals that are being made are lower than that."

Asking rents for downtown office space of all classes have dropped 10 to 12 percent since the end of the year, said David Gurry, a senior vice president in the Seattle office of brokerage Colliers International.

There's relatively little demand, he said, and landlords are starting to price their space accordingly.

Last year, even as the economy stalled, local companies downsized and office-vacancy rates rose, many landlords resisted reducing rents. Instead, they offered prospective tenants upfront concessions — higher tenant-improvement allowances or several months' free rent — in part to keep their buildings' resale values high.

What changed? Two things, Gurry and Christian said.

First, big tenants, led by what once was Washington Mutual, keep putting more space back on the market, increasing available supply. JPMorgan Chase, WaMu's new owner, has canceled leases on more than 750,000 square feet downtown and could make much of its 900,000-square-foot WaMu Center available as well.

Second, new buildings in Central Seattle containing more than 2.5 million square feet of office space are just months from completion, and little space is pre-leased.

"I think the institutional owners [of existing buildings] looked at those realities and said, 'We really need to make some deals,' " Christian said.

Gurry agreed. "They aren't giving the farm away," he said, "but landlords are really taking a close look at where vacancy rates are going to be at year-end."

The total office-vacancy rate in the downtown area in the first quarter was 12.6 percent, Cushman & Wakefield said, up from 11 percent in the previous quarter and 8.4 percent a year ago.

Colliers International said in its own report that the downtown vacancy rate rose from 6.97 percent to 8.93 percent year over year. Unlike Cushman & Wakefield, Colliers includes owner-occupied buildings in its calculations.

Gurry said the vacancy rate could rise to the midteens by the end of the year. Christian said it could hit 20 percent.

In downtown Bellevue, the overall vacancy rate in the first quarter was 12.1 percent, according to Cushman & Wakefield, up from 10.8 percent in the fourth quarter and 5.7 percent a year ago. But rents held up better than Seattle's, declining just 2 percent during the quarter to $38.83.

Average asking rents in downtown Seattle actually were slightly lower than those on the suburban Eastside, including the I-90 and 520 corridors, Kirkland and Redmond, the report said.

Office buildings north and south of downtown Seattle fared relatively well. Rents remained relatively unchanged in the first quarter, Cushman & Wakefield said, while Colliers reported vacancy rates actually declined slightly from the previous quarter.

Some businesses are moving to those areas from downtown, Christian said, and Boeing — a major influence in both areas — has been relatively stable.

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