State of Washington DSHS€¦ · Property Taxes $40,000 Insurance $10,690 Bank Service Charges $510...

OFFERING MEMORANDUM State of Washington DSHS Long Term Leased InvestmentPuyallup, Washington

2 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews

Benjamin A. NorbeSenior Vice [email protected]

Exclusively represented by The information contained herein is proprietary and strictly confidential. It is intended to be reviewed only by the party receiving it from Kidder Mathews and should not be made available to any other person or entity without the written consent of Kidder Mathews.

This information has been prepared to provide summary, unverified information to prospective purchasers, and to establish only a preliminary level of interest in the subject property. The information contained herein is not a substitute for a thorough due diligence investigation. Kidder Mathews has not made any investigation, and makes no warranty or representation, with respect to the income or expenses for the subject property, the future projected financial performance of the property, the size and square footage of the property and improvements, the presence or absence of contaminating substances, PCB’s or asbestos, the compliance with State and Federal regulations, the physical condition of the improvements thereon, or the financial condition or business prospects of any tenant, or any tenant’s plans or intentions to continue its occupancy of the subject property. The information contained in this Marketing Brochure has been obtained from sources we believe to be reliable; however, Kidder Mathews has not verified, and will not verify, any of the information contained herein, nor has Kidder Mathews conducted any investigation regarding these matters and makes no warranty or representation whatsoever regarding the accuracy or completeness of the information provided. All potential buyers must take appropriate measures to verify all of the information set forth herein.

This information has been secured from sources we believe to be reliable. We make no representations or warranties, expressed or implied, as to the accuracy of the information. References to square footage or age are approximate. Recipient of this report must verify the information and bears all risk for any inaccuracies.

kiddermathews.com

Table of Contents1. Executive Summary

• The Offering• Investment Highlights• Location Aerial

2. DSHS Tenancy

• Tenant Information• Financial Summary

3. Property Description

• General Description• Site Plans• Site Aerial & Pictures

4. Market Overview

• Real Estate Market Review

DSHS Office Building PUYALLUP, WA


Executive Summary

Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 4

INVESTMENT HIGHLIGHTSTHE OPPORTUNITY

OFFERING PRICE

$7,300,000 6.00%CAP RATE

$438,851NET OPERATING INCOME

$297PRICE / SF

Kidder Mathews is pleased to offer for sale a single tenant leased State of Washington DSHS Building located in Puyallup, Washington.

The DSHS Building is a newly constructed single-tenanted class “B” suburban office building consisting of 24,552 rentable square feet on 65,062 square feet of land. The DSHS Building was built in 2017 and is located across from a neighborhood shopping center and within a mixed-use urban area that includes a variety of commercial and multifamily uses while maintaining easy access to highways SR 512 and highway 167.

The opportunity offers a strong credit tenant with long-term tenancy, as DSHS has operated in this vicinity for numerous years and has recently re-committed to the market by committing to their lease to this build to suite for 10 years without termination options. As an added benefit to an investor, the property is offered with the ability to assume attractive below market debt at 3.95%.

LONG TERM LEASE WITH GOVERNMENT TENANT Ten year lease commencing April 1, 2017. This is a rare occasion where DSHS

does not maintain any termination options.

SAFE SECURE INVESTMENT DSHS is the state’s largest state run agency that serves 2.8 million people in any given month.

PROVEN OFFICE LOCATION The tenant has successfully operated this market for over 20 years and has

committed to this new building for ten years plus.

GREAT CASH FLOW The efficiencies of operating a newly constructed building allows an investor to achieve a stable income stream, with increases in rent, from a credit Tenant.

EASE OF MANAGEMENT 100% of the building is leased to a single government agency, allowing ease

of management.

NEW CONSTRUCTION Built in 2017, this property’s new construction enables an investor to have little risk

of deferred maintenance and upkeep of the property.

ATTRACTIVE ASSUMABLE FINANCING Attractive, below market financing can be assumed for this investment at a rate of 3.95% with maturity of term at 06.14.2022.


E Main Ave

15th St S

E

DSHS OFFICE BUILDING

SPINNING ELEMENTARY SCHOOL

PUYALLUP RIVER

PUYALLUP ELKS FIELD

6 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 6

RENTON

ISSAQUAH

KENT

BURIEN

MERCERISLAND

BELLEVUE

REDMONDKIRKLAND

BOTHELL

LYNNWOOD

EVERETT

BREMERTON

SEATTLE

VASHON

GIG HARBOR

BAINBRIDGEISLAND

FEDERALWAY

AUBURN

TACOMA

PUYALLUP

LAKEWASHINGTON

PUGETSOUND



DSHS Tenancy


The following are the functioning departments of the DSHS

Aging and Long-Term Support Administration (ALTSA) Behavioral Health Administration (BHA) Children’s Administration (CA) Developmental Disabilities Administration (DDA) Economic Services Administration (ESA) Financial Services Administration (FSA) Rehabilitation Administration (RA) Services and Enterprise Support Administration (SESA)

The property is a co-location facility for DSHS

The building houses two governmental agencies. Those agencies are Children’s Administration and Rehabilitation Administration.

Children’s Administration (CA)

Comprised of 80% of the building Children’s Administration (CA) is the statewide child welfare agency. Its responsibilities are to protect children, promote healthier families and support children in out-of-home care through strong partnerships with communities and tribes. CA works to keep children safe from abuse and neglect and to support birth, foster, kinship and adoptive families. CA provides protective services for children, investigating more than 40,000 abuse and neglect intakes in a typical year. CA licenses foster homes and supports more than 9,000 children in foster or relative care. CA helps families find resources to keep children safe and coordinates health services for foster and adoptive children. CA works closely with youth transitioning out of foster care. Two-year budget: $1.25 billion / Total employees: 2,698

Rehabilitation Administration (RA)

Compromised of 20% of the building, Rehabilitation Administration (RA) partners with communities, families, employers, schools and service organizations to provide effective services to youth and adults who deserve opportunities for new beginnings, self-sufficiency and healthy community engagement. RA provides rehabilitation services to 1,600 of the state’s highest-risk juvenile offenders in 11 state-operated residential facilities and seven local offices; specialized treatment for more than 300 civilly committed sexually violent predators in three state-operated facilities; and vocational rehabilitation services in 37 offices around the state to 21,000 individuals with disabilities who want to work and have difficulty finding or keeping a job. Two year budget: $394 million / Total employees: 1,470

Tenant Information

The Department of Social and Health Services (DSHS) is Washington’s largest state agency. In any given month, DSHS provides some type of shelter, care, protection and/or support to 2.8 million of the state’s 7.1 million people.

The DSHS 2017-2019 budget totals $15.4 billion. That is about 17.4 percent of the total Washington state operating budget. The chart below shows how those budget dollars are distributed.

4 | P a g e Enterprise-Wide Strategic Plan | DSHS

DSHS Budget Overview The DSHS 2017-2019 budget totals $15.4 billion. That is about 17.4 percent of the total Washington state operating budget. The chart below shows how those budget dollars are distributed.

DSHS Administrations DSHS is divided into six direct service administrations and two support administrations. Link to DSHS organizational chart. The illustration below shows the support that each administration provides to the communities DSHS serves.

Financial Summary


TenantLeased SF

Commencement Date

Expiration Date

Current Monthly Rent

Rent PSF

Monthly Rent Increase

Increased Monthly Rent

Rent PSF

Option to Renew

Dept. of Social & Health Services 24,552 04/01/2017 03/31/2027 $45,012 $22.00 04/01/2022 $49,001.70 $23.95 One (1) Five (5) year option

PROJECT SUMMARY

Total Square Footage 24,552

Total Occupied Units 1

Total Occupied SF 24,552

Percent of Project Occupied 100%

Rent/Square Foot $22.00 *Note: Lessee pays for gas, electricity, water, sewer, garbage, interior lighting material. Lessee reimburses Lessor for janitorial and restroom supplies.

Total Vacant Units 0

Total Vacant Square Feet 0

Percent of Project Vacant 0%

Total Units 1

Total Square Feet 24,552

Total Percentage 100%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Rental Rate $45,012.00 $45,012.00 $45,012.00 $45,012.00 $49,001.70 $49,001.70 $49,001.70 $49,001.70 $49,001.70 $49,001.70

Rent Per SF $22.00 $22.00 $22.00 $22.00 $23.94 $23.94 $23.94 $23.94 $23.94 $23.94


RENT ROLL


PROFIT & LOSS BUDGET OVERVIEW

PRO-FORMA ORDINARY INCOME/EXPENSE - JAN - DEC 18

TOTAL BASE RENT $540,144

REIMB INCOME

Gas/Electric $21,500

Garbage $2,970

Water $1,450

Janitorial Services $35,472

Janitorial Supplies $6,000

Total REIMB Income $67,392

TOTAL INCOME $607,536

OPERATING EXPENSES

Property Taxes $40,000

Insurance $10,690

Bank Service Charges $510

Dues, Licenses & Permits $271

Accounting $1,500

Total Administration $2,281

Property Management Fees $18,226

Repairs and Maintenance

Handyman Service $6,000

Handyman Supplies $1,200

Parking Lot and Grounds $400

Total Repairs and Maintenance $7,600

Maintenance Contracts

Alarm & Fire $1,256

Elevator Maintenance/Monitoring $4,687

HVAC Maintenance $4,800

Janitorial Services $35,472

Janitorial Supplies $6,000

Landscaping and Grounds $6,594

Pest Control $250

Sweeping $1,200

Total Maintenance $60,259

Utilites

Electricity $19,100

Gas $2,400

Garbage $2,970

Irrigation $850

Stormwater $2,860

Water/Sewer $1,450

Total Utilities $29,630

TOTAL OPERATING EXPENSES $168,685

NET ORDINARY INCOME $438,851

Financial Summary2018 OFFICE BUILDING BUDGET



Tenant Months Rent PSF, Modified Gross Monthly Rent Annual Rent Option to Renew

Dept. of Social & Health Services 04/01/2017 - 03/31/2022 04/01/2022 - 03/31/2027

$22.00$23.95

$45,012$49,002

$540,144$588,024

One (1) Five (5) year option

ESTIMATED VALUATION SUMMARY

INCOME

Total Base Rent (24,552 SF at $22.00 PSF, Modified Gross): $540,144

Reimbursable Income $67,392

Total Income: $607,536

Operating Expenses: ($168,685)

Net Operating Income $438,851

Cap Rate 6.00%

Value $7,300,000

VALUE PER SQUARE FOOT $297.33 / SF

VALUE AND CASH FLOW SUMMARY

PROFORMA

Net Income $438,851

Building Value at Cap Rate 6% $7,300,000

Loan Amount $4,500,000

Interest Rate 3.95%

Amortization Period 25 years

Debt Service ($283,543)

Income $438,851

Debt Service on Loan ($283,543)

Cash Flow (before dept and taxes) $155,308

Equity from Purchaser $2,800,000

Loan to Value 61.64%

Debt Service Coverage Ratio 154.77%

Financial SummaryRENT ROLL & FINANCIAL ASSUMPTIONS


Property Description

General Description

SUMMARY

Property Address 1402 East Main Avenue, Puyallup, WA

Net Rentable Area/ Lineal Feet 24,552 SF

Year Built 2017

Buildings 1

Number of Stories 2

Land Area 1.48 acres (65,062 SF)

Parking 86 surface parking lot stalls 3.5 per 1,000 SF

Zoning CB

SITE

Land Acres ±1.48 acres (65,062)

Parcel (APN) 784510-032-7

Municipality City of Puyallup

County Pierce, WA

2017 Property Tax Amount $14,920.54

Assessed Value $3,381,800

STRUCTURE

Foundation Concrete slab

Exterior Walls Metal studs

Interior Walls Painted walls on wood frame construction

Roof System Plywood sheeting and flat TPO

Lighting System Fluorescent light fixtures

Windows Double pane

HVAC System Roof mounted HVAC systems

Elevator 1

Access The site direct access from East Main Avenue



Site Plan


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2505 Third AvenueSuite 324Seattle, WA 98121

206.720.7001 phone206.720.2949 fax

www.craftarchitects.com

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3. WATER FOUTAIN WITH BOTTEL FILLER OPTION.

NOTE: ALL PRODUCTS SHOWN HERE ARE NOT FINAL.PRODUCTS SUBSITUTION THAT ARE EQUAL INPERFORMACE TO ONES THAT ARE LISTED HERE AREWELCOMED. APPROVALS ARE BY MJR DEVELOPMENT.

FIRST FLOORFIRST FLOORFIRST FLOOR

Lobby reception area upon entering building

Significant private office build-out with open area as well

Elevator serviced from lobby


Site Plan


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NOTE: Floor Assembly make-up.Wood Joist and Sheathing (seeStructural). 1/2" Homosote. 1/2"Plywood to accept Carpet.

NOTE: Floor Assembly make-up.Wood Joist and Sheathing (seeStructural). 1/2" Plywood and 1/2"Plywood to accept Bathroom Tile.

NOTE: ALL PRODUCTS SHOWN HERE ARE NOT FINAL.PRODUCTS SUBSITUTION THAT ARE EQUAL INPERFORMACE TO ONES THAT ARE LISTED HERE AREWELCOMED. APPROVALS ARE BY MJR DEVELOPMENT.

3. WATER FOUTAIN WITH BOTTEL FILLER OPTION.

SECOND FLOOR

Site Aerial


E Main Ave

15th St S

E


PUGET SOUND ENGINEERING SUPPLIES


Images

Market Overview


Real Estate Market Review

After a solid performance for the regional office market during 2017, Q1 office metrics do not show any signs of losing much steam. The Puget Sound region’s office market saw the vacancy drop down to 7.15%, compared to 7.74% last quarter. With the exception of the Q3 2016 vacancy mark of 6.97%, this is a 10-year low. The quarter saw healthy absorption of 6,503,439 s.f. region-wide, highlighted by just over 4.7 million of net absorption in the Seattle market. This includes the commencement of leases in several new buildings delivered over the previous three quarters.

The primary drivers in the market continue to be a

mixture of old and new tech companies including

Cisco, Apple, eBay, and Alibaba along with Tableau,

Valve, and Wave Broadband. Amazon also remains

active despite their pursuit of a second national

headquarters campus which has been narrowed to

20 finalist cities. Meanwhile, Microsoft has also been

discussing plans to grow their campus in Redmond.

Despite some economists concerns of an economic

slowdown, some of the economic indicators would

suggest otherwise. Washington State’s economy

added 6,800 new jobs in January 2018 according

to the Washington State Employment Security

Department. This compares to a gain of 1,510 new

jobs in January 2017. This latest employment growth

was fueled by construction, services, and retail. The

only sector losing jobs was a minor loss in mining

and logging. The growing employment base, along

with the fact that new construction has generally

been added at healthy levels with strong pre-leasing,

has maintained a strong regional commercial real

estate market across the categories and specifically

in the regional office market. Long-term confidence

in Seattle’s economy and office market has been

exhibited in cap rates well below 5% across a variety

of product sold. In conjunction with strong rent

growth in the Class A category and limited investment

opportunities, these rates pushed prices above

$900/s.f. National and international real estate funds

and private REITs continue to be the most active

buyer classes, with foreign investors primarily looking

at development investments. The largest problem

currently facing these investors is lack of properties

for sale across the board.

The regional trends continued to be positive and

statistics were steady. The total inventory of office

Regional vacancy rate reversed the 4Q 2017 spike, dropping to 7.15%, with strong net absorption of 1,722,641 s.f., tied mainly to leases in new buildings leasing commencing. The region’s availability rate fell from 10.40% to 9.88%, supporting the conclusion that lease timing was the cause of the vacancy bump. There are 13 office projects underway; 10 in the Seattle CBD, one each in Kirkland, Renton, and Des Moines.

Region wide the 6.44M s.f. under construction is 57% pre-leased (30% of the speculative space is pre-leased).

Office property sales were slow Q1 2018, following an active end of 2017.

Suburban properties transactions continue to see increased demand.

Rental rates were nearly flat over the quarter, except for 5% bumps in Seattle and Bellevue. Investors are becoming more cautious regarding longer-term rent growth.

The Seattle office market had a solid, stable 2017, which enhanced the market’s appeal to investors. The result was the second year in a row with about $3 billion in office property sales. Long-term confidence in Seattle’s economy and office market was exhibited in capitalization rates well below 5% across a variety of product sold. In conjunction with strong rent growth in the Class A category and limited investment opportunities, these rates pushed prices above $900 per square foot. National and international real estate funds and private REITs were the most active buyer classes.

4th Quarter 2017 | 1

The regional trends continued to be positive and statistics were steady.

The total inventory of office space in the region rose by 2.9 million square

feet in the third quarter of 2017 including three significant buildings were

delivered- all in the Seattle CBD. About 63% of the buildings delivered

was pre-leased, including two new tenants announced at Madison Centre

taking a combined 2.5 floors. The year ended with net absorption of

1,261,370 s.f. after losing ground in the 4th quarter. The net result was an

increase of the region’s vacancy rate to 7.74%, back to almost exactly

where the year started. This is somewhat misleading as there is a large

amount of pre-leasing that has not yet commenced that would lower the

vacancy by 45 bps. Available space also increased slightly, ending the

year 10.40% compared with 10.32% in the second quarter. The average

asking rent increased across the region over the year, about on average

everywhere except for South King County; the overall year-over-year

growth is at 6%, ranging from less than 1% in the Northend and Tacoma

markets to 8% in Seattle.

The number of projects under construction now stands at 13 with a total

of 6.44 million s.f. Skanska’s 2&U tower, Alexandria’s The Atrium and

Wright Runstad’s Rainer Square started in the fourth quarter. Only Rainier

Square has announced any pre-leasing- Amazon in all 722,000 s.f.

Vacant Space / Vacancy RateThe regional office market now has a standing inventory of 199.8 million

square feet. In the final quarter of 2017 vacancy bumped up by 39 bps

to 7.74%. Part of this was the effect of three buildings in the Seattle CBD

(9th & Thomas, Madison Centre and f5 Tower) being officially completed

and added to the inventory while the pre-leasing will commence over

the next year. Absorption was also weak in the quarter with a net loss of

403,200 s.f. including -190,463 s.f. in Seattle.

Currently there are only 41 spaces over 50,000 s.f. listed for lease and

near-term occupancy in the entire region. Of those only 13 are larger


Seattle Office

4th Quarter

2017

Market Forecast TrendsRegional vacancy rate spiked in the 4th quarter to 7.74%, with negative net absorption of 430,200 s.f., tied mainly to new buildings opening prior to their pre-leasing commencing. The region’s availability rate increased only slightly from 10.32% to 10.40%, supporting the conclusion that lease timing was the cause of the vacancy bump.

Three buildings were delivered this quarter, all in the Seattle market, replaced by three starts in Seattle. There are now 13 office projects underway; 10 in the Seattle CBD, one each in Kirkland, Renton and Des Moines. Region wide the 6.44 million s.f. under construction is 57%

pre-leased (30% of the speculative space is pre-leased).

Office property sales were very strong in the final quarter of 2017, the dollar volume boosted by five $100 million plus sales and 61 transactions overall. Suburban properties transactions continue to see increased demand.

Rental rates were nearly flat over the quarter, except for 5% bumps in Seattle and Bellevue. Investors are becoming more cautious regarding longer-term rent growth.

Market Highlights

ABSORPTION

RENTAL RATE

VACANCY

CONSTRUCTION DELIVERIES

Continued, page 4

Market Forecast Trends

Market Highlights

4TH QUARTER 2017



space in the region rose by 2.9M s.f. in the final

quarter of 2017, including three significant buildings

in the Seattle CBD. With no major deliveries in the

past two quarters, and this quarter’s strong net

absorption of 6,503,439 s.f., the net result was a

decrease in the availability rate to below double

digits for the first time since CoStar has been

tracking that statistic. The current regional availability

is 9.88%. The average asking rent decreased in

the two major markets of Seattle and the Eastside

compared to last quarter, but increased slightly in

the other three smaller market areas.

The number of projects under construction stands

at 13 with a total of 6,503,439 s.f. Skanska’s 2&U

tower, Alexandria’s The Atrium, and Wright Runstad’s

Rainier Square started in the fourth quarter of 2017.

Only Rainier Square has announced any pre-leasing

- Amazon has spoken for all 722,000 s.f.

Vacant Space / Vacancy Rate

The regional office market has a standing inventory

of 201.5M s.f. Vacancy continued its long-term

downward trend, dropping 59 bps to 7.15%. This

reflected a combination of new leasing and start

of leases in the new buildings delivered over the

past three quarters. A big part of the latter was the

Amazon leases in Troy Block-North, Tilt49, and

Centre 425, a total of 1.08M s.f. Absorption was

positive in all of the region’s submarkets in Q1 with

a net gain of 1,755,641 s.f., exceeding the total of

1,261,370 s.f. for all of 2017.

There are 57 spaces over 50K s.f. listed for lease

and near-term occupancy in the region. Of those, 25

are larger than 100K s.f., including nine in the Seattle

CBD and three in downtown Bellevue. The largest

existing contiguous spaces ready for occupancy in

the Seattle CBD are 246,400 s.f. in Madison Centre

and 220,000 s.f. in 800 5th Avenue Building. In

the Eastside market the largest spaces ready for

occupancy are the 177,000 s.f. in Summit II and

119,700 s.f. in Skyline Tower in the Bellevue CBD.

The regional availability rate showed a significant

decrease over the quarter, ending at 9.88%,

compared to 10.40% last quarter. South King saw a

140 bps drop to 15.20% and the Eastside decreased

by 120 bps to 7.90%. Both vacancy and availability

are expected to continue their downward trend over

the next few quarters as preleases in new buildings

commence.

New Construction

The total amount of space delivered Q1 2018 was

555,645 s.f. The most significant was an owner-

occupied medical-oriented building. Three major

projects started last quarter and are well under way.

These include the 664,245 s.f. 2&U by Skanska

(downtown Seattle), The Atrium by Alexandria

(212,000 s.f. in South Lake Union), and the 58-story

Rainier Square with 722,000 s.f. being built by Wright

Runstad and fully pre-leased by Amazon. The three

projects under construction outside Seattle continue

on as planned with no additional leasing reported at

the speculative Kirkland Urban or Southport Office

Campus. There has been little in the way of new

leasing activity at either project thus far into 2018.

The 13 buildings under construction in the region

total 6.5 million s.f. of which about 55%, has been

pre-leased. There still appears to be little potential of

significant over-supply in the near term considering

the limited amount of speculative space being built.

Rent Forecast

Rental rates are primarily stable as the market’s

supply and demand is balanced, evidenced by

three of the markets experiencing a slight increase

in average rent quotes from last quarter, and two

moving slightly downward. The upper end of the

market has seen more growth as premier Class A

space is in relatively short supply and businesses

looking at that space are able to afford cost feasible

rent to get new space built. Changes in average

asking rates showed a 4% decrease quarter-to-

quarter in the Seattle market and a 1% decrease in

the Eastside market. Other markets showed slight

quarter-to-quarter gains in rent ranging between

0.5% and 1.6%. These trends are expected to

continue; however, investors are starting to pull back

on Class A rent increases due to concerns regarding

the pace of office job creation.

Tech company demand continues to pressure larger

blocks of new Class A space rent upward. This has

also affected attractive vintage spaces. A recent

example is the nearly completed renovation of the

Maritime Building located near the waterfront in

Downtown Seattle. Beacon Capital added two floors

to the building and leased all of the office space

to Big Fish, at rates similar to new space in South



2 | Seattle Office Real Estate Market Review

Seattle CBD / Surrounding Area ReviewNet absorption in the Seattle submarket in Q1 was 1,251,334 s.f., well above the 2017 total to 503,601 s.f. The commencement of three major Amazon leases accounted for most of that leasing. Those buildings/leases also contributed to the slow absorption last year as they were initially included as vacant space prior to the leases starting this quarter). The Seattle market vacancy rate returned to its downward trend, ending Q1 at 7.29% compared with 8.13% last quarter. The availability rate decreased by 20 bps to 9.70%, the smaller fluctuation reflecting a fairer picture as availability is not affected by the commencement lag.

The Seattle CBD submarket also benefitted from the commencement lag and vacancy in the CBD decreased 200 bps to 10.7% in Q1. Availability saw a smaller improvement from 12.9% to 12.4% in Q1. Leasing continued across the central Seattle submarket, but the number of available larger spaces did increase over the quarter. This is healthy in terms of attracting and retaining tenants as the economy continues to expand.

The downward vacancy trend in all submarkets of the Seattle market should continue through the next two years considering that 67% of the ten buildings under construction is pre-leased. There may be additional minor blips if 333 Dexter and 2&U deliver with large blocks of space unleased; however, with several tenants still looking for large blocks of space in the market, that is not a major concern. On the investment side, the Seattle market was relatively quiet after a busy 2017. The only major sale was the vintage Joseph Vance Building, selling to Brickman Real Estate, a national investment fund manager with two other vintage buildings in Seattle.

Eastside ReviewThe Eastside office market inventory currently stands at just over 50.5M s.f. accounting for about one fourth of the total regional office supply. Kirkland Urban is the only major office project underway in the Eastside. The North building is expected to be delivered before the end of 2018, but no additional pre-leasing beyond Tableau Software and Wave has been announced. The Eastside has the lowest office vacancy rate in the region at 5.77% as of Q1 2018. The vacancy rate has steadily declined since 2010, now at a ten-year low. Demand has filled three office towers in the past 24 months, in addition to chipping away at vacancy in existing space. The availability rate has also trended downward to the current 7.90%, 120 bps lower than last quarter. Net absorption was 34,837 s.f. in Q1 2018, compared to negative last quarter (-58,527 s.f.) which dropped the year-end total net absorption for all of 2017 to 922,126 s.f. The Bellevue CBD vacancy dropped to 7.1% from 7.6% last quarter, while the CBD availability

rate decreased more modestly from 10.3% to 10.2%. The CBD still faces vacation of part or most of the 500,000 s.f. leased by Expedia in its named Tower 333 building and Skyline Tower, in late 2018 which will be tempered some by the renewal of 120,000 s.f. to create interim office hotel space. All three of the recently opened office towers including Lincoln Square South Tower, Centre 425 (Amazon), and 929 Tower are now stabilized. Based on the current CBD vacancy of 7.1%, even if all 380,000 s.f. of the Expedia space is returned with no pre-leasing, the effect would be a 350 bp increase in the CBD vacancy rate, which is a worst case scenario. Most of the peripheral Eastside submarkets continue to perform well, ending Q1 2018 with vacancy rates of 3.2% and 4.0% respectively for Kirkland and Redmond, both declining from last quarter. An exception to the submarkets is the I-90 Corridor due to the vacation of two buildings by Boeing, including Sunset Corporate Campus North V. The current asking rent for the Eastside market of $36.96/s.f./year is second highest in the region next to Seattle. The Eastside saw the region’s largest office sale in Q1, the $200M Shidler Group acquisition of the Advanta Commons in the I-90 submarket. Interestingly, this was $40M less than the seller (JP Morgan) had paid for the property in July 2010. The price differential is tied to the fact that Microsoft’s lease for the three-building property was expiring in June 2018 and the rate negotiated for their recently signed 5-year renewal. Other notable Eastside sales in the quarter include Mercer Pointe selling for $26.7M, or $374/s.f., at a reported cap rate of 6.70%. The same buyer, Nicola Crosby, also purchased the Bellevue Gateway Building for $25.5M, or $373/s.f. Six other office buildings transferred for over $5M in Q1 2018, indicating the Eastside investment market remains active.

South King County ReviewSouth King County commenced 2018 with a solid 349,620 s.f. of net absorption in Q1, despite Boeing’s giveback of office space in 2017 as the company reduced local employment by about 6,000 jobs. This compares to negative 67,857 s.f. in net absorption for all of 2017. The South King County office market vacancy rate remains the only double digits vacancy indicator in the region, now at 10.9%. The positive is that vacancy in this market dropped down from 12.0% at year-end 2017, a 110 bp decline over the past quarter. The availability rate is also the highest at 15.2%, but also declined from the 16.6% mark last quarter. The main component of the availability rate remains the 748,000 s.f. Southport Office Campus under construction in Renton with no office pre-leasing of note. That project is joined by the build-to-suit FAA Regional Headquarters in Des Moines as the only major office buildings under construction in South King County. In general, leasing activity in South King County consists of mostly smaller

%SF

VacancyNew Construction

1Q18

Net Absorption Average Rent (Median)

YE17YE14 YE15 YE16

0M

1M

2M

3M

4M

5M

6M

7M

8M

4%

5%

6%

7%

8%

9%

10%

11%

12%

$32.12

$37.62$38.37

$41.48

$39.839.36%

8.26%

7.10% 8.13% 7.29%

SEATTLE CBD / SURROUNDING AREA%SF


1Q18


YE17YE14 YE15 YE16

0

300K

600K

900K

1.2M

1.5M

0%

2%

4%

6%

8%

10%

$32.99

$34.26

7.86%

5.96%

$36.96

7.23% 6.97%

$34.60

$37.09

5.77%

EAST KING COUNTY

Area Review


Seattle CBD / Surrounding Area ReviewNet absorption in the Seattle submarket in Q1 was 1,251,334 s.f., well above the 2017 total to 503,601 s.f. The commencement of three major Amazon leases accounted for most of that leasing. Those buildings/leases also contributed to the slow absorption last year as they were initially included as vacant space prior to the leases starting this quarter). The Seattle market vacancy rate returned to its downward trend, ending Q1 at 7.29% compared with 8.13% last quarter. The availability rate decreased by 20 bps to 9.70%, the smaller fluctuation reflecting a fairer picture as availability is not affected by the commencement lag.

The Seattle CBD submarket also benefitted from the commencement lag and vacancy in the CBD decreased 200 bps to 10.7% in Q1. Availability saw a smaller improvement from 12.9% to 12.4% in Q1. Leasing continued across the central Seattle submarket, but the number of available larger spaces did increase over the quarter. This is healthy in terms of attracting and retaining tenants as the economy continues to expand.

The downward vacancy trend in all submarkets of the Seattle market should continue through the next two years considering that 67% of the ten buildings under construction is pre-leased. There may be additional minor blips if 333 Dexter and 2&U deliver with large blocks of space unleased; however, with several tenants still looking for large blocks of space in the market, that is not a major concern. On the investment side, the Seattle market was relatively quiet after a busy 2017. The only major sale was the vintage Joseph Vance Building, selling to Brickman Real Estate, a national investment fund manager with two other vintage buildings in Seattle.

Eastside ReviewThe Eastside office market inventory currently stands at just over 50.5M s.f. accounting for about one fourth of the total regional office supply. Kirkland Urban is the only major office project underway in the Eastside. The North building is expected to be delivered before the end of 2018, but no additional pre-leasing beyond Tableau Software and Wave has been announced. The Eastside has the lowest office vacancy rate in the region at 5.77% as of Q1 2018. The vacancy rate has steadily declined since 2010, now at a ten-year low. Demand has filled three office towers in the past 24 months, in addition to chipping away at vacancy in existing space. The availability rate has also trended downward to the current 7.90%, 120 bps lower than last quarter. Net absorption was 34,837 s.f. in Q1 2018, compared to negative last quarter (-58,527 s.f.) which dropped the year-end total net absorption for all of 2017 to 922,126 s.f. The Bellevue CBD vacancy dropped to 7.1% from 7.6% last quarter, while the CBD availability

rate decreased more modestly from 10.3% to 10.2%. The CBD still faces vacation of part or most of the 500,000 s.f. leased by Expedia in its named Tower 333 building and Skyline Tower, in late 2018 which will be tempered some by the renewal of 120,000 s.f. to create interim office hotel space. All three of the recently opened office towers including Lincoln Square South Tower, Centre 425 (Amazon), and 929 Tower are now stabilized. Based on the current CBD vacancy of 7.1%, even if all 380,000 s.f. of the Expedia space is returned with no pre-leasing, the effect would be a 350 bp increase in the CBD vacancy rate, which is a worst case scenario. Most of the peripheral Eastside submarkets continue to perform well, ending Q1 2018 with vacancy rates of 3.2% and 4.0% respectively for Kirkland and Redmond, both declining from last quarter. An exception to the submarkets is the I-90 Corridor due to the vacation of two buildings by Boeing, including Sunset Corporate Campus North V. The current asking rent for the Eastside market of $36.96/s.f./year is second highest in the region next to Seattle. The Eastside saw the region’s largest office sale in Q1, the $200M Shidler Group acquisition of the Advanta Commons in the I-90 submarket. Interestingly, this was $40M less than the seller (JP Morgan) had paid for the property in July 2010. The price differential is tied to the fact that Microsoft’s lease for the three-building property was expiring in June 2018 and the rate negotiated for their recently signed 5-year renewal. Other notable Eastside sales in the quarter include Mercer Pointe selling for $26.7M, or $374/s.f., at a reported cap rate of 6.70%. The same buyer, Nicola Crosby, also purchased the Bellevue Gateway Building for $25.5M, or $373/s.f. Six other office buildings transferred for over $5M in Q1 2018, indicating the Eastside investment market remains active.

South King County ReviewSouth King County commenced 2018 with a solid 349,620 s.f. of net absorption in Q1, despite Boeing’s giveback of office space in 2017 as the company reduced local employment by about 6,000 jobs. This compares to negative 67,857 s.f. in net absorption for all of 2017. The South King County office market vacancy rate remains the only double digits vacancy indicator in the region, now at 10.9%. The positive is that vacancy in this market dropped down from 12.0% at year-end 2017, a 110 bp decline over the past quarter. The availability rate is also the highest at 15.2%, but also declined from the 16.6% mark last quarter. The main component of the availability rate remains the 748,000 s.f. Southport Office Campus under construction in Renton with no office pre-leasing of note. That project is joined by the build-to-suit FAA Regional Headquarters in Des Moines as the only major office buildings under construction in South King County. In general, leasing activity in South King County consists of mostly smaller

%SF


1Q18


YE17YE14 YE15 YE16

0M

1M

2M

3M

4M

5M

6M

7M

8M

4%

5%

6%

7%

8%

9%

10%

11%

12%

$32.12

$37.62$38.37

$41.48

$39.839.36%

8.26%

7.10% 8.13% 7.29%

SEATTLE CBD / SURROUNDING AREA%SF


1Q18


YE17YE14 YE15 YE16

0

300K

600K

900K

1.2M

1.5M

0%

2%

4%

6%

8%

10%

$32.99

$34.26

7.86%

5.96%

$36.96

7.23% 6.97%

$34.60

$37.09

5.77%

EAST KING COUNTY

Area Review

Lake Union. For most non-full floor or full building

leases these changes have been moderate with

no significant spikes. Even with construction costs

continuing to increase, the current rent levels remain

cost feasible. Investors have become more cautious,

moderating rent growth projections closer to an

average annual rate of 3%, anticipating a market

plateau.

Seattle CBD/Surrounding Area Review

Net absorption in the Seattle submarket in Q1

was 1,251,334 s.f., well above the 2017 total to

503,601 s.f. The commencement of three major

Amazon leases accounted for most of that leasing.

Those buildings/leases also contributed to the slow

absorption last year as they were initially included as

vacant space prior to the leases starting this quarter).

The Seattle market vacancy rate returned to its

downward trend, ending Q1 at 7.29% compared with

8.13% last quarter. The availability rate decreased

by 20 bps to 9.70%, the smaller fluctuation reflecting

a fairer picture as availability is not affected by the

commencement lag.

The Seattle CBD submarket also benefitted from

the commencement lag and vacancy in the CBD

decreased 200 bps to 10.7% in Q1. Availability

saw a smaller improvement from 12.9% to 12.4%

in Q1. Leasing continued across the central Seattle

submarket, but the number of available larger spaces

did increase over the quarter. This is healthy in terms

of attracting and retaining tenants as the economy

continues to expand.

The downward vacancy trend in all submarkets of

the Seattle market should continue through the next

two years considering that 67% of the ten buildings

under construction is pre-leased. There may be

additional minor blips if 333 Dexter and 2&U deliver

with large blocks of space unleased; however, with

several tenants still looking for large blocks of space

in the market, that is not a major concern. On the

investment side, the Seattle market was relatively

quiet after a busy 2017. The only major sale was the

vintage Joseph Vance Building, selling to Brickman

Real Estate, a national investment fund manager with

two other vintage buildings in Seattle.

Eastside Review

The Eastside office market inventory currently stands

at just over 50.5M s.f. accounting for about one

fourth of the total regional office supply. Kirkland

Urban is the only major office project underway in

the Eastside. The North building is expected to be

delivered before the end of 2018, but no additional

pre-leasing beyond Tableau Software and Wave

has been announced. The Eastside has the lowest

office vacancy rate in the region at 5.77% as of Q1

2018. The vacancy rate has steadily declined since

2010, now at a ten-year low. Demand has filled three

office towers in the past 24 months, in addition to

chipping away at vacancy in existing space. The

availability rate has also trended downward to the

current 7.90%, 120 bps lower than last quarter. Net

absorption was 34,837 s.f. in Q1 2018, compared

to negative last quarter (-58,527 s.f.) which dropped

the year-end total net absorption for all of 2017 to

922,126 s.f. The Bellevue CBD vacancy dropped

to 7.1% from 7.6% last quarter, while the CBD

availability rate decreased more modestly from

10.3% to 10.2%. The CBD still faces vacation of

part or most of the 500,000 s.f. leased by Expedia

in its named Tower 333 building and Skyline Tower,

in late 2018 which will be tempered some by the

renewal of 120,000 s.f. to create interim office hotel

space. All three of the recently opened office towers



1st Quarter 2018 | 3kiddermathews.com

tenants that tend to be stable in size and without much need for expansion. No companies have been found as a replacement for the formerly Boeing occupied space in this submarket that has created the surplus in office inventory. The former 342,000 s.f. Weyerhaeuser office campus also continues to contribute to the higher Southend vacancy, although there has been some leasing activity of late. The current rental rate quote is $27.72/s.f./year full service compared to $26.32/s.f./year in 4Q 2017. Sales this quarter included only two office building sales over $5M, and the disposition of Boeing’s Duwamish Towers for redevelopment. Traditionally this market has taken the longest to recover, often serving as a secondary alternative to tenants that are priced out of Seattle and Bellevue.

Snohomish County ReviewAfter posting negative 218,027 s.f. of net absorption during 2017, the Northend office market rebounded in Q1 2018, with positive net absorption of 119,328 s.f. The vacancy rate also compressed from 7.59% at year-end 2017 to 6.86% after the first three months of 2018. Contributing to the positive absorption was a flurry of new leasing activity in the Bothell submarket after Boeing’s exodus of more than 100,000 s.f. The Bothell submarket ended the first quarter 2018 at 8.8%, compared to 12.9% at year-end 2017. The Everett CBD continues to perform steadily with a current vacancy of 6.1% (8.0% availability) compared to 6.9% at year-end 2017. The Lynnwood/Edmonds submarket remains one of the stronger Northend office submarkets with vacancy continuing to hover just above the 5.0% benchmark at 5.4%. The Northend submarkets continue to attract smaller office tenants looking for both proximity to more affordable housing for its employees and affordability with the average rent quotes running $14.62/s.f./year lower than Seattle running $11.75/s.f./year lower than the Eastside. The current asking rate for the Northside is $25.21/s.f./year which is a 1.4% increase from last quarter and 6.0% increase from a year ago. The most significant Snohomish County sale was the March 2018 acquisition of the Redstone Corporate Center I and Redstone Corporate Center II buildings in Lynnwood and Mountlake Terrace, respectively by Westport Capital Partners. The closing price of $70,750,000 indicates the buyer paid $215/s.f. for these Northend assets. Overall, the sales activity has been steady in the Northend market with a mix of investment and owner-user purchases. Gradually declining vacancy is expected.

Pierce County ReviewAfter eleven consecutive quarters of positive net absorption in the Pierce County market, the streak was continued in Q1 2018, with barely 508 s.f.

The vacancy rate moved up slightly to 6.36% from 6.33% at year-end 2017. Tacoma CBD’s vacancy rate increased from 5.7% last quarter to 6.1% currently while the availability rate shot up from 7.8% last quarter to 11.8% currently, an increase of 400 bps over the last three months. This increase is on the heels of State Farm’s announcement in early 2018 that it will close its two Tacoma offices by the end of the year, potentially putting 800 people out of work. State Farm’s Tacoma operation is split between offices at the Frank Russell Building and Columbia Bank Center, where approximately 1,400 are employed. Some of the jobs will be relocated to DuPont. Despite the State Farm announcement, the Tacoma CBD continues to see improved office and residential demand. Rental rates in the Pierce County remain relatively flat with a slight increase up to $22.26/s.f./year n Q1 2018, compared to $22.15/s.f./year last quarter. Sales in this quarter were active, but primarily smaller properties for owner/users or for redevelopment. After seeing only four office sales over $5,000,000 in all of 2017, the slow pace continued into Q1 2018. Optimism remains prevalent surrounding the CBD which continues to gentrify the strong interest in downtown housing, including new multifamily for professionals working in downtown Tacoma. The strongest office market segment in Pierce County continues to be medical-related properties.

%SF


1Q18


YE17YE14 YE15 YE16

-200K

0

200K

400K

600K

800K

1.0M

1.2M

-2.0%

0%

2.6%

4.9%

7.1%

9.4%

11.7%

14.0%

$21.03$21.41

10.65%

12.02%

$27.72

11.40%

9.42%

$26.94$27.29

10.90%

SOUTH KING COUNTY

%SF


1Q18


YE17YE14 YE15 YE16

-300K

-200K

-100K

0

100K

200K

300K

400K

500K

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

$22.58$23.00

7.29% 7.59%

$25.21

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

%SF


1Q18


YE17YE14 YE15 YE16

0

50K

100K

150K

200K

250K

300K

350K

0%

1.4%

2.9%

4.3%

5.7%

7.1%

8.6%

10.0%

$20.38 $20.83

$21.64 $22.15 $22.26

9.70% 8.51%

7.46%

6.33% 6.36%

PIERCE COUNTY

including Lincoln Square South Tower, Centre 425

(Amazon), and 929 Tower are now stabilized. Based

on the current CBD vacancy of 7.1%, even if all

380,000 s.f. of the Expedia space is returned with no

pre-leasing, the effect would be a 350 bp increase

in the CBD vacancy rate, which is a worst case

scenario. Most of the peripheral Eastside submarkets

continue to perform well, ending Q1 2018 with

vacancy rates of 3.2% and 4.0% respectively for

Kirkland and Redmond, both declining from last

quarter. An exception to the submarkets is the I-90

Corridor due to the vacation of two buildings by

Boeing, including Sunset Corporate Campus North

V. The current asking rent for the Eastside market

of $36.96/s.f./year is second highest in the region

next to Seattle. The Eastside saw the region’s

largest office sale in Q1, the $200M Shidler Group

acquisition of the Advanta Commons in the I-90

submarket. Interestingly, this was $40M less than

the seller (JP Morgan) had paid for the property in

July 2010. The price differential is tied to the fact that

Microsoft’s lease for the three-building property was

expiring in June 2018 and the rate negotiated for

their recently signed 5-year renewal. Other notable

Eastside sales in the quarter include Mercer Pointe

selling for $26.7M, or $374/s.f., at a reported cap

rate of 6.70%. The same buyer, Nicola Crosby,

also purchased the Bellevue Gateway Building

for $25.5M, or $373/s.f. Six other office buildings

transferred for over $5M in Q1 2018, indicating the

Eastside investment market remains active.

South King County Review

South King County commenced 2018 with a solid

349,620 s.f. of net absorption in Q1, despite Boeing’s

giveback of office space in 2017 as the company

reduced local employment by about 6,000 jobs. This

compares to negative 67,857 s.f. in net absorption

for all of 2017. The South King County office market

vacancy rate remains the only double digits vacancy

indicator in the region, now at 10.9%. The positive

is that vacancy in this market dropped down from

12.0% at year-end 2017, a 110 bp decline over

the past quarter. The availability rate is also the

highest at 15.2%, but also declined from the 16.6%

mark last quarter. The main component of the

availability rate remains the 748,000 s.f. Southport

Office Campus under construction in Renton with

no office pre-leasing of note. That project is joined

by the build-to-suit FAA Regional Headquarters

in Des Moines as the only major office buildings

under construction in South King County. In general,

leasing activity in South King County consists of

mostly smaller tenants that tend to be stable in

size and without much need for expansion. No

companies have been found as a replacement for the

formerly Boeing occupied space in this submarket

that has created the surplus in office inventory. The

former 342,000 s.f. Weyerhaeuser office campus

also continues to contribute to the higher Southend

vacancy, although there has been some leasing

activity of late. The current rental rate quote is

$27.72/s.f./year full service compared to $26.32/s.f./

year in 4Q 2017. Sales this quarter included only two

office building sales over $5M, and the disposition

of Boeing’s Duwamish Towers for redevelopment.

Traditionally this market has taken the longest to

recover, often serving as a secondary alternative to

tenants that are priced out of Seattle and Bellevue.








%SF


1Q18


YE17YE14 YE15 YE16

-200K

0

200K

400K

600K

800K

1.0M

1.2M

-2.0%

0%

2.6%

4.9%

7.1%

9.4%

11.7%

14.0%

$21.03$21.41

10.65%

12.02%

$27.72

11.40%

9.42%

$26.94$27.29

10.90%

SOUTH KING COUNTY

%SF


1Q18


YE17YE14 YE15 YE16

-300K

-200K

-100K

0

100K

200K

300K

400K

500K

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

$22.58$23.00

7.29% 7.59%

$25.21

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

%SF


1Q18


YE17YE14 YE15 YE16

0

50K

100K

150K

200K

250K

300K

350K

0%

1.4%

2.9%

4.3%

5.7%

7.1%

8.6%

10.0%

$20.38 $20.83

$21.64 $22.15 $22.26

9.70% 8.51%

7.46%

6.33% 6.36%

PIERCE COUNTY

Snohomish County Review

After posting negative 218,027 s.f. of net absorption

during 2017, the Northend office market rebounded

in Q1 2018, with positive net absorption of 119,328

s.f. The vacancy rate also compressed from

7.59% at year-end 2017 to 6.86% after the first

three months of 2018. Contributing to the positive

absorption was a flurry of new leasing activity in the

Bothell submarket after Boeing’s exodus of more

than 100,000 s.f. The Bothell submarket ended

the first quarter 2018 at 8.8%, compared to 12.9%

at year-end 2017. The Everett CBD continues to

perform steadily with a current vacancy of 6.1%

(8.0% availability) compared to 6.9% at year-end

2017. The Lynnwood/Edmonds submarket remains

one of the stronger Northend office submarkets with

vacancy continuing to hover just above the 5.0%

benchmark at 5.4%. The Northend submarkets

continue to attract smaller office tenants looking for

both proximity to more affordable housing for its

employees and affordability with the average rent

quotes running $14.62/s.f./year lower than Seattle

running $11.75/s.f./year lower than the Eastside. The

current asking rate for the Northside is $25.21/s.f./

year which is a 1.4% increase from last quarter and

6.0% increase from a year ago. The most significant

Snohomish County sale was the March 2018

acquisition of the Redstone Corporate Center I and

Redstone Corporate Center II buildings in Lynnwood

and Mountlake Terrace, respectively by Westport

Capital Partners. The closing price of $70,750,000

indicates the buyer paid $215/s.f. for these Northend

assets. Overall, the sales activity has been steady in

the Northend market with a mix of investment and

owner-user purchases. Gradually declining vacancy

is expected.

Pierce County Review

After eleven consecutive quarters of positive net

absorption in the Pierce County market, the streak

was continued in Q1 2018, with barely 508 s.f.

The vacancy rate moved up slightly to 6.36% from

6.33% at year-end 2017. Tacoma CBD’s vacancy

rate increased from 5.7% last quarter to 6.1%

currently while the availability rate shot up from 7.8%

last quarter to 11.8% currently, an increase of 400

bps over the last three months. This increase is on

the heels of State Farm’s announcement in early

2018 that it will close its two Tacoma offices by

the end of the year, potentially putting 800 people

out of work. State Farm’s Tacoma operation is split

between offices at the Frank Russell Building and

Columbia Bank Center, where approximately 1,400

are employed. Some of the jobs will be relocated to

DuPont. Despite the State Farm announcement, the

Tacoma CBD continues to see improved office and

residential demand. Rental rates in the Pierce County

remain relatively flat with a slight increase up to

$22.26/s.f./year n Q1 2018, compared to $22.15/s.f./

year last quarter. Sales in this quarter were active,

but primarily smaller properties for owner/users

or for redevelopment. After seeing only four office

sales over $5,000,000 in all of 2017, the slow pace

continued into Q1 2018. Optimism remains prevalent

surrounding the CBD which continues to gentrify the

strong interest in downtown housing, including new

multifamily for professionals working in downtown

Tacoma. The strongest office market segment






%SF


1Q18


YE17YE14 YE15 YE16

-200K

0

200K

400K

600K

800K

1.0M

1.2M

-2.0%

0%

2.6%

4.9%

7.1%

9.4%

11.7%

14.0%

$21.03$21.41

10.65%

12.02%

$27.72

11.40%

9.42%

$26.94$27.29

10.90%

SOUTH KING COUNTY

%SF


1Q18


YE17YE14 YE15 YE16

-300K

-200K

-100K

0

100K

200K

300K

400K

500K

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

$22.58$23.00

7.29% 7.59%

$25.21

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

%SF


1Q18


YE17YE14 YE15 YE16

0

50K

100K

150K

200K

250K

300K

350K

0%

1.4%

2.9%

4.3%

5.7%

7.1%

8.6%

10.0%

$20.38 $20.83

$21.64 $22.15 $22.26

9.70% 8.51%

7.46%

6.33% 6.36%

PIERCE COUNTY



Investment Market After office investment reached a record dollar

amount in 2017 at $3.1B, about $100M over 2016,

sales activity for Q1 2018 included 79 transactions

totaling $629M in sales volume. These include five

over $20M. The largest sale was Advanta Commons

(Microsoft) in the Eastside I-90 submarket, followed

by the Redstone Corporate Center I & II at $70.75M

in Lynnwood, Joseph Vance Building in Seattle at

$37.3M, Mercer Pointe at $26.7M, and Bellevue

Gateway at $25.5M, both in the Eastside 405

submarket. Noticeably absent this quarter was the

volume of institutional investment activity seen in

past quarters. There remain more interested buyers

than properties for sale, a factor in the below 5.0%

cap rates seen in top sales. Suburban properties

continue to make up the majority of sales as mid-

level buyers are attracted to returns in the 6%

range for seasoned properties. Owner-user activity

has also picked up, but generally accounts for the

smaller scale transactions. Overall, there remains

strong investor confidence and interest in the

region based on its long-term growth population

and employment growth and sound economic

fundamentals.

Data Source: CoStar

1Q 2018 Seattle Office Sales


1Q 2018 Seattle Office Sales

Name City Date Price SF $/SF

Advanta Commons Bellevue Mar-18 $200,000,000 636,322 $314.31

Bellevue Gateway Bellevue Mar-18 $25,500,000 68,290 $373.41

Redstone Corp. Center I & II Lynnwood Mar-18 $70,750,000 209,410 $337.85

Kirkland 405 Corp. Ctr, Bldg A Kirkland Mar-18 $14,800,000 41,405 $357.44

Quadrant I-5 Corp. Pk, Bldg A Redmond Feb-18 $14,400,000 74,974 $192.07

Mercer Pointe (Former AAA) Bellevue Jan-18 $26,700,000 71,329 $374.32

Joseph Vance Building Seattle Jan-18 $37,307,539 112,686 $331.08

Vacant Space / Vacancy RateThe regional office market has a standing inventory of 201.5M s.f. Vacancy continued its long-term downward trend, dropping 59 bps to 7.15%. This reflected a combination of new leasing and start of leases in the new buildings delivered over the past three quarters. A big part of the latter was the Amazon leases in Troy Block-North, Tilt49, and Centre 425, a total of 1.08M s.f. Absorption was positive in all of the region’s submarkets in Q1 with a net gain of 1,755,641 s.f., exceeding the total of 1,261,370 s.f. for all of 2017.

There are 57 spaces over 50K s.f. listed for lease and near-term occupancy in the region. Of those, 25 are larger than 100K s.f., including nine in the Seattle CBD and three in downtown Bellevue. The largest existing contiguous spaces ready for occupancy in the Seattle CBD are 246,400 s.f. in Madison Centre and 220,000 s.f. in 800 5th Avenue Building. In the Eastside market the largest spaces ready for occupancy are the 177,000 s.f. in Summit II and 119,700 s.f. in Skyline Tower in the Bellevue CBD. The regional availability rate showed a significant decrease over the quarter, ending at 9.88%, compared to 10.40% last quarter. South King saw a 140 bps drop to 15.20% and the Eastside decreased by 120 bps to 7.90%. Both vacancy and availability are expected to continue their downward trend over the next few quarters as preleases in new buildings commence.

New Construction ActivityThe total amount of space delivered Q1 2018 was 555,645 s.f. The most significant was an owner-occupied medical-oriented building. Three major projects started last quarter and are well under way. These include the 664,245 s.f. 2&U by Skanska (downtown Seattle), The Atrium by Alexandria (212,000 s.f. in South Lake Union), and the 58-story Rainier Square with 722,000 s.f. being built by Wright Runstad and fully pre-leased by Amazon. The three projects under construction outside Seattle continue on as planned with no additional leasing reported at the speculative Kirkland Urban or Southport Office Campus. There has been little in the way of new leasing activity at either project thus far into 2018. The 13 buildings under construction in the region total 6.5 million s.f. of which about 55%, has been pre-leased. There still appears to be little potential of significant over-supply in the near term considering the limited amount of speculative space being built.

Rent ForecastRental rates are primarily stable as the market’s supply and demand is balanced, evidenced by three of the

markets experiencing a slight increase in average rent quotes from last quarter, and two moving slightly downward. The upper end of the market has seen more growth as premier Class A space is in relatively short supply and businesses looking at that space are able to afford cost feasible rent to get new space built. Changes in average asking rates showed a 4% decrease quarter-to-quarter in the Seattle market and a 1% decrease in the Eastside market. Other markets showed slight quarter-to-quarter gains in rent ranging between 0.5% and 1.6%. These trends are expected to continue; however, investors are starting to pull back on Class A rent increases due to concerns regarding the pace of office job creation.

Tech company demand continues to pressure larger blocks of new Class A space rent upward. This has also affected attractive vintage spaces. A recent example is the nearly completed renovation of the Maritime Building located near the waterfront in Downtown Seattle. Beacon Capital added two floors to the building and leased all of the office space to Big Fish, at rates similar to new space in South Lake Union. For most non-full floor or full building leases these changes have been moderate with no significant spikes. Even with construction costs continuing to increase, the current rent levels remain cost feasible. Investors have become more cautious, moderating rent growth projections closer to an average annual rate of 3%, anticipating a market plateau.

Investment MarketAfter office investment reached a record dollar amount in 2017 at $3.1B, about $100M over 2016, sales activity for Q1 2018 included 79 transactions totaling $629M in sales volume. These include five over $20M. The largest sale was Advanta Commons (Microsoft) in the Eastside I-90 submarket, followed by the Redstone Corporate Center I & II at $70.75M in Lynnwood, Joseph Vance Building in Seattle at $37.3M, Mercer Pointe at $26.7M, and Bellevue Gateway at $25.5M, both in the Eastside 405 submarket. Noticeably absent this quarter was the volume of institutional investment activity seen in past quarters. There remain more interested buyers than properties for sale, a factor in the below 5.0% cap rates seen in top sales. Suburban properties continue to make up the majority of sales as mid-level buyers are attracted to returns in the 6% range for seasoned properties. Owner-user activity has also picked up, but generally accounts for the smaller scale transactions. Overall, there remains strong investor confidence and interest in the region based on its long-term growth population and employment growth and sound economic fundamentals.

Data Source: CoStar

Contact

Brian HatcherExecutive VP, BrokeragePacific [email protected]

The information in this report was composed by the Kidder Mathews Valuation Advisory Group.

Richard Briscoe, MAI

[email protected]

Chris Berger, MAI

[email protected]

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

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Benjamin A. Norbe Senior Vice President [email protected]

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