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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
3 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews
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.
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 5
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 OFFICE BUILDING
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DSHS Tenancy
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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
DSHS OFFICE BUILDING
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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 9
RENT ROLL
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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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 11
DSHS OFFICE BUILDING
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
12 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews
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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 13
14 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews
Site Plan
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 14
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ELEVATIONS
15 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews
Site Plan
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 15
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2505 Third AvenueSuite 324Seattle, WA 98121
206.720.7001 phone206.720.2949 fax
www.craftarchitects.com
3
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
16 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews
Site Plan
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 16
02/
12/1
6 - 2
:54p
m15
-088
_A2.
4 (2
ND
FLO
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FIN
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PLA
N).d
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2505 Third AvenueSuite 324Seattle, WA 98121
206.720.7001 phone206.720.2949 fax
www.craftarchitects.com
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
DSHS OFFICE BUILDING
E Main Ave
15th St S
E
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 17
PUGET SOUND ENGINEERING SUPPLIES
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Images
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 19
Images
Market Overview
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 21
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
Real Estate Market Review
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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 22
Real Estate Market Review
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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 23
Real Estate Market Review
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 24
Real Estate Market Review
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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.
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 25
Real Estate Market Review
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
VacancyNew Construction
1Q18
Net Absorption Average Rent (Median)
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
Kidder Mathews :: DSHS Office Building Offering Memorandum | Tacoma 26
Real Estate Market Review
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
4 | Seattle Office Real Estate Market Review
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
Chris Berger, MAI
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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27 DSHS Office Building Offering Memorandum | Tacoma :: Kidder Mathews
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