SEATTLE — Just up from Lake Union in Seattle’s Northlake neighborhood, passersby can stop and watch something surreal in these remote-work times — an office building under construction.
Northlake Commons, a mixed-use, mass-timber building with 175,000 square feet of office space, was launched before COVID-19 left Seattle with half-filled offices and a double-digit office vacancy rate.
But the developer, Hess Callahan Gray Group, adjusted to that new environment. The building, originally intended for generic office tenants, was redesigned so it can also house tenants from the life sciences sector, which has been less affected by remote work. “You can’t do lab work from home, for the most part,” says HCG’s Joanna Callahan.
The project also has another, natural selling point: It’s not downtown.
Despite serial predictions of an imminent Office Return, most remote workers still haven’t come back. Offices in downtown Seattle remain at around 40% of their pre-COVID worker occupancy, according to data posted by the Downtown Seattle Association. (In downtown Bellevue, offices are up to 65% full, based on estimates using cellphone data by the Bellevue Downtown Association.)
Callahan thinks her project’s neighborhood location can appeal to tenants whose workers don’t mind being in an office, but would rather not “commute downtown, park in a parking garage and take a 40-story elevator” to do so.
Northlake Commons is just one example of the way the Seattle area is adjusting to an office market that stubbornly refuses to revert to its pre-pandemic, downtown-dominated normal.
On top of uncertainties over remote work, the Seattle-area office sector is also coping with thousands of tech-sector layoffs, high-profile exits from several large downtown office buildings and rising competition from office markets in neighborhoods and outlying areas.
Lack of office workers hasn’t stopped new office construction across the region. Projects underway in Seattle and Bellevue will lift the cities’ combined inventory by 6.5 million square feet, or around 8%, by the end of 2024, according to commercial real estate agency Colliers.
But there are mounting questions over who, exactly, is going to work in all those new offices and when they’ll show up.
The office market is notoriously cyclical and none of the current trends is set in stone. But it’s also clear some employers aren’t waiting for a return to normal. Instead, they’re preparing for a world that, at least for the near-term, needs less office space.
“This is a new equilibrium,” says Margaret O’Mara, a University of Washington historian who studies the tech sector and its influence on urban development. After years of rapid office expansion, “things are coming down to Earth and resetting.”
Voting with their (square) feet
That reset is showing up in leasing activity.
Until recently, many Seattle-area employers were hedging on office lease decisions until they knew how many workers were coming back. That could mean sitting on largely empty offices or, if a lease was ending, buying a little more time with a one- to two-year extension.
Now, as work patterns are solidifying, many employers are making moves.
Some have been dramatic. In January, both Amazon and Facebook parent Meta announced they were vacating large office spaces in downtown Seattle, citing the ongoing shift to remote and hybrid work arrangements; Microsoft said it would vacate its offices at the 26-story City Center Plaza in Bellevue.
More often, the moves have been less visible, with employers deciding to stay in the downtowns, but at a much smaller scale.
In downtown Seattle, office tenants leased just 1.2 million square feet in the second half of 2022, down 25% from the second half of 2021 and 40% from the second half of 2019, according to data from commercial real estate firm Cushman & Wakefield.
In Bellevue, lease volumes in the second half of 2022 were down 64% from 2021 and by 50% from 2019, according to Cushman.
By late 2022, employers “had a little bit more certainty into their future … and for the most part, most companies figured out that they needed less space,” says Trevor Youngren, a senior director at Cushman who helps tenants find office space in the Seattle area.
Overall office vacancy in downtown Seattle was 24.9% as of December, or roughly five times what it was in December 2019, according to Colliers. In downtown Bellevue, office vacancy is now 10.9%, or almost double the rate in late 2019.
So far, the softer downtown office markets aren’t resulting in big rent drops. But brokers say that’s mainly because landlords are stepping up other concessions, such as several months’ free rent or more help with office improvements. The goal of these upfront concessions, brokers say, is to fill space without cutting the rent for a lease that could run five years or more.
But with vacancy rates so high, rent cuts are just around the corner, brokers say. Cushman’s Youngren is already getting calls from landlord brokers saying, “‘We have a lot of flexibility there, and you can tell us what we need to do to get the deal’,” he says. “That kind of narrative hasn’t happened in 10 plus years.”
To the ‘burbs?
Not all Seattle-area office markets are going soft.
In areas just to the north of downtown Seattle, such as Northgate, or neighborhoods just north of the Lake Washington Ship Canal, leasing activity has stayed high, relative to the downtowns. Likewise for Renton, much of the suburban Eastside, even farther afield: In downtown Everett, office vacancy is at 7.6% and Tacoma’s suburbs are at 3.8%, according to commercial real estate firm Kidder Mathews.
For tenants, attractions of these non-downtown areas can include lower rents, more parking and many of a downtown’s amenities, such as restaurants and shops, but with fewer of the costs, including congestion and safety concerns.
For office tenants considering a move to Fremont, for example, “there’s a lot of restaurants, there’s bars, there’s trails, there’s breweries,” says Connor McClain, senior vice president and leasing expert at Colliers. “And because of that ongoing activity, tenants inherently feel safer.”
No one is predicting a sudden wave of suburban flight. Office inventory outside of downtowns is limited — downtown Seattle has more office space than Seattle and Bellevue’s suburbs combined. And changing neighborhoods can be hugely disruptive for employees, particularly those who don’t live nearby.
Instead, many employers likely will use market conditions to negotiate cheaper leases or to move to nicer downtown offices. Some may join civic efforts to restore the amenities that made downtowns attractive in the first place.
But such responses sidestep larger questions about the office market.
One is whether, or when, high vacancy rates will start to threaten landlords’ abilities to pay or refinance their construction debt or to flip the properties. Some industry insiders think that risk, which became an issue during the Great Recession, is likely to resurface.
Debt issues aside, the office market still faces a more basic question: what’s the future of the office?
Certainly, some of the decline in office leasing is driven by broader economic uncertainties and by tech executives “trying to signal to the market that the days of irrational exuberance are over and we’re slowing down or right-sizing,” says the UW’s O’Mara.
But it also reflects what the success of remote work has done to older assumptions about offices, such as that companies always need more office space for every new hire, or that creativity needs in-person work, says O’Mara.
But the pandemic also accelerated changes in the geography of work that were already underway before COVID, says Richard Florida, urban studies theorist and author of the 2002 book “The Rise of the Creative Class.”
As workers age and form families, Florida says, they often lose interest in the hip downtowns they were initially attracted to and move to outlying neighborhoods with family-friendly amenities.
Those workers still value the energy and sociability of in-person work. But “they want that closer to where they live,” says Florida, who thinks office geography will gradually grow more decentralized, with more offices in neighborhoods and suburbs and fewer downtown.
That’s a vision likely to resonate with Seattle-area housing advocates who think some of those half-full offices should be converted into affordable housing.
Florida doesn’t think downtowns like Seattle will stop being important hubs for work. But he thinks they’ll need to make themselves far more attractive as places for recreation and entertainment, especially for families.
“The idea that cities and central business districts can survive by packing and stacking office workers in vertical towers,” Florida says. “That’s no longer going to work.”