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In bad sign for downtown Seattle recovery, demand for office space tanks

By Gene Balk, The Seattle Times
Published: November 17, 2023, 7:40am

SEATTLE — Downtown Seattle’s recovery from the pandemic, already shaky, took a step backward this month.

PCC Community Markets announced it would be closing its new Fourth Avenue store, which was supposed to be the chain’s flagship. There simply weren’t enough customers to turn a profit, the company said.

While some metrics for downtown recovery have looked pretty good in recent months — visitor foot traffic and hotel occupancy rates are up — the number of workers who’ve returned to the office has lagged at roughly half of 2019 levels.

And sadly, some new data suggests this won’t improve anytime soon.

Interest in leasing new office space in Seattle was at just 21% of pre-pandemic levels in the third quarter of 2023, according to a report from New York-based VTS, which provides leasing and asset management software for commercial real estate landlords.

VTS produces a quarterly index number that gauges the interest among companies for new office space in seven major markets. Seattle’s third-quarter performance was the worst of the seven.

“I don’t think we saw one tenant come in over 50,000 square feet for a whole quarter [in Seattle],” said Lexi Russell, senior market research manager at VTS. “I think it’s kind of concerning.”

The only tenants coming into the Seattle market in the third quarter were those seeking smaller office spaces. There was an uptick in tenants looking for midsized office spaces of 10,000-50,000 square feet, which prevented an all-out crash in demand.

“Small companies — three- to five-person companies — aren’t the ones moving the needle,” Russell said. “All the volatility we’ve been seeing in Seattle is from that dearth of large tenants.”

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The VTS index represents a novel way to measure demand for office space. Traditionally, that demand would be captured at the point where a company signs a lease or moves into a space. Instead, VTS looks at the number of office-space tours by potential tenants.

Tours are how a company first engages the market. And nobody was touring Seattle’s large office spaces in the last quarter.

The San Francisco market has also been struggling, but did see an uptick in interest in large office spaces in the third quarter, pushing demand to 41% of pre-pandemic levels. Prospective tenants were from AI, financial institutions and some other industries, according to Russell.

That may be a good sign for Seattle also bouncing back in the next quarter.

“Seattle and San Francisco have a lot of synergy, particularly both being on the West Coast and being tech-focused,” Russell said, “so a lot of the trends I see in one I do tend to see in the other, but to varying degrees because they’re different sizes.”

A challenge faced by both Seattle and San Francisco is the prevalence of remote work compared with many other markets. A large portion of the economy works remotely very well, which limits the need for office space.

The Los Angeles market was the top performer among the seven markets in the last quarter, with interest in office space at 74% of pre-pandemic levels.

“When I chat with asset managers in L.A. they’re still very realistic, but optimistic,” Russell said. “I think there’s a lot more optimism in Los Angeles than what I’ve been hearing in some of the other markets, like Seattle.”

Russell said there was a lot of optimism in Seattle in 2021, when the COVID-19 vaccines first rolled out, and it seemed like things could soon return to normal. That optimism did bring back demand for office space. In the third quarter of 2022, office-space demand in Seattle was at 44% of pre-pandemic levels.

But the optimism was temporary, and interest in new office space is less than half what it was one year earlier.

“Since then, every other headwind has been forcing us back into pessimism,” she said.

Russell believes it’s important in markets like Seattle, where remote work is so prevalent, to reestablish the office as a place where people want to be, not have to be. And she believes things are heading in that direction.

And despite Seattle’s bleak performance in the last quarter, she said she still has faith in this city.

“I’m a big fan of Seattle in general. It’s a beautiful place and there are a lot of incredibly brilliant people,” she said. “It’s hard to see the light at the end of the tunnel, but I think it has to be there.”