by Laurel Demkovich, Washington State Standard
September 9, 2024
Despite more workers returning to offices, much of downtown Seattle’s office space is still reeling from the pandemic and it could be years before it is in high demand again.
Office construction in the city is down significantly in the last year and vacancy rates remain some of the highest in the country, a new national report says.
The city saw the biggest slowdown in office construction in the West over the past year, according to the August report on office market trends from CommercialEdge. Current projects equal about 2.1 million square feet of office real estate, compared to 6.6 million in July of last year.
Vacancy rates remain high, with nearly a quarter of the city’s downtown office space dormant, according to the report.
Jon Scholes, president and CEO of the Downtown Seattle Association, said slow construction and vacancies aren’t surprising given COVID’s lasting imprint on the city.
“We clearly have a lot of supply, and demand for new space is not significant in Seattle,” he said. “I don’t expect new office development from the ground up for the next five years.”
Despite a slow comeback, the number of workers returning to work in person – at least for part of the week – is steadily increasing, Scholes said.
In July, more than 90,000 workers were back in the office each weekday, according to the Downtown Seattle Association. That’s the second-highest number since March 2020, only behind June of this year when more than 94,000 workers were in offices daily. It’s also up 14% from July of last year.
Still, many offices remain empty.
Seattle’s 23.2% office vacancy rate was among the highest in the country in July, only surpassed by Houston with 23.8% and San Francisco with 25.4%.
Annie Han, senior research analyst at commercial real estate researcher CBRE, wrote in a report on office conversions in Seattle that vacancies will likely continue to climb in the Puget Sound area as more direct leases expire and the pace of leasing remains slow.
Research from Savills, a commercial real estate brokerage firm, found that the Seattle/Puget Sound office market saw a notable surge in leasing activity in the last few months, but most of that was in Bellevue. Seattle’s higher availability suggests a slower recovery, according to the report.
One reason Seattle is struggling to fill offices is because it is competing with real estate in Bellevue, which has its own advantages as a location, Scholes said.
The CommercialEdge report also points to a slowdown in the life sciences sector as one of the biggest factors behind a slow commercial real estate market in Seattle. The sector, which uses buildings for labs, research centers and clinics, takes up a large portion of buildings in the city.
“Once a driving force behind the growth of the market’s pipeline, the life science sector is now grappling with an oversupply and diminished demand,” according to the report.
CommercialEdge found life science construction slowed nationwide, down to 11% of all construction this year compared to more than a quarter last year.
What to do with empty office space
Local, state and federal officials are looking to incentivize developers to repurpose these spaces into something more useful, like housing or research facilities.
Washington’s Legislature recently approved a law that allows developers to defer sales and use taxes if they convert existing structures into affordable housing.
Cities like Seattle and Spokane are eager to see this shift. Earlier this year, the Seattle City Council unanimously voted to exempt conversion projects from some regulations and fees.
But the incentives may only do so much.
“While office conversions are being adopted nationwide, their prevalence in the Puget Sound region remains limited,” Han said.
Office conversions are on the rise in Seattle, but not necessarily for multifamily housing.Office-to-housing conversions make up about 40% of conversion projects in the Puget Sound area while office-to-life science projects make up about 39%, according to a CBRE report on office conversions in Seattle.
In the last 20 years, the region has only had 14 office buildings converted to other uses, like housing, lab space or hotels. Those conversions as well as current and planned projects are only expected to add 450 housing units – or 3% of the total number of units in all of 2023.
Part of the reason is the difficulty in converting offices.
Existing structures often require significant modification for things like plumbing, window access and utilities, and it can sometimes be more expensive and time-consuming to convert a building than simply tearing it down and starting from scratch. There can also be zoning challenges and historical preservation restrictions that developers must consider.
Scholes said government incentives are helpful but will only go so far spurring conversion activity in Seattle.
“I don’t think we’re going to see dozens of conversions, but we may see a handful in the next few years or so,” he said.
Washington State Standard is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Washington State Standard maintains editorial independence. Contact Editor Bill Lucia for questions: [email protected]. Follow Washington State Standard on Facebook and X.