MARKET TRENDS | SEATTLE OFFICE 1ST QUARTER  ABSORPTION |  VACANCY |  RENTAL RATE |  CONSTRUCTION DELIVERIES 2020

may push through, but the bulk of leasing and sale transactions have been put on hold, The Puget Sound regional office market 1st quarter results saw from a matter of days to several months, until vacancy inch up to 6.05%, from 5.87% last quarter, as the region more information becomes available and participants on both sides of the table can braces for what is expected to be a tumultuous next few quarters of reevaluate their position. Essentially, we are 2020. The 1st quarter ended showing solid net office absorption of in a holding pattern – which is in high contrast 2,055,484 s.f. in the region with delivery of five major office projects to a normally fast moving and vibrant Puget boosting the region’s office inventory to just under 211.1 million s.f. Sound marketplace of the past decade. We also know the construction project stoppage will cause delays in deliveries and The start of the quarter was earmarked by the addition of new cranes and that a number of proposed projects may be continued rampant construction activity in Seattle and Bellevue with six new furloughed until the ramp up for the next construction starts and developers continuing to push through the entitlement cycle. Sales are also expected to remain process looking to snag pre-commitments from one of the tech titans. The scarce over the upcoming quarter, as there quarter ended in extreme antithetical fashion with a complete regional was already a sharp drop in volume tied to construction stoppage, permit desks closing and the capital markets virtually the 2020 increase in the Washington’s real coming to a halt due to the Coronavirus pandemic and Governor Inslee’s estate excise tax (REET) and, for the moment, statewide call to Stay at Home. While 2019 will certainly be remembered for capital markets are at a standstill. Related its office boom driven by the aggressive footprint expansions of tech titans complicating factors include dramatic in our region, the 2020 chapter has yet to be written, but will certainly look fluctuations in the stock market, changes in strikingly different when all is said and done. interest rates and reduced spending.

The COVID-19 pandemic and its local, national and worldwide societal and The impacts of COVID-19 were generally not economic impacts are being cast down in a manner not experienced in recent reflected in the 1st quarter employment data history. While other commercial market sectors such as retail and lodging are as job growth was up year over year (January much more significantly impacted at present, its affects will reach the regional 2019-January 2020) adding 70,859 jobs office market as well, but to what extent remains the question. Based on (up 3.2%). It is noted that the Puget Sound the early pulse from Kidder Mathews professionals and other office market Economic Forecaster’s initial 1st quarter participants, there are differing views as to the extent market conditions will be forecast projected employment growth of impacted, but what is clear is that most deals and business negotiations have 2.0% in 2020, but it has since been revised to been sidelined. Currently, what we know is that although a trickle of leases an increase of 0.5%, with a loss in jobs for the

AVERAGE ASKING SUBMARKET 1Q 2020 MARKET HIGHLIGHTS ANNUAL RENT/SF VACANT SPACE 6.96M SF of office under construction in 1Q 2020 1Q 2020 12.8M SF region, primarily in Seattle and the Eastside PUGET $40.33 SOUND 2.13M SF ABSORPTION of 2.05M s.f. of office space EASTSIDE TOTAL EASTSIDE AVAILABILITY decreased slightly for the $31.18 2.95M SF quarter from 8.26% to 8.20% currently SOUTH KING COUNTY SOUTH KING COUNTY 70% of the 7M s.f. of office space under $28.47 1.15M SF construction in the region is pre-commited SNOHOMISH COUNTY SNOHOMISH COUNTY DEMAND remains strong for Class A space $41.88 $25.85 5.37M SF 1.16M SF in Bellevue CBD SEATTLE CLOSE-IN PIERCE COUNTY SEATTLE CLOSE-IN PIERCE COUNTY

1Q 2020 | SEATTLE | OFFICE | KIDDER MATHEWS 2nd quarter (26,400) followed by modest recovery in the 3rd quarter (+8,750 jobs). The projections are likely to change again as market analysis includes both observing facts and observing market reactions and analyzing the Covid-19 impacts becomes more complicated when there is no data and market participants themselves are facing uncertainty and not yet able to form any clear consensus as to the projects on the Eastside and four in Seattle. Eastside starts of note potential effects of these factors. At the end of the 1st quarter, this is include 5501 Lakeview Dr. in Kirkland and Vulcan’s 700,000 s.f. 555 essentially where we stand. 108th Ave NE project in the Bellevue CBD. The four Seattle projects collectively total 611,475 s.f., averaging a modest 152K+ s.f. in size. In general, real estate investors and real estate capital are mostly Of the new starts, there are pre-commitments for approximately 52% patient, and focus on longer views that would likely bridge the effects of the space. For existing close-in office projects currently underway, of the current disruptions. This was proven in the Seattle markets in 11 are in Seattle and collectively total 3.58M+ s.f. (45% of which is the 2008 recession where there were few forced sales and real estate pre-leased). There are now 9 office projects in the Eastside under investment lead the recovery, starting less than two years after the construction with the largest being 1001 Office Towers at 715K s.f. and market crash. So far, the economic impact on COVID-19 is clearly fully leased to . While many more new projects are planned negative. Businesses in discretionary retail, travel, and leisure are in both Seattle and Bellevue, permitting has been stymied and it the most immediately affected, with no real quantifiable hit on the remains to be seen which projects will push through. Fortunately, of industrial or office markets yet aside from the generally ceasing the 21 projects under construction, 70% is pre-leased. of many transactions. Most office professionals expect negative results to continue over the next one or possibly two quarters. The disruption in activity pertains to prospective tenants looking in the RENT FORECAST market, capital market equity flow and almost certainly a near-term The two largest markets in the region posted rental rate decreases tightening in equity and lending underwriting requirements. Next while the three smaller markets all posted slight increases over quarter will surely be more telling, stay tuned. the 1st quarter. The most notable rent increase was the Southend going from $30.03/s.f./yr last quarter to $31.18/s.f./yr currently, an VACANT SPACE/VACANCY RATE increase of 3.8%. The other two increases seen in the Northend and Tacoma markets were modest. The highest average rent continues At the end of the 1st quarter 2020, the region has a total office inventory to be in Seattle at $41.88/s.f./yr which is a $0.36/s.f./yr decline from of 211.1M s.f. Current regional office vacancy stands at 6.05% with the $42.24/s.f./yr average last quarter. Seattle is followed closely 12.8M s.f. of total vacant space, including sublet vacancy. Of the total by the Eastside at $40.33/s.f./yr., also down from $40.75/s.f./yr last vacant space, about 12% is from sublet vacancy. The current regional quarter. The Northend and Tacoma post the lowest average rents vacancy rate is an increase of 18 bps over 5.87% vacancy last quarter, at $28.47/s.f./yr and $25.85/s.f./yr, respectively. Through the end of but remains 43 bps below the 6.48% vacancy rate from one year ago. 1st quarter, Bellevue CBD rents had been aggressively pushed to an Three of the region’s five major markets posted increases in vacancy average Class A rent quote of $52.94/s.f./yr, due to shortened supply. with the Southend again setting the high mark at 13.40%. Despite the The question moving forward into the 2nd and 3rd quarters will be overall uptick in vacancy, net absorption for the quarter was healthy “where is market rent”. Certainly we expect to see rents dip near- at 2.05M+ s.f. led by Seattle with 1.67M+ s.f. in net absorption. This term, but it remains to be seen to what extent. compares to 5.76M+ s.f. in net absorption for all of 2019. The only market to post negative net absorption was the Southend at -42,141 s.f. The regional availability rate, tracking space being marketed but INVESTMENT MARKETSAs expected, sales activity experienced not necessarily completed or physically vacant, ended the quarter at a significant decline over the 1st quarter due to the excise tax rate 8.20%, down slightly from 8.26% last quarter. The lowest vacancy was increase that took effect January 1, 2020. In fact, there were only the Eastside at 4.12%, a slight increase over the 4.04% vacancy rate three office transactions of over $15 million that have closed thus posted last quarter. far in 2020. After purchasing f5 Tower in Seattle and the Summit Building in Bellevue in December 2019, Kohlberg Kravis Roberts picked up the only sizable office asset in the 1st quarter, purchasing NEW CONSTRUCTION ACTIVITY the Amazon leased (former HQ) for $40.15M At quarter end, 20 of the 21 major office projects under construction ($922/s.f.) and a reported cap rate of 4.2%. Also selling was in the region were in the Seattle and Eastside markets. There were Crestwood Corporate Plaza in Bellevue for $23.5M+ ($317/s.f.) and five major deliveries adding 1.4M s.f. of new supply. The two largest Woodinville Medical for $15.7M ($485/s.f.). Total sales volume for completions were Facebook leased Block 16 at 338,000 the quarter was $556.7M compared to $4,683.3M last quarter, an s.f. in Bellevue and Skanska’s 2+U Tower at 686,908 s.f. There were 88% decline. With the REET increase and halt of the capital markets, also six new construction starts over the quarter including two new continued slowing of investment sales will continue.

BRIAN HATCHER This information supplied Regional President, Brokerage, Northwest herein is from sources we deem reliable. It is provided without 206.296.9600 any representation, warranty or Kidder Mathews is the largest independent commercial real [email protected] guarantee, expressed or implied estate firm on the West Coast, with 900 real estate professionals as to its accuracy. Prospective The information in this report was composed by and staff in 22 offices in Washington, Oregon, California, Buyer or Tenant should conduct the Kidder Mathews Valuation Advisory Group. Nevada, and Arizona. Kidder Mathews offers a complete range an independent investigation and verification of all matters deemed of brokerage, appraisal, property management, consulting, CHRIS BERGER, MAI to be material, including, but not project and construction management, and debt & equity 425.450.1175 limited to, statements of income finance services for all property types. The firm performs $9.6 [email protected] and expenses. CONSULT YOUR billion in transactions, manages over 70 million square feet of ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR. space, and conducts over 1,680 appraisals annually. KIDDER.COM

DATA SOURCE: COSTAR 1Q 2020 | SEATTLE | OFFICE | KIDDER MATHEWS SEATTLE CLOSE-IN REVIEW SEATTLE CBD / SURROUNDING AREA

s.f. The CBD accounted for just over half 8M 8%

of the volume with 49 deals totaling 7M 7% 11 MAJOR CONSTRUCTION projects 417K+ s.f. 6M 6% underway totaling just under 3.6M ASKING RATES in the Seattle CBD 5M s.f. with five projects expected to be 5% increased to $47.92/s.f./yr, down from delivered in 2020; 45% of the space is 4M $38.37 $39.85 $41.88 4% $49.25/s.f./yr last quarter. $42.24 pre-committed. $41.48 3M 3% VACANCY in the Seattle CBD ended the FOUR OFFICE BUILDING DELIVERIES 2M 2% quarter at 7.7%, up 100 bps from last over the quarter totaling just under 1.1M 1M 1% s.f.; about three quarters of the new quarter’s 6.7%. 2016 2017 2018 2019 1Q 2020 supply was leased. Largest delivery was PERIPHERAL SEATTLE SUBMARKETS Skanska’s 686K s.f. 2+U tower. exhibit 1st quarter vacancy rates of New Construction Absorption 5.3% in Ballard/U District, 2.5% for Lake STRONG NET ABSORPTION of Vacancy (%) Average Rent (Median) 1,676,096 s.f. for 1Q 2020 in Seattle Union and 2.9% in N Seattle/Northgate. market. This compares to 4,549,014 s.f. Vacancy in Queen Anne/Magnolia for all 2019. remains the high mark at 10.9%. which collectively totaled $2.0B+ in 45% OF NEW CONSTRUCTION (3.5M+ OFFICE VACANCY in Seattle currently combined sales volume. stands at 5.76%, compared to 5.24% last s.f.) in the Seattle market is pre-leased quarter and 5.82% one year ago. including all of 333 Dexter to Apple NO NOTEWORTHY OFFICE INVESTMENT (639K+ s.f.). sales over the quarter as the REET AVAILABILITY RATE increased over the increase that forced sales to close late last CURRENT AVAILABLE NEW quarter from 8.70% at year-end 2019, to year. 9.40% currently. CONSTRUCTION appears manageable at 1.9M+ s.f. considering the Seattle AVERAGE RENT for Seattle is $41.88/s.f./yr, LEASING ACTIVITY was moderate with market has historically absorbed about down $0.36/s.f./year from $42.24/s.f./yr CoStar reporting 129 total deals at 780K+ 2.3M s.f. annually. Amazon at Apollo last quarter.

BELLEVUE CBD AVAILABILITY RATE EASTSIDE REVIEW dropped from 6.1% to 5.2% with EAST KING COUNTY

developers remaining positioned. 4M 8%

FACEBOOK AND AMAZON continued to 3.5M 7% EASTSIDE OFFICE INVENTORY stands at be active over the quarter; Alibaba, UBS 3M 6% 51,610,422 s.f., comprising about one $40.33 and GE also with notable leases. $40.75 fourth of the regional supply. 2.5M $37.18 5% $34.60 $37.09 VULCAN’S 555 108TH AVE NE 2M 4% OFFICE VACANCY at the end of 1Q 2020 is the lowest of all market areas PROJECT (700,000 s.f.) commenced 1.5M 3% construction in the Bellevue CBD along at 4.12%, up slightly from 4.04% last 1M 2% with Kirkland’s 5501 Lakeview Dr. project quarter. 500K 1% at 54,420 s.f. Skanska’s The Eight tower 0% THE AVAILABILITY RATE dropped over and are in queue. 2016 2017 2018 2019 1Q 2020 the quarter to 5.00%, down from 6.20% last quarter. 9 MAJOR EASTSIDE office projects New Construction Absorption under construction (not including Vacancy (%) Average Rent (Median) NET ABSORPTION for the quarter was expansions at the Microsoft and Costco 273K+ s.f., compared to year-end 2019 campuses) which collectively total net absorption for the Eastside of 847K+ 3.25M+ s.f.; a healthy 96% is pre- s.f. committed.

LEASING ACTIVITY was steady over the WRIGHT RUNSTAD’S BLOCK 16(338K NOTEWORTHY SALES include the 1st quarter with CoStar reporting 108 s.f.) was delivered in the Spring District; transfers of Tower 333 (Amazon) at deals at 1.02M+ s.f. in total volume. as the Amazon leased 1001 Office Towers $401,500,000 ($922/s.f.) and Crestwood (aka Binary Towers) is well underway with Corporate Plaza for $23,575,000 BELLEVUE CBD OFFICE VACANCY its 2 office towers (715K s.f.) in the CBD. ($317/s.f.). remained unchanged from last quarter at 3.8%; the average CBD rent quote VACANCY RATES in peripheral Eastside AVERAGE RENT for the Eastside is is $52.94/s.f./yr currently, down from submarkets varied at 3.7% and 4.0%, for currently $40.33/s.f./yr, down $0.42/s.f./ $53.11/s.f./yr last quarter. Kirkland and Redmond respectively. year from $40.75/s.f./yr last quarter.

1Q 2020 | SEATTLE | OFFICE | KIDDER MATHEWS SOUTH KING COUNTY REVIEW

SOUTH KING COUNTY NEGATIVE NET ABSORPTION -42K+ construction in the Southend market at 1.2M 18% s.f. at end of 1Q 2020. This compares to 129K s.f.129K s.f. 325K+ s.f. of net absorption at year-end 1M 15% 2019. 33 OFFICE LEASE TRANSACTIONS 800K $30.03 12% occurred this quarter, totaling 167K+ s.f., $31.18 $27.29 OFFICE VACANCY remains high at $29.13 or about 5K s.f. per average deal. 600K 9% 13.40%, up slightly from 13.38% last $26.94 quarter and well above 11.87% at the SUBMARKET VACANCIES for Renton/ 400K 6% end of 2018. Tukwila and Federal Way/Auburn remain 200K 3% high at 17.4% and 15.1%, respectively. NO MAJOR DELIVERIES or construction 0 0 starts occurred this past quarter. NO SIGNIFICANT sale transactions. 2016 2017 2018 2019 1Q 2020 ALASKA AIRLINES’ headquarters HIGH VACANCY is expected to continue expansion building remains the in the South King County market into New Construction Absorption only significant office project under 2020. Vacancy (%) Average Rent (Median)

SNOHOMISH COUNTY / NORTHEND REVIEW SNOHOMISH COUNTY THE NORTHEND SUBMARKET will 500K 8%

THE NORTHEND OFFICE market is third continue to attract office tenants 400K 7% largest market in the region, with a looking for housing stock proximity and 300K 6% current office inventory of over 22.4M s.f. affordability especially with the addition 200K $28.09 5% of light rail. $25.98 $28.47 VACANCY decreased over the 1st 100K $23.58 4% $24.86 quarter from 5.34% last quarter to 5.15% AT AN AVERAGE RENT QUOTE $28.47/s.f./ 0 3% currently, a 19 bps drop. yr, it is $13.41/s.f./yr more affordable than the current average rent in Seattle and -100K 2% AVAILABILITY RATE remained $11.87/s.f./yr more favorable than the -200K 1% unchanged from last quarter’s 6.30%. Eastside average quote. 2016 2017 2018 2019 1Q 2020 BOTHELL/KENMORE SUBMARKET THE ONLY SIGNIFICANT INVESTMENT VACANCY New Construction Absorption dropped slightly to 9.7% SALE this quarter was the transfer of in the 1st quarter compared to 10.0% Woodinville Medical Center at $15.7M Vacancy (%) Average Rent (Median) last quarter. The Everett CBD reports a ($485/s.f.) current vacancy of 4.2%, up slightly from 3.9% last quarter. NO SIGNIFICANT OFFICE sales this quarter.

PIERCE COUNTY REVIEW PIERCE COUNTY

350K 14% VACANCY RATE for Pierce County is for all of 2019. 5.31%, below last quarter’s 5.67%. 300K 12% SUBMARKET VACANCY for Puyallup $25.85 250K 10% AVAILABILITY RATE availability rate is high at 11.4% while University Place/ $22.69 $25.04 $22.15 decreased from 6.40% last quarter to Lakewood has rather low vacancy of 200K $21.64 8% 5.90% currently. 3.2%. 150K 6%

ONE THIRD of the Pierce County office AVERAGE RENT increased slightly to 100K 4% supply is in the Tacoma CBD which has a $25.85/s.f./yr from $25.04/s.f./yr last current 1st quarter vacancy rate of 8.0%. quarter. 50K 2%

The CBD availability rate dropped to 0% 2016 2017 2018 2019 1Q 2020 7.6% currently from 8.2% last quarter. THE DOWNWARD SHIFTin vacancy over the 1st quarter can be attributed to LEASING VOLUME was moderate at 39 steady positive net absorption, no new New Construction Absorption deals averaging about 5,750 s.f. in size. construction and resurgence in the CBD. Vacancy (%) Average Rent (Median)

POSITIVE NET ABSORPTION of 70K+ NO OFFICE PROJECTS currently under s.f. in the 1st quarter, compared to 6K s.f. construction.

1Q 2020 | SEATTLE | OFFICE | KIDDER MATHEWS