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Class A Office Investment Opportunity in Tacoma, WAOFFERING MEMORANDUM

1313 Broadway Plaza

Table of Contents

Exclusively offered by

The information contained in the following Offering Memorandum 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 Offering Memorandum 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, current or past tax payments, 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.

Will [email protected]

kiddermathews.com

Executive SummaryThe OpportunityLocation AerialLocation Map

Property DescriptionProperty SummarySite AerialFloor PlansProperty Photos

Financial Analysis

Rent Roll

Valuation & Financial Assumptions

Market OverviewPierce County Market Overview2018 2nd Quarter Report

01

02

03

04

1313 BROADWAY PLAZA

Drew [email protected]

Executive Summary

01

1313 BROADWAY PLAZA 3

The Offering

Location Aerial

Location Map

INVESTMENT SUMMARY

OFFERING PRICE $16,500,000

CURRENT OCCUPANCY 80%

PRICE / SF $177.42

LAND AREA .92 AC

YEAR BUILT 1976 / 2017

NET RENTABLE AREA 93,000 SF

STORIES 6

PARKING 93 stalls

TENANTS

1313 BROADWAY PLAZA | OFFERING MEMORANDUM | KIDDER MATHEWS 4

Executive Summary

1313 Broadway Plaza is a multi-tenant six-story class “A” office

building consisting of 93,000 rentable square feet on 40,000

square feet of land.

The property offers a rare ownership opportunity to own a class A office building in the Pierce County market. One of the largest office buildings in Downtown Tacoma, 1313 Broadway Plaza offers floor plates of 17,108 square feet, on-site structured parking of 1/1,000 square feet, numerous services nearby with great access and exposure. The 1313 Broadway Plaza is a well positioned and desirable asset.

The Tacoma CBD, the hub of the Pierce County market, consists of over 7,000,000 SF of Class A/Class B office space. The Pierce County population is estimated at 843,954 people. The population of Tacoma increased by 6% between 2010 and 2015, due to residents and employees moving south from King County.

Tacoma is the economic engine of the South Puget Sound and the third largest city in Washington State. Tacoma’s economic drivers include the Port of Tacoma, the ninth largest container port in North America and MultiCare Health System, one of the largest healthcare providers in the country. In addition, the Puget Sound is home to the Boeing Company, Amazon.com, and Franciscan Health System.


TACOMA DOME

LEMAY MUSEUM

HOTEL MURANO

CONVENTION CENTER

1201 PACIFIC

COURTYARD MARRIOT

TACOMA ART MUSEUM

MUSEUM OF GLASS

1313 BROADWAY

UW TACOMA


RENTON

ISSAQUAH

KENT

BURIEN

MERCERISLAND

BELLEVUE

REDMONDKIRKLAND

BOTHELL

LYNNWOOD

EVERETT

SEATTLE

VASHON

GIGHARBOR

BAINBRIDGEISLAND

FEDERALWAY

AUBURN

TACOMA

PUYALLUP

LACEY

DUPONT

TUMWATER

OLYMPIA

LAKEWOOD

LAKEWASHINGTON

PUGETSOUND

1313 BROADWAY

Property Description

02

Property Summary

Site Aerial

Floor Plans

Property Photos



ADDRESS 1313 Broadway StreetTacoma, WA

COUNTY Pierce

MUNICIPALITY City of Tacoma

BUILDING SIZE 93,000 square feet

LAND AREA .92 acres (40,000 SF)

YEAR BUILT/ RENOVATED

1976/2017

NUMBER OF STORIES 6

ZONING DCC - District Center Core

TYPE OF CONSTRUCTION

Reinforced concrete frame and light weight steel

EXTERIOR WALLS Tinted spandrel glass panels in aluminum frames

INTERIOR WALLS Painted dry wall and suspended acoustic tile ceiling panels in a t-grid system

ROOF SYSTEM Flat, built-up membrane surface over concrete and steel support decking

LIGHTING SYSTEM Fluorescent light fixtures

WINDOWS Glass in aluminum frames

HVAC Roof mounted HVAC system

ACCESS Direct access from Broadway and Commerce on 13th Street

PROPERTY DESCRIPTION


Broadw

ay

Com

merce St

Pacific Ave

A St

S 13th St

1313 BROADWAY

I-5/I-705 ACCESS


Floor 1

Floor 2FLOOR 1 FLOOR 2

FLOOR 3 FLOOR 4

FLOOR PLANS

ACS VACANT

NW HARDWOODS

MERIT HARBOR CAPITAL

NICB

BNY MELLON


Floor 5 Mezzanine

FLOOR 5 MEZZANINE

OUTSIDE PARKING INSIDE PARKING

FLOOR PLANS

BNY MELLON

BNY MELLON

SECURITAS

VACANT

Financial Analysis

03

Rent Roll

Valuation & Financial Assumptions



Financial Analysis

FINANCIAL SUMMARY

NOI $1,353,047.70

CAP RATE 8.25%

CASH ON CASH RETURN 12.48%

PRICE $16,500,000

PRICE PSF $177.42

OCCUPANCY 80%

PARKING

93 stalls $135.00/month

Kidder Mathews exclusively represents the ownership of 1313

Broadway Plaza which offers investors a unique opportunity

to own a multi-tenant, 80% leased class A office building in

Downtown Tacoma. The property allows an investor to achieve

an income stream from multiple credit tenants. Including Bank

of New York Mellon, The American Cancer Society, Northwest

Hardwoods, National Insurance Crime Bureau and Merit

Harbor Capital and Securitas Security Services.

$16,500,000TOTAL PRICE


RENT ROLL - AS OF SEPTEMBER 2018

TENANT UNIT SIZE (SF) LEASE START LEASE EXP MONTHLY RENT ANNUAL

RENTANNUAL RENT/SF

LEASE TYPE RENT BUMPS

Securitas Security Services USA, Inc. 150 3,768 10.01.18 12.31.25 $7,065.00 $84,780.00 $22.50 Full Service

10.01.19 $7,222.00 10.01.20 $7,379.00 10.01.21 $7,536.00 10.01.22 $7,693.00 10.01.23 $7,850.00 10.01.24 $8,007.00

American Cancer Society, Inc 100 10,453 04.01.14 03.31.19 $21,078.86 $252,946.32 $24.19 Full Service 04.01.18 $21,078.86

VACANT 110 1,475

VACANT 200 17,108

Northwest Hardwoods, Inc 300 13,094 06.01.17 12.31.24 $22,478.03 $269,736.36 $20.59 Full Service

02.01.18 $21,823.3306.01.18 $22,478.0306.01.19 $23,152.3706.01.20 $23,846.9506.01.21 $24,562.3506.01.22 $25,299.2206.01.23 $26,058.2006.01.24 $26,839.95

National Insurnace Crime Breau 310 1,665 03.01.18 02.28.23 $3,468.75 $41,625.00 $25.00 Full Service

03.01.18 $3,468.7503.01.19 $3,572.8103.01.20 $3,679.6503.01.21 $3,790.6503.01.22 $3,904.37

Merit Harbor Group, LLC 350 2,286 03.01.18 02.28.25 $4,762.50 $57,150.00 $25.00 Full Service

03.01.18 $4,762.5003.01.19 $4,905.3803.01.20 $5,052.0603.01.21 $5,204.4603.01.22 $5,360.6703.01.23 $5,521.4903.01.24 $5,687.13

BNY Mellon Performance & Risk 400 17,108 04.01.14 03.31.24 $33,018.44 $396,221.08 $23.16 Full Service

04.01.18 $33,018.4404.01.19 $33,731.2704.01.20 $34,444.1104.01.21 $35,156.9404.01.22 $35,869.7704.01.23 $36,582.61

BNY Mellon Performance & Risk 500 17,108 04.01.14 03.31.24 $33,008.44 $396,221.28 $23.16 Full Service

04.01.18 $33,018.4404.01.19 $33,731.2704.01.20 $34,444.1104.01.21 $35,156.9404.01.22 $35,869.7704.01.23 $36,582.61


RENT ROLL - AS OF SEPTEMBER 2018

TENANT UNIT SIZE (SF) LEASE START LEASE EXP MONTHLY RENT ANNUAL

RENTANNUAL RENT/SF

LEASE TYPE RENT BUMPS

BNY Mellon Performance & Risk M100 8,935 04.01.14 03.31.24 $17,244.55 $206,934.60 $23.16 Full Service

04.01.18 $17,244.5504.01.19 $17,616.8404.01.20 $17,989.1304.01.21 $18,361.4304.01.22 $18,733.7204.01.23 $19,106.01

Total Occupied SF 74,417

Total Vacant SF 18,583

Total SF 93,000


INVESTMENT SUMMARY

ESTIMATED VALUATION SUMMARY - AS OF SEPTEMBER 2018

Occupied Income: Office $1,727,478.00

Occupied Income: Parking (63 stalls x $135.00/Month) $102,060.00

Vacant Space Proforma Income (17,018 SF x $23.00 PSF, FS) $393,484.00

Suite 150 Proforma Income (1,475 SF x $20.00 PSF, FS) $29,500.00

Vacant Stalls Proforma Income (17 stalls x $135/Month) $27,540.00

Total Full Service Income $2,280,062.01

Vacancy 5% ($114,003.10)

Reserve 2% ($45,601.24)

Adjusted Full Service Operating Income: $2,120,457.67

Estimated Operating Expenses: ($8.16 x 93,000 SF) ($758,880.00)

Estimated Adjusted Net Operating Income: $1,361,577.67

ACTUAL INCOME

Occupied Income: Office $1,727,478.01

Occupied Income: Parking $102,060.00

Total Full Service Income $1,829,538.01

Vacancy 5% ($91,476.90)

Reserve 2% ($36,590.76)

Estimated Operating Expenses: ($8.16 x 93,000 SF) ($758,880.00)

Estimated Adjusted Net Operating Income: $942,590.35

CAP RATE 5.71%

PRICE $16,500,000.00

FINANCIAL ASSUMPTIONS

INCOME

Year 1 Net Operating Income $1,361,577.67

CAP RATE 8.25%

PRICE $16,500,000.00

PRICE PSF $177.42

PROPOSED FINANCING

Price $16,500,000.00

Down Payment $4,950,000.00

LTV 70%

New Loan Amount $11,550,000.00

Interest Rate 5%

Amortization 30 years

Year 1 Net Operating Income $1,361,577.67

Annual Debt Service ($744,034,77)

Cash Flow After Debt Service $617,543.67

CASH ON CASH RETURN 12.48%

Market Overview

04

Pierce County Market

2018 2nd Quarter Report



Market OverviewIn addition to being the home of the third largest city

in Washington, Tacoma is located approximately

equidistant between Portland and Seattle. This

proximity to the two largest metro areas in the

Northwest has in part, lead to recent development.

First Industrial Trust completed construction in

nearby DuPont, building a 1 million square foot

fulfillment facility for Amazon.

Pierce County has been one of the fastest

growing counties in the state of Washington

since the 1960’s, and has consistently exceeded

the state’s overall rate of growth. Pierce County

supports manufacturers such as Boeing, Milgard

Manufacturing, James Hardie Building Products,

Toray Composites (America), Inc., and Medallion

Foods. Recreational Equipment, Inc. (REI),

Whirlpool, and Costco also have major distribution

centers here. State Farm Insurance has a regional

headquarters in Pierce County, and innovation

thrives at the research divisions of Intel and Madigan

Army Medical Center.

The majority of population increase has been due

to the migration of people into the County. This

continued migration is the result of Pierce County’s

relatively stable economy and exceptional quality of

life. The low-cost living, award-winning education,

and lifestyle opportunities, combined with the

area’s competitive cost of doing business, create

an outstanding environment for businesses and

residents to work, play, and live.

ECONOMY

Two words best describe the business climate

found in Pierce County’s economy: emerging

opportunity. In part, this is because of the county’s

strategic location at the mid-point between the major

metropolitan areas of the central Puget Sound to the

north, and Portland, Oregon to the south.

The presence of the military exerts a stabilizing

influence on the Pierce County economy and

employs nearly 57,000 residents of Pierce County. In

the last several years, the county has noticed quite

a dramatic shift in the regional diversification of its

workforce. Professional services rank as one of the

leading components of industry. These include a

solid anchor of Intel, multiple web design firms, and

legal and consulting companies.

State jobs and public education employ roughly

20,000 residents. Medical services that provide

emergency and maintenance health care for

the surrounding five-county region. Traditional

manufacturing by many local producers that

captures a significant piece of their specific global

market. An emerging life sciences community has

grown in the region within the last five years.

Fort Lewis and Lewis-McChord Air Force Base

Joint Base Lewis-McChord (JBLM) is the largest

military installation in the western United States, and

the second largest employer in the entire state of

Washington. Its presence is recognized throughout

Pierce and Thurston Counties and Washington State

as a significant economic benefit to the South Puget

Sound. In turn, communities surrounding JBLM

enhance the quality of life for military personnel and

families by providing high quality neighborhoods,

schools, recreation opportunities, and retail services.

JBLM has experienced significant population growth

to support its mission. Since 2003, nearly 40,000

people have arrived at JBLM and more continue to

arrive. The total military-connected population is

estimated to reach 136,000 by 2016.


Port of Tacoma

The Port of Tacoma is an independent seaport

located on more than 2,400 acres of land that are

used for shipping terminal activity, warehousing,

distribution and manufacturing. The Port plays

the largest international trade role in the Pacific

Northwest, handling between nine and thirteen

million tons of cargo and more than $52 billion in

commerce. Major imports include automobiles,

electronics, and toys, while major exports include

grain, forest products, and agricultural products.

Based on tonnage, the Port’s largest export is grain

(corn and soybeans) that come into the port by rail

from the Midwest. In 2014, the Port of Tacoma’s top

trading partner, based on two-way trade value, was

China/Hong Kong.

China/Hong Kong was also the top partner ranked

by volume imported and value imported. Japan was

the top partner ranked by volume exported and

value exported. The top commodities exported, by

value, were cereals and grains. The top commodities

imported, by value, were vehicles and parts,

followed by industrial machinery and electronics.

The port is among the top ten largest container ports

in North America. Containers hold everything from

computers and lawn furniture, to apples and frozen

meat. Based on container volumes, China is the

port’s largest trading partner. More than 70 percent

of the containers imported through the port move

by rail to markets in the Midwest and East Coast.

The port is served by the BNSF Railway and Union

Pacific railroads. Shoreline rail service is provided by

Tacoma Rail, which is owned by the City of Tacoma.

U.S. Oil and Refining operates an oil refinery in the

Port of Tacoma. Oil tankers bring crude oil, which is

refined into a variety of products, including JP-8 jet

fuel for Lewis-McChord Field Air Force base. Port

activities are related to more than 43,000 jobs in

Pierce County, and 113,000 jobs in Washington.

HEALTH CARE HUB

Pierce County is home to six top-notch full-service

hospitals, Good Samaritan Hospital and Rehab

Center, Madigan Army Medical Center, St. Joseph

Medical Center, Saint Clare Hospital, St. Anthony

Hospital and Tacoma General Allenmore Hospital.

The area’s health care hub has hundreds of clinical

trials underway and a medical community committed

to research and collaboration with local universities

and other research institutions. Numerous

specialized medical clinics are located throughout

the region.

RECREATION OPPORTUNITIES

Puget Sound bays and outlets offer an abundance

of year-round outdoor recreational activities

such as sailing, fishing, canoeing, diving, and

kayaking. Numerous trails for biking and hiking

are conveniently located 120 miles away at Mt. St.

Helens, at Mt. Rainier which is 81 miles away, and 74

miles away at Ocean Shores. PGA level golf courses

and many other fine public and private courses are

also around the area. Entertainment includes several

of the Northwest’s largest gaming casinos.

ART AND CULTURE

Pierce County is home to some of the most active

communities in Washington. Puyallup is home to

numerous fairs, festivals, museums, galleries, and

antique districts. Artists and performers showcase

their talents through live theater at Broadway Center

for the Performing Arts, Northwest Sinfonietta,

Tacoma Art Museum, Tacoma Opera, and The

Tacoma Symphony Orchestra.

EDUCATION

The quality of education in Pierce County is a major

draw to the South Puget Sound area. Pierce County

students consistently show educational attainment

levels exceeding both state and national averages.

35% of Pierce County residents typically hold

bachelor or graduate degrees, and more than ninety

percent attain a high school or GED diploma. Pierce

County students also consistently achieve SAT

scores above state and national averages.


Pacific Lutheran University

Pacific Lutheran University is a private institution

that was founded in 1890. It has a total

undergraduate enrollment of 3,195 students.

Pacific Lutheran University’s ranking in the 2015

edition of Best Colleges in Regional Universities

(West), was #14.

University of Puget Sound

University of Puget Sound is a private institution

that was founded in 1888. It has a total

undergraduate enrollment of 2,553. University of

Puget Sound’s ranking in the 2015 edition of Best

Colleges in National Liberal Arts Colleges, was

seventy-two.

Pierce College

Pierce College is designated an institutional

member of Servicemembers Opportunity Colleges

(SOC), a group of more than 1,700 colleges and

universities providing voluntary post-secondary

education to members of the military throughout

the world. Pierce College provides education

programs at Joint Base Lewis-McChord. These

programs are specifically designed to serve

the needs of active-duty military personnel,

their family members, VA benefit recipients,

and civilians in the community. Located on two

campuses in Pierce County, current student

enrollment is approximately 23,855.

EMPLOYMENT

The number of jobs in Pierce County totaled

approximately 275,800 in 2015. The Auburn

Boeing Plant, opened in 1966, is the largest

airplane parts plant in the world with 2,100,000

square feet and 1,265,000 parts manufactured

each year. With 5,179 employees, the Boeing

plant is the largest employer in the area. Many

businesses are small shops or small to medium

service businesses, including The World Vision

Headquarters, St. Francis Hospital, and United

States Postal Service. Numerous companies with

over 1,000 employees, including City of Tacoma,

Weyerhauser, Xerox Commercial Services, State

Farm, Muckleshoot Tribal Enterprises, Costco,

and The Outlet Collection Seattle are located in

Pierce County.

TOP EMPLOYERS

Rank Companies Employees

1 Joint Base Lewis-McChord 56,624

2 Local Public School Districts (K-12) 13,352

3 Multicare Health System 6,547

4 Washington State Employees 6,488

5 Franciscan Health System 5,709

6 Pierce County Government 2,872

7 Washington State Higher Education 2,632

8 City of Tacoma 2,222

9 Emerald Queen Casino 2,200

10 Walmart 1,785

11 Boeing 1,700

12 Tacoma Public Utilities 1,332

13 Costco 1,185

14 U.S. Postal Service 1,100

15 State Farm Insurance Companies 1,070

16 Washington State National Guard 1,050

17 Comcast Cable 1,018

18 Puyallup Tribe 984

19 Davita 904

20 Intel Corporation 900


GREATER SEATTLE AREA

Seattle is the largest city in the four-county

metropolitan area known as the Puget Sound

region. The area’s other major metropolitan cities

include Bellevue, Tacoma, Everett, and Bremerton.

Surrounding these are growing cities that include

Kirkland, Redmond, Kent, Renton, Bothell, and

Issaquah.

CLIMATE

The temperate climate lets residents and visitors

enjoy the outdoors year-round. High temperatures in

July average just 75 degrees, while low temperatures

drop below freezing an average of only 15 days per

year. The rainfall keeps the region’s vegetation a lush

green, however, it rarely rains heavily and the total

average rainfall is 35 inches, less than New York City

or Miami.

OUTDOOR ACTIVITIES, CULTURE, SPORTS

The Seattle area’s natural beauty and mild climate

encourage year-round activities such as hiking in the

Olympic or Cascade Mountains, kayaking on Lake

Union, or cycling on any of the many rails-to-trails

paths.

Art and culture are also driving forces in the region.

There are 34 museums, 30 performing arts centers,

and—at last count—at least 29 professional theatre

companies.

Professional sports teams include major league

football and baseball as well as soccer and hockey.

The region’s professional football team, the

Seahawks, won the Super Bowl in 2013. In addition,

there is thoroughbred racing, minor league baseball,

and the University of Washington Huskies to cheer on.

DEMOGRAPHICS

The region consists of approximately 3,898,720

(2015, U.S. Census Bureau Estimate) residents in

King, Snohomish, Pierce, and Kitsap counties. The

current figure represents a 1.6% increase over the

2014 as the region added 63,270 new people. This

marks the fourth consecutive year of increased

annual growth. Positive population growth in the

region is expected to continue through the end of

the forecast period. The Puget Sound Regional

Council is estimating the area’s population to be

4,479,131 in 2030, an 11.9% increase.

The Seattle-Tacoma-Bellevue metropolitan area

(MSA) is clearly the economic engine of Washington

State. The MSA ranks 13th among 362 markets

nationwide in terms of effective buying income (EBI

or after-tax, discretionary spending power). The

median household EBI in the Greater Seattle Area is

20% higher than the national median.

Approximately 56% of the population is in the prime

workforce age of 25-64. Residents are among the

most highly educated in the nation, with more than

35% having at least a bachelor’s degree and one-

third of those holding a graduate or professional

degree.

Long-term forecasts call for the Greater Seattle area

to resume its historic strong growth patterns. The

Puget Sound Regional Council expects the area to

add approximately 855,000 new jobs by 2040.

EDUCATION

Washington State is home to six public four-year

colleges and universities, 34 public community

and technical colleges, and more than 300 private

colleges, universities, career, and vocational schools.


The University of Washington continues to gain

increased national recognition. According to

America’s Best Colleges, U.S. News & World Report

in 2015, the UW was ranked 52 among all national

universities, tied with University of Texas-Austin and

Pepperdine University. The U.S. News 2015 graduate

school rankings show many of the UW’s graduate

programs among the best in the nation. The medical

school ranked first among all schools in the country

for primary care and the School of Nursing also

retained its top ranking for the 27th year. Overall

the UW School of Medicine ranked tenth among

research medical schools and first among public

medical schools. The graduate program in computer

science ranked sixth and the college of education

graduate program was seventh.

Seattle University is a Jesuit university situated

on 48 acres in Seattle’s First Hill and Capitol

Hill neighborhoods. The school was founded in

1891 and is the largest independent university in

the Pacific Northwest. The university has a total

enrollment of 7,422 students of which 63% are

undergraduates. Seattle University employs 1,400

faculty and staff. The U.S. News 2015 rankings place

Seattle University 6th among the top universities

in the West that offer a full range of masters and

undergraduate programs.

TRANSPORTATION

King County has a well-developed transportation

system which provides links to all parts of the

country and world. Seattle’s port is closer to the

main trading partners in Asia than any other major

U.S. port and the region’s distribution networks

move goods efficiently inland.

The Puget Sound region’s multi-modal transportation

system includes two transcontinental railroads,

nationwide trucking capacity, three interstate

highways, a ferry system, a world-class port and an

international airport.

The Burlington Northern Santa Fe (BNSF) and Union

Pacific Southern Pacific (UPSP) railroad serve the

greater Seattle area. Both railroads have spur lines

that span the area, making it possible to deliver

almost any type of load. Outside of Puget Sound

and across the state, there are over 4,000 miles of

operable track.

Truck transportation in Washington State is

made possible by over 3,700 interstate trucking

companies, including common carrier and contract

companies. The State ranks among the top 10

states in general freight tonnage carried by trucks

intrastate. The competition results in favorable

negotiated freight rates.

All regional communities are accessible from Seattle

over an efficient, well-planned freeway system. The

average commute between Seattle and outlying

cities and suburbs is 23 minutes (non-peak) and

45 minutes (peak). The region’s highway network is

anchored by three main highways:

U.S. Interstate 5 which runs north-to-south from Vancouver, British Columbia to San Diego, California

Interstate 90 which runs west-to-east connecting Seattle with New York

Interstate 405 (Washington) is a 30-mile stretch of freeway that bypasses Seattle east of Lake Washington. I-405 runs from Lynnwood in the north to Tukwila in the south


Over 23 million passengers annually ride the

Washington State Department of Transportation’s

Ferry System, the largest in the country and the third

largest in the world. This system transports over 10

million vehicles a year, more than any ferry system

in the world. The fleet has 20 auto-passenger ferries

and two passenger-only ferries. The DOT operates

20 terminals and operates on nine routes.

The Port of Seattle has world-class facilities and

relative proximity to Asia; the port is the fastest

route for cargo to and from America’s heartland. The

transit time from port cities in Asia to Seattle is eight

days, which is 30 hours less than through Southern

California ports. The Seattle-Tacoma-Everett port

region is the third largest container complex in the

country, smaller only than New York/New Jersey

and Los Angeles/Long Beach. It is the 8th largest

US port in 2015 in terms of TEU’s and cargo activity

supports more than 21,000 jobs. The region’s ports

serve not only the Pacific Northwest but also the

Midwest, East Coast, and Canada. The Northwest

Seaport Alliance saw container volumes surpass the

3 million mark in October, a 5 percent increase year

to date. Containerized exports fueled the growth,

posting a 9 percent gain over October 2014. Import

volumes declined slightly, signaling the end of

the peak shipping season when retailers increase

inventories ahead of the holiday shopping season.

Through the first 10 months of the year, imports rose

4 percent to 1,208,091 TEUs, and exports grew 9

percent to 1,102,194 TEUs. Domestic volumes to

Alaska and Hawaii remained flat, up 1 percent to

748,769 TEUs. Auto imports also continued to post

gains in October—up more than 6 percent year to

date to 154,291 units—as the 2016 models began

arriving. Meanwhile, year-to-date break-bulk cargo

volumes and grain, log, petroleum and molasses

exports continue to be impacted by a weaker export

market. The Northwest Seaport Alliance is a marine

cargo operating partnership of the ports of Seattle

and Tacoma.

In 2014, over 37.4 million passengers and 327,240

metric tons of air cargo passed though Sea-Tac

airport. Passenger levels increased 7.7% from 2013

and the volume ranked the airport as the 22nd

busiest in the U.S. Because of the state’s strategic

geographic location, Sea-Tac is one to two hours

of flying time closer to Pacific Asia than Southern

California airports. In addition, trans-polar routing

enables Sea-Tac to rival East Coast cities like New

York in flight times to European capitals.

ECONOMY

While the greater Seattle economy includes a broad

range of companies, local business and civic leaders

have identified key innovative, knowledge-based

industries that drive our economy and are critical to

the region’s current and future prosperity.

Aerospace

Clean Technology

Information Technology

Interactive Media

Life Sciences

Aerospace

The Puget Sound region has a proud history and a

strong future as a leader in the aerospace industry. In

2015, aerospace supported more than 102,000 jobs

(over 7,000 engineers) in the region and includes


over 650 companies, making the area the largest

commercial aviation center in the country. The

largest employer is Boeing Commercial Airplanes

which is headquartered in Renton about 15 minutes

south of downtown Seattle. The region is home to

final assembly operations for the 737, 747, 767,

777, and 787 aircraft. In November 2015 Boeing had

79,334 employees in the Puget Sound region.

Clean Technology

Analysts predict a boom in clean technologies amid

an oncoming energy crunch. The alternative-energy

industry’s revenues are projected to quadruple to

$226 billion by 2017, according to a report by Clean

Edge, a Portland-based market-research firm.

There are more than 400 clean technology

companies located in the region employing more

than 21,000 people. There is a 64% greater

concentration of clean technology, or “green,” jobs

in the Seattle area than the U.S. average.

Statewide, the clean technology industry accounted

for more than 62,000 jobs in the sectors of energy

efficiency, renewable energy, reducing pollution

and pollution cleanup. The sectors of wind, solar,

biomass, wave/ tidal and geothermal energy

currently employ more than 17,000. Washington

State has long supported clean technology and has

the largest coordinated hydro-electric system in the

world, providing 73% of the state’s electrical power.

The Washington Clean Technology Alliance (WCTA)

was established in 2007 to take full advantage of the

opportunities presented by this emerging sector and

to ensure Washington’s continued leadership.

Information Technology

Many of the most well-known names in the software

and information technology industry are located in

the Greater Seattle area. The established companies

include Intel, Microsoft, Amazon, Nintendo, T-Mobile,

RealNetworks, Expedia, and several others.

The strong base of businesses has created the

largest employment cluster in the region, supporting

nearly 110,000 jobs. The Greater Seattle area has

several world-leading strengths in the IT sector.

The State of Washington is the largest employer of

software publishing workers in the US. Washington

ranks first in the country in the creation of new

software companies.

Microsoft is the second largest employer in the

State of Washington. In addition to the nearly

42,940 employees in the region at the end of 2015,

the company historically has had an estimated

3.4 implied employment multiplier. As a result, the

company currently also supports nearly 98,000

indirect jobs in the area. Microsoft has also greatly

impacted the region through next generation

companies. Since Microsoft’s founding, over

250 companies have been spun off through

investment and development or from former

Microsoft employees.

Amazon continued its strong employment growth

through 2015. The online retailer added 9,400

employees worldwide last year, an expansion of

more than 38%. The company doesn’t release

detailed employment information for the region;

however, recent local leasing activity indicates many

of the new and 2016 planned hires will be based in

the Seattle area.


Amazon leased approximately 460,000 square

feet at the 1918 Eighth office tower in downtown

Seattle. This lease is in addition to the 1.7 million

square foot headquarters in South Lake Union

which is apparently already near capacity. They

are under construction on 4 city blocks totaling

approximately 3 million square feet. Tech companies

require approximately 250 square feet per employee.

Therefore they plan to house an additional 10,000

employees upon completion of this Amazon campus.

The rich and deep pool of talent has led other

industry leading IT companies such as Google

to establish the area as an important location for

growth. In the Greater Seattle area, Google has a

complex of new buildings in Kirkland and offices

in the Fremont neighborhood of Seattle. A local

manager has indicated that at least 100 positions

will be added to the 700 employees already working

in the two locations. The local engineers are working

on the high priority projects such as the Chrome

browser and operation systems and Google Talk.

TOP PUGET SOUND AREA COMPANIES

Amazon.com

AT&T Wireless

Alaska Airlines

Berlex Laboratories

Boeing

Children’s Hospital

Costco

Expedia, Inc.

Group Health Cooperative

Macy’s

Microsoft

MultiCare Health System

Nintendo

Nordstrom

Paccar, Inc.

Providence Health Care

REI

Safeco

Safeway

Starbucks

Swedish Health Services

Symetra Financial

T-Mobile

The Kroger Company

University of Washington

Virginia Mason Medical Center

Weyerhaeuser - Forest Products


Market Overview

The primary drivers in the market continue to be a mixture of old and new tech companies. With a booming business enterprise, one of the most active tenants regionally is WeWork, which has executed several new leases in downtown Seattle as well as in the Bellevue CBD, reducing an already short supply of close-in large block Class A space. The Seattle market has four build-to-suit buildings under construction for Facebook, Google and Amazon, as well as six being developed speculatively. Meanwhile, Microsoft has been active on the Eastside, purchasing nine buildings from Blackstone near their main campus as they ready for a major renovation to their existing headquarters, and plan to add 18 new buildings to their campus. Also active on the Eastside are other tech companies including Google, INRIX, Smartsheet and Quantum.

Washington State’s economy added 8,500 new jobs in May of 2018 according to the Washington State Employment Security Department. The preliminary unemployment rate for May in Seattle MSA is 3.7%, compared to 4.7% for all of Washington State. According to Conway Pederson, the employment growth through 2018 is expected to be 2.4%, compared to 2.5% in 2017 and 3.2% in 2016. This most recent employment growth has been fueled

by construction, services and retail. Long-term confidence in Seattle’s economy and office market has been exhibited in cap rates seen below 5% across a variety of products sold, including 4.5% for the recent sale of the Amazon leased Roxanne Building in Seattle. In conjunction with strong, Class Arent growth and limited investment opportunities, these low rates have pushed prices above $900/s.f. National and international real estate funds and private REITs continue to look at the Seattle region, but face a dwindling supply of available product to purchase. Foreign investors continue to show interest in development investments, particularly in the Bellevue CBD.

The total office inventory for the region stands at 201.8 million s.f. as of the 2nd quarter of 2018. This is a slight increase over last quarter with the delivery of three new projects during the quarter. The current regional availability rate dropped to 9.49% suggesting a positive near-term outlook for vacancy. The number of projects currently under construction is 12, with an associated office area of 5,984,876 s.f. Of this amount, 54% is pre-leased, indicating there is about 2.8 million s.f. for the region to absorb. The bulk of the new construction is in Downtown Seattle.

Regional vacancy continued the downward trend, dropping from 7.15% to 6.84% currently, with the 2Q 2018 net absorption of 627,693 s.f., bringing the year-to-date 2018 regional office absorption to 2.4 million s.f.

There are 12 office projects underway; 10 in the Seattle CBD, one in Kirkland and one in Renton. Region-wide there is about 6.0 million s.f. of new office supply under construction that is 54% pre-leased.

LaSalle Investment Management purchased the Amazon leased Roxanne Building in South Lake Union for $129,500,000. The sale is a regional milestone at $992/s.f

Over the last quarter Microsoft, Amazon and Google continue to expand their footprint which has limited the supply of large block Class A spaces in Seattle and Eastside markets.

Rental rates were nearly flat overthe quarter, except for respective 3% and 2% increases in the Seattle and Bellevue rates. Investors are becoming morecautious regarding longer-termrent growth.

2nd Quarter 2018 | 1

Real Estate Market Review

Seattle Office

2nd Quarter

2018

The regional office market continues to see an overall tightening, which has fueled further compression in vacancy and moderately increasing rents. With continued job growth and tech companies expanding their footprints in Seattle, Bellevue and Kirkland, the fundamentals of the regional office market remain strong. For the 2nd quarter of 2018, we saw regional office vacancy drop to 6.84%, down from 7.15% last quarter, setting a 10-year low. Second quarter net absorption totaled 627,693 s.f. bringing year-to-date absorption to 2,383,334 s.f.

The primary drivers in the market continue to be a mixture of old and new tech companies. With a booming business enterprise, one of the most active tenants regionally is WeWork, which has executed several new leases in downtown Seattle as well as in the Bellevue CBD, reducing an already short supply of close-in large block Class A space. The Seattle market has four build-to-suit buildings under construction for Facebook, Google and Amazon, as well as six being developed speculatively. Meanwhile, Microsoft has been active on the Eastside, purchasing nine buildings from Blackstone near their main campus as they ready for a major renovation to their existing headquarters, and plan to add 18 new buildings to their campus. Also active on the Eastside are other tech companies including Google, INRIX, Smartsheet and Quantum.

Washington State’s economy added 8,500 new jobs in May of 2018 according to the Washington State Employment Security Department. The preliminary unemployment rate for May in Seattle MSA is 3.7%, compared to 4.7% for all of Washington State. According to Conway Pederson, the employment growth through 2018 is expected to be 2.4%, compared to 2.5% in 2017 and 3.2% in 2016. This most recent employment growth has been fueled by construction, services and retail. Long-term confidence in Seattle’s economy and office market has been exhibited in cap rates seen below 5% across a variety of products sold, including 4.5% for the recent sale of the Amazon leased Roxanne

Building in Seattle. In conjunction with strong, Class Arent growth and limited investment opportunities, these low rates have pushed prices above $900/s.f. National and international real estate funds and private REITs continue to look at the Seattle region, but face a dwindling supply of available product to purchase. Foreign investors continue to show interest in development investments, particularly in the Bellevue CBD.

The total office inventory for the region stands at 201.8 million s.f. as of the 2nd quarter of 2018. This is a slight increase over last quarter with the delivery of three new projects during the quarter. The current regional availability rate dropped to 9.49% suggesting a positive near-term outlook for vacancy. The number of projects currently under construction is 12, with an associated office area of 5,984,876 s.f. Of this amount, 54% is pre-leased, indicating there is about 2.8 million s.f. for the region to absorb. The bulk of the new construction is in Downtown Seattle.

Vacant Space / Vacancy RateThe regional office market has a total standing office inventory of 201,838,616 s.f., per CoStar. Overall office vacancy continues its lengthy downward run dropping 31 bps from 7.15% last quarter, to 6.84% currently. The decrease in vacancy is the result of steady new leasing activity along with a limited and healthy pre-leased supply of new construction coming on line. A big part of the latter has been the Amazon

Continued, page 4

Market Forecast Trends

Regional vacancy continued the downward trend, dropping from 7.15% to 6.84% currently, with the 2Q 2018 net absorption of 627,693 s.f., bringing the year-to-date 2018 regional office absorption to 2.4 million s.f.

There are 12 office projects underway; 10 in the Seattle CBD, one in Kirkland and one in Renton. Region-wide there is about 6.0 million s.f. of new

office supply under construction that is 54% pre-leased.

LaSalle Investment Management purchased the Amazon leased Roxanne Building in South Lake Union for $129,500,000. The sale is a regional milestone at $992/s.f.

Over the last quarter Microsoft, Amazon and Google continue to expand their footprint which has

limited the supply of large block Class A spaces in Seattle and Eastside markets.

Rental rates were nearly flat over the quarter, except for respective 3% and 2% increases in the Seattle and Bellevue rates. Investors are becoming more cautious regarding longer-term rent growth.

Market Highlights

ABSORPTION

RENTAL RATE

VACANCY

CONSTRUCTION DELIVERIES

Market Forecast Trends

Market Highlights

2ND QUARTER 2018 MARKET REPORT

The regional office market continues to see an overall tightening, which has fueled

further compression in vacancy and moderately increasing rents. With continued

job growth and techc ompanies expanding their footprints in Seattle, Bellevue and

Kirkland, the fundamentals of the regional office market remain strong. For the 2nd

quarter of 2018, we saw regional office vacancy drop to 6.84%, down from 7.15%

last quarter, setting a 10-year low. Second quarter net absorption totaled 627,693

s.f. bringing year-to-date absorption to 2,383,334 s.f.


Vacant Space / Vacancy Rate

The regional office market has a total standing office inventory of 201,838,616 s.f., per CoStar. Overall office vacancy continues its lengthy downward run dropping 31 bps from 7.15% last quarter, to 6.84% currently. The decrease in vacancy is the result of steady new leasing activity along with a limited and healthy pre-leased supply of new construction coming on line.

New Construction

The total amount of space delivered in the 2nd quarter 2018 was 685,340 s.f. dispersed among three projects. The most significant was the delivery of the 300,000 s.f. FAA Headquarters Building in Federal Way. There are eight major speculative projects underway in the region. Six are in Seattle and collectively contain 2,523,818 s.f. of which 871,022 s.f., or 35% is pre-leased. Some of the more significant office projects include the 682,283 s.f. 2&U Building (2nd Avenue and University Street) being developed by Skanska, Kilroy’s 333 Dexter Building at 638,817 s.f. and the 58-story Rainier Square building with 722,000 s.f. being built by Wright Runstad and fully preleased by Amazon. Underway in Kirkland is the speculative Kirkland Urban project of 660,000 s.f. It is currently 34% pre-leased with the uncommitted space receiving strong interest due to its large block appeal and location. There are no significant office projects currently under construction in the Bellevue CBD, despite the myriad of cranes. The other major speculative project outside of Seattle is the 688,147 s.f. Southport Office Campus in Renton which has no pre-leasing to date. The 12 major buildings under construction in the region collectively contain just under 6.0 million square feet. Of this amount, 54% has been pre-leased.

Rent Forecast

Rental rates are primarily stable, evidenced by four of the five markets experiencing a slight increase in average rent quotes from last quarter, and one moving slightly downward. The most significant

increase was seen in the Seattle market where the current quote increased $1.17/s.f/year over last quarter to $41.00/s.f./year currently, as of the 2nd quarter 2018. The upper end of the market has seen more growth as premier Class A space is in relatively short supply, especially for the larger blocks. Changes in average asking rates showed a 3% increase quarter to quarter in the Seattle market and a 1.7% increase in the Eastside market. Tech company demand continues to put upward pressure on larger blocks of new Class A space rent and we expect to see this continue. This is highlighted in the new build-to-suit developments for Google, Facebook and Amazon in South Lake Union. Despite steady leasing, investors have become more cautious, moderating rent growth projections, anticipating a market plateau and lower job creation in 2019.

Seattle CBD/Surrounding Area Review

Net absorption in the Seattle submarket during the 2nd quarter was 197,199 s.f. indicating year-to-date net absorption of 1,448,547 s.f. after adding in the 1st quarter absorption of 1,251,348 s.f. The current mid-year total is already well above the total for all of 2017 at 503,601 s.f. The commencement of three major Amazon leases accounted for most of that leasing. The Seattle market vacancy rate continues to trend downward, ending the 2nd quarter at 7.06% compared with 7.29% last quarter. The availability rate indicates a similar downward trend going from 9.70% last quarter to 9.30% currently. Examples of some of the more significant lease transactions include three new leases to WeWork which include a combined 295,000 s.f. at Met Park East, Fourth & Madison and 1201 Third. UBS Financial also expanded at Fourth & Madison and First American Title leased two floors at Madison Centre. Asking rates in the Seattle CBD have increased from $42.77/s.f./year in the 1st quarter of 2018 to $45.17/s.f./year currently. Most new leases include a market TI allowance, several months of free rent and annual rent escalations of $0.75-$1.00/s.f./year. One of the recent trends has also been for lengthier lease

terms of 120 months to 180 months at the newer wers and premier Class A buildings. The downward vacancy trend in all Seattle submarkets should continue through the next two years considering that 64% of the ten buildings under construction are pre-leased. There may be additional minor hiccups if 333 Dexter and 2&U deliver with large blocks of space unleased, however with several tenants still looking at these large blocks of space in the market, it is not a major concern. On the investment side, there are several noteworthy sales including the June 2018 transfer of 5th & Bell for $95,000,000 and the sale of the Chromer Building at $32,500,000. Of most significance, however is LaSalle’s purchase of the Amazon leased Roxanne Building in South Lake Union for $129.5 million, or a record $992/s.f. The reported cap rate was 4.5%.

Area Review

2 | Seattle Office Real Estate Market Review

Seattle CBD / Surrounding Area ReviewNet absorption in the Seattle submarket during the 2nd quarter was 197,199 s.f. indicating year-to-date net absorption of 1,448,547 s.f. after adding in the 1st quarter absorption of 1,251,348 s.f. The current mid-year total is already well above the total for all of 2017 at 503,601 s.f. The commencement of three major Amazon leases accounted for most of that leasing. The Seattle market vacancy rate continues to trend downward, ending the 2nd quarter at 7.06% compared with 7.29% last quarter. The availability rate indicates a similar downward trend going from 9.70% last quarter to 9.30% currently. Examples of some of the more significant lease transactions include three new leases to WeWork which include a combined 295,000 s.f. at Met Park East, Fourth & Madison and 1201 Third. UBS Financial also expanded at Fourth & Madison and First American Title leased two floors at Madison Centre. Asking rates in the Seattle CBD have increased from $42.77/s.f./year in the 1st quarter of 2018 to $45.17/s.f./year currently. Most new leases include a market TI allowance, several months of free rent and annual rent escalations of $0.75-$1.00/s.f./year. One of the recent trends has also been for lengthier lease terms of 120 months to 180 months at the newer towers and premier Class A buildings. The downward vacancy trend in all Seattle submarkets should continue through the next two years considering that 64% of the ten buildings under construction are pre-leased. There may be additional minor hiccups if 333 Dexter and 2&U deliver with large blocks of space unleased, however with several tenants still looking at these large blocks of space in the market, it is not a major concern. On the investment side, there are several noteworthy sales including the June 2018 transfer of 5th & Bell for $95,000,000 and the sale of the Chromer Building at $32,500,000. Of most significance, however is LaSalle’s purchase of the Amazon leased Roxanne Building in South Lake Union for $129.5 million, or a record $992/s.f. The reported cap rate was 4.5%.

Eastside ReviewThe Eastside office market inventory currently totals just over 50.5 million s.f., or about one fourth of the regional office supply. Kirkland Urban is the only major office project underway in the Eastside. The North building is expected to be delivered at the end of 2018 and the project overall is 34% pre-leased with reported strong interest for the uncommitted space. Tableau Software and Wave have accounted for the majority of pre-leasing. The Eastside market currently has the lowest office vacancy in the region at 5.44% as of the 2nd quarter 2018. The

vacancy rate has steadily declined since 2010 and is at a ten year low mark. The availability rate also continues to trend downward at 7.60% currently, compared to 7.90% last quarter. Net absorption was 160,784 s.f. in the 2nd quarter 2018, or 195,621 s.f. year-to-date for the first half of 2018. WeWork has also been the most active Eastside tenant over the quarter, leasing space in two CBD buildings. This rather lackluster year-to-date absorption is about 23% of the 10-year average absorption at 850,000 s.f. Bellevue’s CBD office vacancy dropped to 5.5% from 7.1% last quarter, while the CBD availability rate decreased more modestly from 10.2% last quarter, to 9.5% currently. Although the CBD still faces the Expedia vacation, it is expected that this space will be backfilled in short order. There are currently no office projects under construction in the CBD. Most of the peripheral Eastside submarkets continue to perform well ending the 2nd quarter 2018 with vacancy rates of 3.1% and 4.4% respectively for Kirkland and Redmond. One exception is the I-90 Corridor which has a high current vacancy of 14.3% due to several large vacations. The current rent quote for the Eastside is $37.57/s.f./year up from $36.96/s.f./year last quarter. Eastside sale activity has continued to be strong starting with Microsoft’s purchase of nine office and flex building purchases from Blackstone Group in June of 2018 at price of $250 million. The partially Microsoft leased Redmond Town Center office center also sold for $268,400,000 or $461/s.f. Oakhurst Center sold for $45,400,000, or $312/s.f., in May of 2018. The buyer was Swift Real Estate Partners. Four other office buildings transferred for over $5 million in the 2nd quarter 2018 with several more under contract.

South King County ReviewSouth King County finished the first half of 2018 with 120,734 s.f. of net absorption during the 2nd quarter, bringing the year-to-date total to a very solid 470,354 s.f. This compares to a negative 67,857 s.f. in net absorption for all of 2017 due to Boeing’s giveback of space. South King County is the only office market posting double digit vacancy at 10.35% currently which is an improvement over the 10.9% rate last quarter. The current availability rate for the Southend market sets the regional high mark at 14.2% due largely to the 688,147 s.f. of speculative space coming on line at Southport Office Campus which has no office pre-leasing of note. That project stands alone as the only major new office under construction with the recent delivery of the build-to-suit FAA Regional Headquarters in Des Moines earlier this year. One of the larger office vacancies in the market is the former FAA building which became available when the FAA moved into their new headquarters facility. The

%SF

VacancyNew Construction

2Q18

Net Absorption Average Rent (Median)

YE17YE14 YE15 YE16

0

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

$41.00

9.36%

8.26%

7.10% 8.13% 7.06%

SEATTLE CBD / SURROUNDING AREA

%SF


2Q18


YE17YE14 YE15 YE16

0M

1M

2M

3M

4M

5M

6M

7M

8M

0%

2%

4%

6%

8%

10%

$32.99

$34.26

7.86%

5.96%

$36.96

7.23% 6.97%

$34.60

$37.09

5.44%

EAST KING COUNTY


Eastside Review

The Eastside office market inventory currently totals just over 50.5 million s.f., or about one fourth of the regional office supply. Kirkland Urban is the only major office project underway in the Eastside. The North building is expected to be delivered at the end of 2018 and the project overall is 34% pre-leased with reported strong interest for the uncommitted space. Tableau Software and Wave have accounted for the majority of pre-leasing. The Eastside market currently has the lowest office vacancy in the region at 5.44% as of the 2nd quarter 2018. The vacancy rate has steadily declined since 2010 and is at a ten year low mark. The availability rate also continues to trend downward at 7.60%\ currently, compared to 7.90% last quarter. Net absorption was 160,784 s.f. in the 2nd quarter 2018, or 195,621 s.f. year-to-date for the first half\ of 2018. WeWork has also been the most active Eastside tenant over the quarter, leasing space in two CBD buildings. This rather lackluster yearto-date absorption is about 23% of the 10-year average absorption at 850,000 s.f. Bellevue’s CBD office vacancy dropped to 5.5% from 7.1% last quarter, while the CBD availability rate decreased more modestly from 10.2% last quarter, to 9.5% currently. Although the CBD still faces the Expedia vacation, it is expected that this space will be backfilled in short order. There are currently no office

projects under construction in the CBD. Most of the peripheral Eastside submarkets continue to perform well ending the 2nd quarter 2018 with vacancy rates of 3.1% and 4.4% respectively for Kirkland and Redmond. One exception is the I-90 Corridor which has a high current vacancy of 14.3% due to several large vacations. The current rent quote for the Eastside is $37.57/s.f./ year up from $36.96/s.f./year last quarter. Eastside sale activity has continued to be strong starting with Microsoft’s purchase of nine office and flex building purchases from Blackstone Group in June of 2018 at price of $250 million. The partially Microsoft leased Redmond Town Center office center also sold for $268,400,000 or $461/s.f. Oakhurst Center sold for $45,400,000, or $312/s.f., in May of 2018. The buyer was Swift Real Estate Partners. Four other office buildings transferred for over $5 million in the 2nd quarter 2018 with several more under contract

South King County Review

South King County finished the first half of 2018 with 120,734 s.f. of net absorption during the 2nd quarter, bringing the year-to-date total to a very solid 470,354 s.f. This compares to a negative 67,857 s.f. in net absorption for all of 2017 due to Boeing’s giveback of space. South King County is the only office market posting double digit vacancy at 10.35% currently which is an improvement over the 10.9% rate last quarter. The current availability rate for the Southend market sets the regional high mark at 14.2% due largely to the 688,147 s.f. of speculative space coming on line at Southport Office Campus which has no office preleasing of note. That project stands alone as the only major new office under construction with the recent delivery of the build-to-suit FAA Regional Headquarters in Des Moines earlier this year. One of the larger office vacancies in the market is the former FAA building which became available when the FAA moved into their new headquarters facility. The 197,446 s.f. remnant just sold in the 2nd quarter 2018 for $13,750,000,or $70/s.f. in vacant shell space condition. This market is still struggling to backfill the office space vacated by Boeing in

2017, the former 342,000 sq ft Weyerhaeuser office campus vacancy, and the recent FAA vacancy. Nonetheless, the market has seen small but steady levels of leasing in 2018 which has caused the vacancy rate to compress. The current rental rate quote is $27.65/s.f./year full service compared to $26.32/s.f./year in the 4th quarter 2017. The only sale of significance this quarter was the transfer of the former FAA Headquarters in April of 2018 at $70/s.f. Traditionally this market has taken longest to recover, usually serving as a secondary alternative to tenants priced out of the Seattle and Bellevue markets.

Area Review

2 | Seattle Office Real Estate Market Review

Seattle CBD / Surrounding Area ReviewNet absorption in the Seattle submarket during the 2nd quarter was 197,199 s.f. indicating year-to-date net absorption of 1,448,547 s.f. after adding in the 1st quarter absorption of 1,251,348 s.f. The current mid-year total is already well above the total for all of 2017 at 503,601 s.f. The commencement of three major Amazon leases accounted for most of that leasing. The Seattle market vacancy rate continues to trend downward, ending the 2nd quarter at 7.06% compared with 7.29% last quarter. The availability rate indicates a similar downward trend going from 9.70% last quarter to 9.30% currently. Examples of some of the more significant lease transactions include three new leases to WeWork which include a combined 295,000 s.f. at Met Park East, Fourth & Madison and 1201 Third. UBS Financial also expanded at Fourth & Madison and First American Title leased two floors at Madison Centre. Asking rates in the Seattle CBD have increased from $42.77/s.f./year in the 1st quarter of 2018 to $45.17/s.f./year currently. Most new leases include a market TI allowance, several months of free rent and annual rent escalations of $0.75-$1.00/s.f./year. One of the recent trends has also been for lengthier lease terms of 120 months to 180 months at the newer towers and premier Class A buildings. The downward vacancy trend in all Seattle submarkets should continue through the next two years considering that 64% of the ten buildings under construction are pre-leased. There may be additional minor hiccups if 333 Dexter and 2&U deliver with large blocks of space unleased, however with several tenants still looking at these large blocks of space in the market, it is not a major concern. On the investment side, there are several noteworthy sales including the June 2018 transfer of 5th & Bell for $95,000,000 and the sale of the Chromer Building at $32,500,000. Of most significance, however is LaSalle’s purchase of the Amazon leased Roxanne Building in South Lake Union for $129.5 million, or a record $992/s.f. The reported cap rate was 4.5%.

Eastside ReviewThe Eastside office market inventory currently totals just over 50.5 million s.f., or about one fourth of the regional office supply. Kirkland Urban is the only major office project underway in the Eastside. The North building is expected to be delivered at the end of 2018 and the project overall is 34% pre-leased with reported strong interest for the uncommitted space. Tableau Software and Wave have accounted for the majority of pre-leasing. The Eastside market currently has the lowest office vacancy in the region at 5.44% as of the 2nd quarter 2018. The

vacancy rate has steadily declined since 2010 and is at a ten year low mark. The availability rate also continues to trend downward at 7.60% currently, compared to 7.90% last quarter. Net absorption was 160,784 s.f. in the 2nd quarter 2018, or 195,621 s.f. year-to-date for the first half of 2018. WeWork has also been the most active Eastside tenant over the quarter, leasing space in two CBD buildings. This rather lackluster year-to-date absorption is about 23% of the 10-year average absorption at 850,000 s.f. Bellevue’s CBD office vacancy dropped to 5.5% from 7.1% last quarter, while the CBD availability rate decreased more modestly from 10.2% last quarter, to 9.5% currently. Although the CBD still faces the Expedia vacation, it is expected that this space will be backfilled in short order. There are currently no office projects under construction in the CBD. Most of the peripheral Eastside submarkets continue to perform well ending the 2nd quarter 2018 with vacancy rates of 3.1% and 4.4% respectively for Kirkland and Redmond. One exception is the I-90 Corridor which has a high current vacancy of 14.3% due to several large vacations. The current rent quote for the Eastside is $37.57/s.f./year up from $36.96/s.f./year last quarter. Eastside sale activity has continued to be strong starting with Microsoft’s purchase of nine office and flex building purchases from Blackstone Group in June of 2018 at price of $250 million. The partially Microsoft leased Redmond Town Center office center also sold for $268,400,000 or $461/s.f. Oakhurst Center sold for $45,400,000, or $312/s.f., in May of 2018. The buyer was Swift Real Estate Partners. Four other office buildings transferred for over $5 million in the 2nd quarter 2018 with several more under contract.

South King County ReviewSouth King County finished the first half of 2018 with 120,734 s.f. of net absorption during the 2nd quarter, bringing the year-to-date total to a very solid 470,354 s.f. This compares to a negative 67,857 s.f. in net absorption for all of 2017 due to Boeing’s giveback of space. South King County is the only office market posting double digit vacancy at 10.35% currently which is an improvement over the 10.9% rate last quarter. The current availability rate for the Southend market sets the regional high mark at 14.2% due largely to the 688,147 s.f. of speculative space coming on line at Southport Office Campus which has no office pre-leasing of note. That project stands alone as the only major new office under construction with the recent delivery of the build-to-suit FAA Regional Headquarters in Des Moines earlier this year. One of the larger office vacancies in the market is the former FAA building which became available when the FAA moved into their new headquarters facility. The

%SF


2Q18


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0

1M

2M

3M

4M

5M

6M

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4%

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7%

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9%

10%

11%

12%

$32.12

$37.62$38.37

$41.48

$41.00

9.36%

8.26%

7.10% 8.13% 7.06%

SEATTLE CBD / SURROUNDING AREA

%SF


2Q18


YE17YE14 YE15 YE16

0M

1M

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3M

4M

5M

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10%

$32.99

$34.26

7.86%

5.96%

$36.96

7.23% 6.97%

$34.60

$37.09

5.44%

EAST KING COUNTY

2nd Quarter 2018 | 3kiddermathews.com

197,446 s.f. remnant just sold in the 2nd quarter 2018 for $13,750,000, or $70/s.f. in vacant shell space condition. This market is still struggling to backfill the office space vacated by Boeing in 2017, the former 342,000 sq ft Weyerhaeuser office campus vacancy, and the recent FAA vacancy. Nonetheless, the market has seen small but steady levels of leasing in 2018 which has caused the vacancy rate to compress. The current rental rate quote is $27.65/s.f./year full service compared to $26.32/s.f./year in the 4th quarter 2017. The only sale of significance this quarter was the transfer of the former FAA Headquarters in April of 2018 at $70/s.f. Traditionally this market has taken longest to recover, usually serving as a secondary alternative to tenants priced out of the Seattle and Bellevue markets.

Snohomish County ReviewAfter posting negative 218,027 s.f. of net absorption during all of 2017, the Northend office market saw positive net absorption for the second consecutive quarter with net absorption of 84,489 s.f. This brings the year-to-date 2018 net absorption to 203,817 s.f. Office supply in this market totals 22.1 million s.f. The vacancy rate dropped from 6.86% last quarter to 6.48% currently. Contributing to the positive absorption was steady new leasing activity highlighted by the Premera Blue Cross lease for 65,586 s.f. at Quadrant Monte Villa Center in Bothell. The Bothell/Kenmore submarket ended the second quarter 2018 at a vacancy rate of 9.2%. The Everett CBD continues to perform steadily with a current vacancy of 6.7% (8.2% availability). The Lynnwood/Edmonds submarket contains about 5 million s.f. of office space with vacancy continuing to hover just above the 5.0% benchmark at 5.3%. The Northend submarket continues to attract smaller office tenants looking for both proximity to more affordable housing and affordability. For example, the current average rent quote in the Northend is $15.48/s.f./year lower than Seattle and $12.05/s.f./year lower than the Eastside. The most significant Snohomish County sale was the June 2018 acquisition of the Sparling Technology Center in Lynnwood for $15,360,000 or $220/s.f. The buyer was Redstone Group out of Canada. With only a modicum of new construction and rising rates in the Seattle and Eastside markets, gradually declining vacancy is expected here.

Pierce County ReviewFor the twelfth consecutive quarter, the Pierce County office market has posted positive net absorption of 64,487 s.f. during the 2nd quarter

2018. The vacancy rate dropped from 6.36% last quarter to 6.08% currently. Tacoma CBD’s vacancy rate currently stands at 6.0% as of the 2nd quarter 2018, relatively unchanged from 6.1% last quarter. The CBD availability rate also remains essentially unchanged at 11.1%, compared to 11.2% last quarter. Built into the higher availability rates is State Farm’s anticipated departure from the Frank Russell Building and Columbia Bank Center, where approximately 1,400 are employed. Some of the jobs will relocate to DuPont. Overall, the Tacoma CBD continues to see steady demand for office and residential product. Leasing activity over the last quarter has been to small tenants with no new deals over 5,000 s.f. in size. Rental rates in Pierce County remain relatively flat at $22.28/s.f./year which is essentially unchanged from the $22.26/s.f./year quote last quarter and $22.15/s.f. for the 4th quarter 2017. The volume of office sales this quarter in Pierce County was nominal with a couple of small transaction geared to owner/users, none of which exceeded $5 million. Optimism remains prevalent surrounding the CBD which continues to gentrify, spurring continued interest in downtown housing, including options for professionals working downtown. The most active office segment in the Pierce County market continues to be for medical-related properties.

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$21.03$21.41

10.65%

12.02%

$27.65

11.40%

9.42%

$26.94$27.29

10.35%

SOUTH KING COUNTY

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2Q18


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$22.58$23.00

7.29% 7.59%

$25.52

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

%SF


2Q18


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$20.38 $20.83

$21.64 $22.15 $22.28

9.70%

8.51%

7.46%

6.33% 6.08%

PIERCE COUNTY


Snohomish County Review

After posting negative 218,027 s.f. of net absorption during all of 2017, the Northend office market saw positive net absorption for the second consecutive quarter with net absorption of 84,489 s.f. This brings the year-to-date 2018 net absorption to 203,817 s.f. Office supply in this market totals 22.1 million s.f. The vacancy rate dropped from 6.86% last quarter to 6.48% currently. Contributing to the positive absorption was steady new leasing activity highlighted by the Premera Blue Cross lease for 65,586 s.f. at Quadrant Monte Villa Center in Bothell. The Bothell/ Kenmore submarket ended the second quarter 2018 at a vacancy rate of 9.2%. The Everett CBD continues to perform steadily with a current vacancy of 6.7% (8.2% availability). The Lynnwood/Edmonds submarket contains about 5 million s.f. of office space with vacancy continuing to hover just above the 5.0% benchmark at 5.3%. The Northend submarket continues to attract smaller office tenants looking for both proximity to more affordable housing and affordability. For example, the current average rent quote in the Northend is $15.48/s.f./year lower than Seattle and $12.05/s.f./year lower than the Eastside. The most

significant Snohomish County sale was the June 2018 acquisition of the Sparling Technology Center in Lynnwood for $15,360,000 or $220/s.f. The buyer was Redstone Group out of Canada. With only a modicum of new construction and rising rates in the Seattle 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

For the twelfth consecutive quarter, the Pierce County office market has posted positive net absorption of 64,487 s.f. during the 2nd quarter 2018. The vacancy rate dropped from 6.36% last quarter to 6.08% currently. Tacoma CBD’s vacancy rate currently stands at 6.0% as of the 2nd quarter 2018, relatively unchanged from 6.1% last quarter. The CBD availability rate also remains essentially unchanged at 11.1%, compared to 11.2% last quarter. Built into the higher availability rates is State Farm’s anticipated departure from the Frank Russell Building and Columbia Bank Center, where approximately 1,400 are employed. Some of the jobs will relocate to DuPont. Overall, the Tacoma CBD continues to see steady demand for office and residential product. Leasing activity over the last quarter has been to small tenants with no new deals over 5,000 s.f. in size. Rental rates in Pierce County remain relatively flat at $22.28/s.f./year which is essentially unchanged from the $22.26/s.f./year quote last quarter and $22.15/s.f. for the 4th quarter 2017. The volume of office sales this quarter in Pierce County was nominal with a couple of small transaction geared to owner/users, none of which exceeded $5 million. Optimism remains prevalent surrounding

the CBD which continues to gentrify, spurring continued interest in downtown housing, including options for professionals working downtown. The most active office segment in th






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$21.03$21.41

10.65%

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$27.65

11.40%

9.42%

$26.94$27.29

10.35%

SOUTH KING COUNTY

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$22.58$23.00

7.29% 7.59%

$25.52

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

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$20.38 $20.83

$21.64 $22.15 $22.28

9.70%

8.51%

7.46%

6.33% 6.08%

PIERCE COUNTY






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$21.03$21.41

10.65%

12.02%

$27.65

11.40%

9.42%

$26.94$27.29

10.35%

SOUTH KING COUNTY

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$22.58$23.00

7.29% 7.59%

$25.52

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

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$20.38 $20.83

$21.64 $22.15 $22.28

9.70%

8.51%

7.46%

6.33% 6.08%

PIERCE COUNTY


Investment Market

Sales activity for the 2nd quarter of 2018 included 76 transactions totaling $634 million in sales volume bringing the year-to-date total for the first half of 2018 to 155 transactions, totaling $1.263 billion in total sales volumes. The majority of large sale activity occurred in the Eastside market. One of the larger transactions was the June 2018 acquisition of Daytona Laguna Campus in Redmond by Microsoft which purchased nine buildings (including some flex and industrial space) from Blackstone Group LP for $250 million, or $355/s.f. The 34 acre site is near Microsoft’s campus where they are planning a renovation to their headquarters and the eventual addition of 2.5 million s.f. of new office space. Microsoft was the primary tenant in another large Eastside office sale, the June 2018 transfer of the six building Redmond Town Center Office campus. Shorenstein sold the property to Invesco for $268,400,000, or $461/s.f. Microsoft had just executed renewals in three of the buildings and then expanded into a fourth. The other two buildings

are leased to AT&T. Oakhurst Center in Bellevue also sold for $45.4 million this quarter. Perhaps the most significant sale was the June 2018 purchase of the Roxanne Building in the South Lake Union. LaSalle paid $129.5 million for the vintage 2013, building which was leased long-term to Amazon. The indicated cap rate was 4.5% and the unit pricing of $992/s.f. sets a pricing record for office sales in the region.

Other sales of significance in the Seattle market included the June 2018 transfer of 5th & Bell for $95,000,000 ($482/s.f.) and the sale of the Chromer Building for $32,500,000 ($641/s.f.), also in June. Lastly, the former FAA Headquarters building in Renton sold in a vacant shell condition for $13,750,000, or a nominal $70/s.f. Overall, there remains strong investor confidence and interest in the region at all levels.

Data Source: CoStar

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