Office property transactions within Seattle’s central business district (CBD) have experienced a dramatic decline, falling to just $29 million in 2023, a staggering 98.7% drop from the previous year’s $2.3 billion, as Trepp reported this week, citing data from Cushman & Wakefield.

The broader Seattle area, encompassing Tacoma and Bellevue, was not spared, witnessing a nearly 93% fall in sales volume from $3.8 billion to $283.4 million.

Driving Forces Behind The Drop

This sharp decline in office property transactions can be attributed to several factors, including significant job losses in the tech sector, which is a major economic driver in the region.

As the data showed, the Seattle area saw the tech industry shed 44,700 jobs last year, a trend expected to persist and further reduce demand for office space. Additionally, the increasing adoption of hybrid working models has negatively impacted the need for traditional office environments.

Chart: Unemployment Rate In Seattle-Tacoma-Bellevue On The Rise

“Several major companies, including Amazon.com Inc. AMZN, Alphabet Inc. GOOGLGOOG, Meta Platforms Inc. META, DocuSign Inc. DOCU and Weyerhaeuser Co WY, updated or enacted their hybrid work policies in the spring, resulting in seven straight months of downtown Seattle foot traffic averaging over 50% of 2019 figures,” Cushman & Wakefield wrote.

Vacancy Rates Rise

In the fourth quarter alone, Seattle reported 690,000 square feet of negative absorption, indicating a rise in vacant office space. This brought the annual total to 2.75 million square feet of negative absorption, a marked increase from the year before.

“Absorption will remain in the red in the first half of 2024 due to growing vacancy,” Cushman & Wakefield stated.

The Seattle CBD’s office space inventory also grew, with 405,000 square feet added across three buildings, and another 1.5 million square feet currently under construction.

The direct vacancy rate in Seattle’s CBD has also risen sharply, reaching 20.4% in the fourth quarter, up from 16.7% a year earlier. When including sublease space, the overall vacancy rate stands at 25.7%, an increase from 19.5%.

At a national level, Seattle ranks fourth behind Detroit, Houston and San Francisco in terms of office vacancy rates.

Prices Start To Adjust To A New Market Reality

Trepp, a leading provider of data, insights and technology solutions to the structured finance and commercial real estate industries, is closely monitoring four troubled commercial real estate loans in the Seattle area.

Among them, the Pacific Building, situated at 720 3rd Avenue, is marked by notably distressing financial indicators: an occupancy rate of merely 42% and a debt-service coverage ratio (DSCR) of 0.29. This DSCR is significantly below the value of 1, signaling that the property is generating inadequate income to meet its loan obligations.

CBRE Group Inc. CBRE reports the leasing rate for this property is at $30.00 per square foot annually, trading at a significant discount compared to the average rate in the area.

“Seattle CBD average asking rents were $46.60 per square foot on an annual gross basis at the end of the fourth quarter,” down 8.5% on the year, as per Cushman & Wakefield data.

Read Now: Commercial Real Estate Investing: The Ultimate Guide