Seattle's downtown office space: Boom to bust
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Buildings seen from the First Light tower in downtown Seattle. Photo: M. Scott Brauer/Bloomberg via Getty Images
Seattle's financial district is among the most vulnerable in the U.S., according to a report showing defaults on commercial real estate loans are climbing amid soaring office vacancy rates.
Why it matters: With long-term interest rates rising and commercial property values dropping, office building owners may struggle to refinance loans that mature this year, according to the report by the Kaplan Group, a collection agency specializing in recovering large corporate debt.
By the numbers: The three most exposed financial districts are San Francisco, Seattle and Houston, according to the Kaplan scoring.
- Seattle office vacancy increased to 24.7% in the first quarter of 2024, up from 21.86% in the last quarter of 2023, according to a Flynn Ferguson report.
Case in point: A court-appointed receiver was assigned this year to manage the assets for Unico Properties' Colman Building, a historic office building in Seattle's waterfront area, after Unico defaulted on its loan, according to Kidder Matthews.
- The building had been struggling with high vacancy rates and loan records showed last year that the Seattle-based company was wrestling to keep pace with debt repayments, the Puget Sound Business Journal reported.
- The recent sales of the historic Dexter Horton Building on Second Avenue and Pacific Place Mall at a fraction of their purchase prices also underscore the potential turmoil in downtown Seattle's office market.
The big picture: Despite return-to-work mandates, tech sector employment growth overall has slowed considerably since the pandemic, with office demand falling in both Seattle and the Eastside.
Flashback: Before the pandemic, major companies like Amazon and Microsoft were expanding their footprints and Seattle boasted an office vacancy rate under 5%, according to a 2019 Cushman Wakefield report.
- However, the pandemic dramatically shifted these dynamics, leading to a drastic increase in remote work and changing the way businesses utilize office space.
What they're saying: The city's above-average days on market and vacancy rate emphasize the need for strategic interventions to prevent foreclosures, Kaplan Group CEO Dean Kaplan told Axios in an email.
- Seattle's financial district "faces substantial challenges in maintaining occupancy," Kaplan said.
What we're watching: Transforming vacant office spaces into residential units has proven to be complicated and expensive, but mixed-use development could revitalize downtown and potentially avert further financial distress, the authors of the Kaplan report say.