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 VACANCY

RENTAL RATE

CONSTRUCTION

DELIVERIES

YEAR-TO-YEAR BASIS

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

VacancyNew Construction

2Q18

Net Absorption Average Rent (Median)

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

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.

%SF

VacancyNew Construction

2Q18

Net Absorption Average Rent (Median)

YE17YE14 YE15 YE16

-200K

0

200K

400K

600K

800K

1M

1.2M

-2%

0%

2%

4%

6%

8%

10%

12%

14%

$21.03$21.41

10.65%

12.02%

$27.65

11.40%

9.42%

$26.94$27.29

10.35%

SOUTH KING COUNTY

%SF

VacancyNew Construction

2Q18

Net Absorption Average Rent (Median)

YE17YE14 YE15 YE16

-300K

-200K

-100K

0

100K

200K

300K

400K

500K

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

$22.58$23.00

7.29% 7.59%

$25.52

8.45% 8.37%

$23.58

$24.86

6.86%

SNOHOMISH COUNTY

%SF

VacancyNew Construction

2Q18

Net Absorption Average Rent (Median)

YE17YE14 YE15 YE16

0

50K

100K

150K

200K

250K

300K

350K

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

9.0%

10.5%

$20.38 $20.83

$21.64 $22.15 $22.28

9.70%

8.51%

7.46%

6.33% 6.08%

PIERCE COUNTY

4 | Seattle Office Real Estate Market Review

pre-leasing activity. Absorption was also positive for all of the region’s submarkets in the 2nd quarter with a net gain of 627,693 s.f., bringing the year-to-date total to 2,383,334 s.f. This already surpasses the total net absorption of 1,261,370 s.f. for all of 2017. Currently there are 25 office spaces over 50,000 s.f. listed for lease and near-term occupancy in the entire region. Of those, 10 are larger than 100,000 s.f., including three in the Seattle CBD and one in downtown Bellevue. The demand for large block space in the CBD’s is strong and this inventory will likely shrink. The regional availability rate, which tracks space being marketed but not necessarily completed or currently vacant, showed a decrease over the quarter, ending at 9.49%, compared to 9.88% last quarter. South King County saw a 100 bps

New Construction ActivityThe 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 pre-leased 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 ForecastRental 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.

Investment MarketSales 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

Kidder Mathews is the largest, independent commercial real estate firm on the West Coast, with more than 700 real estate professionals and staff in 21 offices in Washington, Oregon, California, Nevada, and Arizona. We offer a complete range of brokerage, appraisal, property management, consulting, project and construction management, and debt equity finance services for all property types.

MANAGEMENT

PORTFOLIO

50M+

PROPERTY MANAGEMENT

ASSIGNMENTS

ANNUALLY

1,500

VALUATION ADVISORY

TOTAL #

APPRAISERS/MAI’S

36/21

ANNUAL

TRANSACTION

VOLUME

$7B

ANNUAL

LEASING SF

34.6M

ANNUAL

SALES SF

16.5M

COMMERCIAL BROKERAGE

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

Contact

Brian HatcherExecutive VP, Brokerage206.296.9600bhatcher@kiddermathews.com

The information in this report was composed by the Kidder Mathews Valuation Advisory Group.

Chris Berger, MAI

425.454.7040 | cberger@kiddermathews.com

kiddermathews.com