As downtown Seattle offices empty, city facing years of 'zombie' towers

Downtown Seattle may be sending strong “we’re back” vibes during its World Cup star turn. But downtown’s economic engine is still stuck on the sidelines. Nearly 37% of the downtown Seattle office space is vacant — the most of any major U.S. downtown, according to real estate brokerage Cushman & Wakefield. Iconic office towers like the 44-floor U.S. Bank Center, at Fifth Avenue and Pike Street, are nearly half empty and trading at fire-sale prices. Veteran developers like Martin Selig have defaulted on huge pieces of their office portfolios. The city’s office economy is in free fall. Since 2020, downtown office properties have lost a staggering $15 billion, or 46%, of their value and are generating $128 million less in property taxes, according to King County assessor’s office data. This is uncharted territory. After the Great Recession of 2008-10, when downtown office vacancy peaked at 21%, the market recovered in five years. We’re past the five-year mark, and downtown still has so much empty space that even if demand returned to prepandemic levels, we’d need eight more years to refill it. And despite a recent flurry of office leasing in and around downtown, few market observers expect anything like a return to prepandemic demand. To the contrary, given the new realities of remote work, artificial intelligence and other office market headwinds, experts like Peter Kolaczynski, director of commercial data with Yardi, a real estate management software company, think as much as a quarter of Seattle’s office supply is effectively “excess.” “So,” Kolaczynski asks, “what do you do with this stuff?” ‘I don’t think it’s ever’ coming back Some commentators have blamed the downtown office apocalypse on Seattle’s taxes, antibusiness rhetoric and perceptions of public safety. It’s true that Seattle is losing office tenants to more business-friendly, less frayed downtowns, like Bellevue’s, where the 25% downtown vacancy rate is closer to the 23% average for large U.S. cities, according to Cushman. The bigger culprit, though, is the tech sector. Its astonishing decadelong push for office space, and equally astonishing slowdown, left downtown Seattle with a gap between supply and demand that will be very difficult to bridge. From 2012, when Seattle-area tech hiring picked up steam, to its peak in 2022, office supply in downtown Seattle and South Lake Union grew by a third — or the equivalent of around 18 U.S. Bank Centers — according to data from the real estate firm Kidder Mathews. But even after tech firms began layoffs in 2022, as a “correction” for pandemic over-hiring, more space kept pouring into downtown Seattle as towers begun years earlier finally hit the market. This isn’t the first time office supplies have overshot demand; that’s the nature of a real estate sector made of large, slow projects. What’s different this time is how long demand may take to catch up. Tech hiring is unlikely to return to its pre-2022 intensity, given the industry’s recent pivot from spending on people to spending on AI data centers. That alone would have a major effect on Seattle’s office future. For a sense of how major, consider: If downtown Seattle were to see a return of all prepandemic office demand except what was generated by one tech firm — Amazon — the time needed to refill current office vacancies would grow from eight years to 16 years, according to estimates from Cushman. And sadly, cooler tech hiring isn’t the only major drag on demand. Despite multiple initiatives to end remote work, the two- or three-day-in-the-office week is the new reality at many companies, which has spurred moves to smaller offices. Worker presence downtown is barely 60% of 2019 levels, according to the most recent cellphone tracking data posted by the Downtown Seattle Association. “I don’t think it’s ever going to come back to what it was,” said Steven Bourassa, director of the Washington Center for Real Estate Research at the University of Washington, of downtown’s supine office market. “At least not any time in the foreseeable future.” Historically, overbuilt markets correct themselves. Landlords drop rents until buildings refill. That’s already underway in Seattle. The new owner of the U.S. Bank Center, having paid just $280 million, or less than half of what the building went for in 2019, presumably can afford to lower rents enough to fill the place, which is now 45% vacant, according to CoStar. Overall, office rents across downtown Seattle are down an inflation-adjusted 25% since late 2019, according to Cushman data. The problem is, office space has a shelf life. Buildings age. Layouts and amenities fall out of fashion. At a time scale of a decade or more, a lot of vacant space, especially in older properties, “isn’t going to be usable,” Yardi’s Kolaczynski said. Kolaczynski estimates that with age, shifting demand and other market headwinds, the U.S. office sector overall is overbuilt by 15% to 20%. In Seattle, that translates to between nine and 12 U.S. Bank Centers in office space we may not need. Winners and losers One answer, experts say, is to turn some of that excess office into something the market wants more of, like storage or housing. As office buildings plunge in value, they eventually become cheap enough for ambitious developers to buy and convert into apartments and condos, which gradually helps reduce office demand. A 2024 analysis by Moody’s Commercial Real Estate Group estimated that 14% of Seattle’s office properties “are suitable for multifamily conversion.” A more recent analysis by Yardi puts Seattle’s conversion potential at 24%. The city of Seattle estimates that, with aggressive incentives, conversions could generate up to 6,000 housing units over the next seven years. At a rough approximation, that would use around a fifth of the city’s present office surplus. But “potential” is doing a lot of work here. Newer, larger office buildings, like the U.S. Bank Center, are hugely impractical for conversion, thanks to massive floor plates, centralized plumbing and other utilities and a host of other constraints. The preferred candidates are typically smaller, older buildings, especially those with C- or E-shaped floor layouts, which make it easier to create smaller units with adequate windows. But these buildings can be prohibitively costly to bring up to seismic and energy building codes, said Jen Pasquier, a Seattle developer who wants to convert the 10-story Liggett Building, at Fourth and Pike, into 93 apartments. Conversion projects also can be hard to finance, Pasquier said, especially in a market like Seattle, where there is uncertainty over where the city is “going with taxation (and) with safety and security.” As a result, Pasquier is still “exploring whether it’s viable for us to convert the building,” she said. “A lot of that has to do with conversations we have with the city (and) with capital markets.” Those uncertainties may help explain why the city of Seattle now has just four major office conversions, representing 400 housing units, at various stages of development. For some market watchers, conversion’s slow start is simply one more indicator that the office sector is in for an extended winter, with a steady stream of fire sales and dozens of half-empty buildings propped up by investors and banks — much like the “zombie” savings & loans that U.S. regulators kept alive during the 1980s. “A city of zombie office buildings,” said Dan Bertolet, a development and affordability expert at Seattle-based Sightline Institute. Yardi’s Kolaczynski is more optimistic. He said the office market has done far better than many experts feared when remote work became the norm. He expects landlords to get more aggressive and creative in finding tenants or new uses for their buildings, especially those who snapped up defaulted properties for “nickels and dimes on the dollar.” But, he adds, “there will be losers,” especially older, high-vacancy properties. Broadly speaking, Kolaczynski expects the office crisis to play out very much like the shopping mall crisis, which also generated a lot of conversion hopes and a lot of disappointment. “You had some winners, few and far between, and you got a lot of losers,” Kolaczynski said. “And a lot of losers ended up being knocked down.”