Broderick Group described Microsoft’s possible move out of Bellevue as a “catastrophic blow” to the market.
Microsoft Corp. is gradually confirming its plans to relinquish office space on the Eastside, putting Bellevue’s real estate market on an unhealthy trend.
The Redmond-based software maker doesn’t plan to renew leases on 1.1 million square feet of office space next year. Microsoft leases about 5 million square feet of office space in King County. All of its office space in the region is located on the Eastside.
Over half its leased space — roughly 2.6 million square feet — is made up of five leases in Bellevue and Issaquah set to expire between 2023 and 2025, and the company has already confirmed it will let the first three lapse in the Interstate 90 corridor, a submarket that is already strapped with a 13.8% vacancy rate.
After the 2023 leases expire, Microsoft — which is working to cut expenses, like most tech companies — will have roughly 1.56 million square feet of office space in Bellevue’s central business district to decide to keep or cut loose between 2024 and 2025.
As of 2021, the company had more than 9,000 employees in Bellevue, according to the city’s latest comprehensive annual financial report.
Broderick Group described Microsoft’s possible move out of Bellevue as a “catastrophic blow” to the market in its third quarter Eastside market report. If Microsoft pulls all the way out of Bellevue, the entire city’s vacancy would jump from over 8% to 24%, which several Seattle-area brokers have told the Business Journal is well above the range for a healthy market, capped at about 9%.
When Microsoft confirmed to the Business Journal that it planned to let 2023 leases expire, it said the decision wasn’t due to layoffs or hiring. Over the past year, the company has eclipsed 60,000 employees in the Puget Sound region, according to Business Journal research.
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Microsoft owns another 10 million square feet, encompassed by its Redmond campus where it is adding 2 million square feet of office space over the next three years.
As of 2020, the company’s owned Redmond properties were valued at over $3.7 billion by the King County Assessor’s Office, according to the city’s latest comprehensive financial report.
The prospect of Microsoft potentially pulling out of 1.56 million square feet of office space — from the leases it has yet to decide on — is one of the blows affecting future development along with Amazon, a growing Bellevue office occupier, pumping the brakes on its office tower development.
Broderick Group said Microsoft’s uncertainty, coupled with rising vacancy and sublease supply, has pushed away demand on at least two Eastside sites under construction, one of which was in downtown Bellevue, the Eight by Skanska, scheduled for early 2024. The sites had no pre-leasing action in the third quarter.
“If Skanska is successful at leasing a large portion of The Eight by 2024, and Microsoft reconsiders its commitment to downtown Bellevue, then the door will open for additional projects to break ground,” Broderick Group reported. “Until then, all new developments will pause to assess the unfolding market conditions.”