The pandemic recovery across the national office market has yet to solidify in downtown Seattle, forcing landlords such as Blackstone to accept steep price cuts.
The private equity giant's subsidiary Perform Properties is in the final stages of a deal with Spear Street Capital to sell the U.S. Bank Center tower for $280 million, less than half what it paid for the building seven years ago.
While the U.S. Bank Center sale has not been finalized and could still fall through, if realized it would mark the latest substantially discounted deal in Seattle. That's a market where property owners have struggled with significant occupancy losses — and demand at just a fraction of what it was before the 2020 pandemic outbreak.
The New York investment conglomerate acquired the 44-story building for more than $610 million in the most expensive office acquisition of 2019. It enlisted the help of brokerage Eastdil Secured earlier this year to market the 944,000-square-foot property at 1420 Fifth Ave., which CoStar data shows is currently about 45% vacant.
U.S. Bank Center's last price tag was largely justified given the tower's more than 97% occupancy rate at the time of the deal. Blackstone's bet reflected the Seattle office market's strengthening reputation as a global tech hub and represented an attractive investment opportunity.
Yet the pending sale agreement with San Francisco-based Spear Street, earlier reported by Bloomberg, shows how dramatically the tables have turned as downtown Seattle's vacancy rate has soared to historic highs.
"We believe this sale is the most optimal outcome for our investors and all parties involved," a Blackstone representative told CoStar News. They added that the firm's stake in the traditional U.S. office market accounts for less than 1.5% of its total portfolio, and that it "effectively wrote off this investment in 2023."
Spear Street Capital did not immediately respond to CoStar News' requests for comment.
Bet on a comeback
The $280 million price tag for the U.S. Bank Center building is especially notable given the capital Blackstone invested several years ago to upgrade and reposition the property ahead of what it expected to be rebounding demand.
While that recovery has yet to materialize, the more than $70 million renovation transformed the tower's three-story open-air lobby and retail area. It now houses a popular coffee shop, myriad coworking and lounge spaces, and public seating, creating an attractive hangout spot that is far more populated than the downtown Seattle sidewalks outside the main entrance doors.
It also spotlights an interesting dynamic in which the city's central business district has been left out of the market's broader resurgence.
Investors, including Blackstone, have focused their attention and capital on the eastern suburbs that have long attracted the likes of tech giants such as Amazon, Microsoft, Meta and OpenAI, among others. Bellevue, specifically, has long been a hot spot for high-profile tenants setting up satellite offices away from their Silicon Valley campuses.
Suburban Bellevue's office availability rate is less than 8.5%, according to CoStar data, just a fraction of the nearly 20% reported across the broader Seattle area.
The deal could also provide Spear Street with a window into a market that other Seattle-area stakeholders say has hit rock bottom and is poised to recover.
Landlords such as Hudson Pacific Properties and Kilroy Realty have pointed to a recent spike in touring and negotiations as activity begins to shift westward across the lake and back to downtown Seattle. What's more, the neighborhood's large blocks of available space could work in its favor as tenants, particularly fast-growing artificial intelligence startups, are signing deals and expanding their real estate portfolios.
"Demand in Seattle has picked up tremendously," Arthur Suazo, Hudson's executive vice president of leasing, told analysts earlier this month. He added that of the real estate investment trust's total leasing pipeline, about a quarter consists of deals based in Seattle.
"We're benefiting from the tightness of the market in Bellevue and from the diminishing trophy space that had been on the market," Suazo said. "Tenants are out in the market now and are focusing on the downtown core. Tour activity is up quarter over quarter, and they haven't increased anywhere more than in Seattle."