An increase in vacancies across the board is reduction in demand, plain and simple.

That the new equilibrium price to re-tenant all the buildings is lower is evidence of that.

But the OP is correct that when enough of the building owners default on their debt, the building will be foreclosed, sold for less and asking rents will go down towards the new equilibrium price.

Thus occupancy is likely to improve again down the line.

But, yes, this is not a bullish situation for Seattle. Office generally hasn't been doing well nationally, so it's more of a question of relative performance.