In 2013, Washington’s office market has been characterized by tenant-favorable conditions, lower-than-average deal volume and absorption reliant on a handful of major transactions. The metropolitan area has recovered its pre-recession employment levels; however, with the federal government being the region’s major economic driver, there has been considerable impact on the office market from BRAC (Base Realignment and Closure), sequestration, the recent government shutdown and the failure of Congress and the President to permanently resolve budget and debt-ceiling issues. And while sequestration technically took effect in 2013, many major tenants, in anticipation of cutbacks, began right-sizing their occupancy well in advance. Obviously any tenant whose revenues depend on government contracts led the charge in this proactive right-sizing movement. At the same time, federal tenants face a mandated reduction in their utilization rate, and private-sector tenants are looking for more densely packed, open-workspace floor plans as demonstrated by tenants leasing less space as they relocate. Notwithstanding the apparent economic headwinds, it is a remarkable time for confident tenants to lock in favorable terms. Concession packages, which comprise improvement allowances and rent abatement periods, are at all-time market highs, and landlords have demonstrated a willingness to restructure leases considerably in advance of expirations. …
Market Reports
The Washington, D.C., area boasts the lowest unemployment rate among major metros, at 5.5 percent as of February 2013, which is about two percentage points below the total U.S. unemployment rate of 7.6 percent. In the 12 months prior to February 2013, the area fell only behind New York, Los Angeles Basin and Houston in terms of job growth, with 39,700 new jobs created. At the same time in 2012, retailers shed approximately 1,100 jobs. While the effects of sequestration legislation are still unknown, the projected job growth from 2013 to 2017 is estimated to average 48,100 per annum. Two rapidly growing industry sectors are cybersecurity and healthcare. The Washington area also has an average household income of $108,400, making it an impressive 59 percent higher than the U.S. average. Incomes grew by 43 percent from 2000 to 2012, compared to 20 percent nationally. By 2017, the area’s average income is estimated to rise 14 percent, still higher than 13 percent nationally. Retail inventory (all types) for the Washington metro area totals approximately 220 million square feet. As of March 2013, the overall vacancy rate was 4.8 percent — the lowest in the nation. The market has seen no overall …
Washington, D.C. continues to grow and thrive but in a very different manner than it did in the past. While the national debt surpassed $16 trillion, the local economy has benefited from the government spending — which has resulted in the metro area having the lowest unemployment rate in the country. Additionally, D.C. continues to reap the benefits of having seven out of the top 10 wealthiest counties in the United States located within the metropolitan trade area. Furthermore, Generations X and Y are changing the real estate landscape by rejecting the baby boomer suburban ideology and opting to migrate to the city for non-committal rental housing, public transit, and a closer proximity to work and shopping. As many retailers will attest, if you are not growing, you are dying. The District has always been a vital market for retailer expansion. Today, with a floundering American economy and fewer opportunities for growth in the middle of the country, Washington has become a focal point for retailer expansion. For example, YO! Sushi, the British conveyor belt sushi concept, elected to open its first North American unit at D.C.’s Union Station. In addition, Walmart spent significant time and money creating unique store …
The uncertainty created by the nation’s current economic and fiscal conditions continues to dampen confidence for both government and private sector tenants resulting in increasing vacancy rates and declining net absorption in the D.C. market. In anticipation of the looming possibility that the government will fail to resolve its budget impasse, and so enforce mandated federal budget cuts (i.e., “sequestration”), companies that rely on federal spending are consolidating operations, discarding excess space and deferring leasing decisions. As a result, the Washington, D.C., vacancy rate, which has been in the mid-single digits for at least the last decade, has steadily increased since 2010 to over 12.5 percent as of the second quarter of 2012. The D.C. market’s leasing activity has been dominated by lease renewals, totaling 87 percent of all leasing activity in 2011 and 70 percent for the first half of 2012. Despite the economic uncertainty, the D.C. market continues to see new development activity, with nearly 2 million square feet currently under construction, and more than 70 percent of this space pre-leased. The 10-acre, mixed-use CityCenterDC project on the former Convention Center site has approximately 500,000 square feet of office space currently under construction, 77 percent of which has …
A slight decline in vacancy this year confirms that Washington, D.C.’s apartment sector is in a new phase, where a closer alignment in tenant demand and completions will maintain vacancy within a tight range. Solid rental absorption promises to persist as employers hire workers who create new households and homeownership remains out of reach for many who cannot qualify for mortgages. However, potential cuts in defense spending might dull future housing demand in Virginia. The difference in the multifamily market at mid-year 2012 and one year ago shows the revival of residential construction as developers have cranked up production of all types of housing. Multifamily starts have jumped and represent more than 40 percent of all residential groundbreakings over the past year, approximately two times the typical proportion. All sections of the market will receive new multifamily stock this year, with only modest growth expected in Maryland offset by significant completions in Virginia. Meanwhile, most of this year’s production in the district will come online in the second half of 2012, limiting the extent of vacancy declines in the third and fourth quarters. Positive job growth supported growth in D.C.’s multifamily sector. Employers added 25,200 workers in the first six …
Washington, D.C.’s suburban industrial markets in Maryland and Northern Virginia have seen limited new development due to supply constraints for well-located and developable land. Currently, suburban Maryland’s industrial activity is centered around the redevelopment of inefficient but well-located properties to meet the needs of today’s warehouse users that require features such as ceilings with at least 24-foot clear heights, 120-foot truck loading courts, trailer-drop areas and flexible configurations with 50-foot on center column spacing. With its strong fundamentals, the industrial property investment sales market continues to be a focus for institutional investors and REITs. Despite overall economic sluggishness, both markets have strong upside potential. Suburban Maryland Exemplifying suburban Maryland’s redevelopment trends, Chesapeake Realty Group, Oakmont Industrial and Carlyle Group are renovating a 368,000-square-foot former special-purpose facility into a new, modern general- purpose distribution center along the eastern Capital Beltway network. A similar deal involves the renovation and Nash Finch’s subsequent 500,000-square-foot lease of a former Giant Food ’60s-era distribution center. This single transaction led to the vacancy rate falling to below 9 percent in the Landover submarket. Limited new development is occurring along the main transportation arteries feeding into D.C.’s CBD. Demand drivers include regional distributors and service companies catering …
The watchwords for D.C. tenants in fourth quarter, and throughout 2011, were efficiency and flexibility. While many companies opted to renew leases and maintain existing footprints, others relocated and took the opportunity to streamline their operations. This “doing more with less” approach has proven particularly appealing in the face of political uncertainty and economic headwinds and firms are finding they’re able to save significantly on occupancy costs along the way. Writ large, these actions are contributing to an upward trend in availability and are likely to lower the aggregate demand for office space in D.C. for a long time to come. At the height of the economic downturn, companies were forced to reorganize their operations and create leaner organizations in an effort to reduce financial commitments. This heightened efficiency is now being implemented as a long-term cost-savings strategy and tenants are not eager to alter this new model. The real estate decisions made by law firms, in particular, have been demonstrative of this trend as recent leases have resulted in a net decrease in firms’ occupied space. This is especially telling since new leases typically account for both today’s space needs as well as room for expansion during the lease …
Market Overview Unlike most major markets across the U.S., the retail real estate landscape in the Washington, D.C. MSA, which includes the inner-city core as well as Northern Virginia and nearby Maryland, looks quite similar to that of 2006. While most big cities face the issue of too much supply and not enough demand, D.C. is busy developing new centers to keep up with demand. For example, Hines’ CityCenterDC project in downtown D.C., now under construction on the 10-acre site of the District’s old convention center, is a 2.5 million-square-foot mixed-use project that promises to have a major impact on the East End of downtown. The 1.3 million-square-foot first phase, slated for completion in late 2013, is set to include office buildings, condos, apartments, 185,600 square feet of retail, a park and a central plaza. Upon completion, the retail portion will total about 400,000 square feet. Inside the Beltway, 10-acre sites aren’t easy to come by and, given its critical mass, CityCenterDC has the potential to be a game-changer in this market. Two of the city’s waterfront areas are also seeing major development. Thanks to the efforts of Forest City Washington and a host of other developers, the Southeast Waterfront …
To take measure of the recession’s effect on office transactions in the Washington market, simply watch the city’s tenant base. In a town where the market-wide vacancy rate is 10.8 percent, lessees are being very careful about any real estate moves they make. Tenants who are active are obtaining short-term deals, hoping a brighter day is in the immediate future. “Getting decisions made takes considerably more time than in years past,” says Wendy Feldman Block of Studley’s Washington office. “Although some people feel that tenants are showing less hesitancy recently than they were 6 months ago, it’s very painful getting decisions made.” Hesitancy among landlords also is contributing to the city’s transactional slump. These owners are in financial trouble, but tenants are requiring massive tenant improvement packages and free rent before leases are signed. This culture leaves landlords in a bind; they want to get space leased up, but they also have to make money. If tenants were more prevalent, finding other interested parties wouldn’t be a problem, but the tenant pool has become smaller and smaller. “There are too few tenants for too much space — particularly for those who have requirements that are under 50,000 square feet,” she …
While the recession has impacted NOIs in the Washington area, the local apartment market has weathered the economic downturn better than in most metros. The 60 basis point year-to-date rise in vacancy to 6 percent is the most glaring effect of the recession. Although rents remain resilient, asking rents inched up 0.4 percent in the most recent 3-month period, while effective rents declined for only the second quarter since 2004. Job losses have weighed the most on Class A asking rents, particularly in areas where rent gains were sizable recently, such as Pentagon City/Crystal City, the Connecticut Avenue Corridor and Rockville. The district’s Dupont Circle, Logan Circle and Columbia Heights neighborhoods, however, are notable exceptions to this trend, as these areas remain desirable to renters. Lower-tier asking rents have managed to push higher in many locations, although softer rents and vacancy rents have been recorded in the Anacostia/Northeast D.C. and Stafford County submarkets. Development completions are accelerating this year, and the construction pipeline is expected to remain relatively full through 2010, posing a further threat of concession increases. A metro-leading 9,000 units are under consideration in Virginia, while there are 6,600 units planned in the district and 3,900 units proposed …
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