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.
Uncertainty Causes Rising Vacancy Rates
193
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 been pre-leased to Covington & Burling LLP. Other significant projects include NPR’s new 450,000-square-foot headquarters on North Capitol Street, and StonebridgeCarras’ 400,000-square-foot Constitution Square development located adjacent to the Department of Justice’s 900,000-square-foot headquarters.
Outside of the District of Columbia, the Northern Virginia office market has been and will continue to be significantly impacted by the implementation of the Base Realignment and Closure Act (BRAC), which was announced in 2005. BRAC will relocate Department of Defense users to new developments on nearby military bases, including Fort Belvoir and Marine Corps Base Quantico in Virginia, as well as Fort Meade and Andrews Air Force Base in Maryland, and will likely result in a net of 2,000 new jobs in the region, most of which will be outside the Beltway. More than 2 million square feet was vacated as of the second quarter of 2012. An additional 2.5 million square feet is scheduled to be vacant by the end of 2013, but some agencies have executed short-term extensions, as is reflected in the negative 2.5 million square feet of net absorption in Northern Virginia since the beginning of 2012.
New development in Northern Virginia can be seen in areas expecting substantial growth due to BRAC, but is more commonly centered on Metro locations, such as the Rosslyn-Ballston Corridor and the new Metro station in Tysons Corner and Reston that is scheduled to open in 2013. Nearly half of the 3.1 million square feet under construction in this market is made up of three projects that are all Metro-accessible, including the 524,432-square-foot Tysons Tower in Tysons Corner; a 476,313-square-foot project in Reston; and 1812 N Moore Street, a 580,000-square-foot project in Rosslyn.
The suburban Maryland submarkets have always been known for slower growth. The most attractive submarkets for investment opportunities continue to be those with a mixed-use component or Metro location, including Bethesda, White Flint, Washingtonian and Twinbrook. These submarkets have 1.4 million square feet under construction, 54 percent of which is pre-leased. Two large development projects of note are Metro-accessible build-to-suits: 5601 Fishers Lane, the 490,998-square-foot building for the National Institute of Allergy and Infectious Diseases (NIAID) in Rockville, and North Bethesda Center 1, the 358,440-square-foot mixed-use development for the U.S. Regulatory Commission in North Bethesda.
— Patrick Shooltz, senior vice president and regional director of the Mid-Atlantic with New Boston Fund
previous post