The Washington DC office market saw limited growth in the third quarter of 2012, with net absorption of only 12,000 square feet. Vacancy rates fell slightly to 10.3% despite uncertainty around elections and government spending keeping demand cautious. Average asking rents rose modestly by 1.2% over the quarter. Small to mid-size private sector tenants such as law firms and non-profits drove the limited demand while the public sector remained stalled awaiting policy decisions. No new supply was delivered in the quarter and vacancy is expected to remain flat with modest rental growth over the next 18 months due to a lack of significant demand drivers.
1. Office Market Snapshot
Washington, DC • Third Quarter • 2012
Market Tracker Vacancy Net Absorption Deliveries Asking Rent
*Arrows = Current Qtr Trend 10.3% 12,000 SF 0 SF $50.17 FS
Uncertainty Slows Office Market Recovery
Uncertainty surrounding the elections, tax reform and government spending kept Washington, DC office
market tenants cautious during the third quarter of 2012. The limited momentum of the first half of
2012 continued into the third quarter, as only 12,000 square feet was absorbed. This mere ”drop in the
bucket” demand brought the year-to-date total net absorption to a negative 34,000 square feet. Still,
despite the slower pace of growth, and with new supply in check, vacancy fell slightly to 10.3% following
three consecutive quarters at 10.4%. Average asking rents rose modestly by 58 cents, or 1.2%, over the
quarter to $50.17 per square foot on a full service basis, and by 80 cents, or 1.6%, year over year.
WASHINGTON, DC OFFICE
Small and mid-size tenants drove demand for office space. Those tenants– primarily private sector ones
Economic Indicators – were a diverse mix of law firms, government affairs offices, education-related entities, executive suites
and non-profits. Gross leasing activity remained stable over the quarter, with the bulk of activity
Q3 12 Q3 11 occurring in the core submarkets of the East End and the Central Business District (CBD). Tenants
continued to adopt cautious and defensive leasing approaches, either cutting down on their average
DC Metro Employment 2.5M 2.4M square foot per employee or growing conservatively. Only a handful of transactions represented net
growth. Aside from a couple of lease renewals, demand from the public sector remained stymied with
DC Metro Unemployment 5.5% 6.0% both landlords and tenants awaiting policy decisions and greater government budget clarity. However,
during the third quarter a few agencies downsized into already leased spaces, as total public sector net
U.S. Unemployment 8.2% 9.7% absorption totaled a negative 140,000 square feet – the second lowest quarterly level in at least three
years.
U.S. CCI 65.64 50.26
Amid the vast majority of tenants finding creative solutions to reduce space requirements, a handful
found it advantageous to expand their real estate footprints. Georgetown University, for example, signed
the top non-renewal lease in the District during the third quarter which accounted for approximately
Net Absorption 90,000 square feet of net growth. Offsetting that, however, was law firm Dewey & LeBoeuf’s return of
about 125,000 square feet to the East End submarket, the result of the firm’s bankruptcy. The
5.0 non-profit United Nations Foundation signed the second largest non-renewal lease of the quarter for
4.0 85,000 square feet, accounting for over 35,000 square feet of net growth in the CBD submarket.
Square Feet (mil)
3.0
In a chronic-uncertainty-plagued environment in which landlords compete for a finite set of tenants in
2.0
the market, some landlords, looking to increase occupancy levels, assumed several millions of dollars of
1.0
lease liability in order to secure a tenant. A few large law firms, in fact, are (as of the writing of this
0.0
report) in lease negotiations for this reason, with leases likely to be signed in the next couple of
-1.0
quarters.
2007 2008 2009 2010 2011 YTD
2012
No new office supply was delivered to the Washington, DC office market in the third quarter of 2012.
However, four office projects totaling 480,000 square feet are scheduled to deliver by the end of 2012,
37% of which was available at the end of the third quarter. The remaining development pipeline will
Vacancy Rate deliver approximately 1.5 million square feet to the District of Columbia in 2013, 32% of which was
preleased at the end of the quarter. Look for MRP Realty to break ground on a speculative basis next
quarter on approximately 111,000 square feet at 900 G Street, NW scheduled to deliver mid-2014.
13%
12%
11%
Forecast
10% Historical Average • Potential cuts in government spending and the consolidation of multiple leased spaces into single
9% locations may ultimately reduce the government’s space needs.
8%
7% • Concerns over the effects of mandated federal spending cuts in early 2013 on local businesses will
6% remain a factor in hiring decisions.
5%
• A lack of significant demand drivers and flat vacancy rates will keep overall asking rental rate
4%
2007 2008 2009 2010 2011 2012 increases modest to flat over the next 18 months.
• Growth is expected to remain subdued through 2013, with the private sector driving the bulk of
office demand in the near term. Tenants across industry sectors will likely continue a “wait and
see” approach to leasing decisions.
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