National Press Club: DCBIA DC Office Leasing Outlook

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Leasing & economic update presented to DCBIA at the National Press Club 10/11/12

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National Press Club: DCBIA DC Office Leasing Outlook

  1. 1. DCBIA Commercial RealEstate UpdateOctober 11, 2012 © Copyright 2012 Cassidy Turley. All rights reserved.
  2. 2. Big Pause in the Economy DC Metro: Total Nonfarm Employment, 000’s 2480 Office Trends: 2470 • No new demand for space 2460 • Vacancy inching up • Rents are flat to falling 2450 • Shift to short-term 2440 renewals Minimal job growth since February • Confidence is at a low 2430 • BRAC headwind is here 2420 1 M 2 A 2 A 1 O 1 Ja 1 A 2 Se 1 Ju 2 2 Fe 2 11 M 2 12 D 1 -1 -1 -1 l-1 1 -1 l-1 -1 -1 -1 -1 1 1 n- p- n- b- n- ct pr ar ay ug ug ec ov Ju Ju Ju N DC Metro Employment, 000sSources: BLS © Copyright 2012 Cassidy Turley. All rights reserved. 2
  3. 3. Employment Growth/Decline by Industry DC Metro, Aug 12 vs. Aug 11, Rolling 3 Month Av. (Industry Total Employment Level)Source: Bureau of Labor Statistics © Copyright 2012 Cassidy Turley. All rights reserved. 3
  4. 4. Fiscal Cliff Scenario Real GDP, Annualized % Under current law, the fiscal drag from spending cuts & tax increases will sink the US into recession in 2013Source: Cassidy Turley Research © Copyright 2012 Cassidy Turley. All rights reserved. 4
  5. 5. Fed Expects NO Cliff Real GDP, Annualized % Under current law, the fiscal drag from spending cuts & tax increases will sink the 6% US into recession in 2013 4% 2% 0% -2% -4% -6% 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 Fiscal Cliff Fed BaselineSource: Cassidy Turley Research © Copyright 2012 Cassidy Turley. All rights reserved. 5
  6. 6. Consensus Expects NO Cliff GDP, Annualized %Source: U.S. Bureau of Economic Analysis (BEA); National Association of Business Economics (NABE) © Copyright 2012 Cassidy Turley. All rights reserved. 6
  7. 7. Federal Spending Slows, but NO Cliff DC Metro: Federal Outlays, billions $ $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Reagan Bush I Clinton Bush II Obama Obama/Romney Republican Controlled House Democrat Controlled House Light Colored Bar = Opposite Party PresidentSources: Consolidated Federal Funds Report; GMU Center for Regional Analysis, Cassidy Turley © Copyright 2012 Cassidy Turley. All rights reserved. 7
  8. 8. Despite all of this… DC Metro share of US GDP DC Metro Rankings: #1 Lowest Unemployment #1 Educated Workforce #1 Real Estate Market by ULI #2 Job Growth Since 2000 #3 Population/Net MigrationSource: Cassidy Turley Research © Copyright 2012 Cassidy Turley. All rights reserved. 8
  9. 9. There is Strength Household balance sheets looking much betterSource: U.S. Board of Governors of the Federal Reserve System, U.S. Bureau of Economic Analysis © Copyright 2012 Cassidy Turley. All rights reserved. 9
  10. 10. There is Strength Median Existing Home Prices: % Year-over-Year Change DC US Growth Growth 2.5 yrsSource: National Association of Realtors®, Moody’s © Copyright 2012 Cassidy Turley. All rights reserved. 10
  11. 11. There is StrengthJob Growth: % Chg. August 2012 over August 2011 Strong Growth Moderate Growth Below U.S. Growth © Copyright 2012 Cassidy Turley. All rights reserved. 11
  12. 12. DC Metro Job Growth Forecast 20 Year Historical AverageSource: Bureau of Labor Statistics, George Mason University, Moody’s, Cassidy Turley © Copyright 2012 Cassidy Turley. All rights reserved. 12
  13. 13. DC Metro Office Leasing © Copyright 2012 Cassidy Turley. All rights reserved. 13
  14. 14. Washington Metro Deliveries – Net Absorption – Vacancy 18 16% 16 14% 14 12% Square Feet (millions) 12 Vacancy Rate 10 10% 8 8% 6 4 6% 2 4% 0 2012f 2013f 2014f 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2% -2 -4 0% New Deliveries Net Absorption Vacancy Rate 10 Yr Avg. Deliveries 7.9m sq ft 10 Yr Avg. Net Abs 3.4m sq ftf= forecastSource: Cassidy Turley Research © Copyright 2012 Cassidy Turley. All rights reserved. 14
  15. 15. Leasing Activity Slows DC Metro Gross Leasing Activity, millions sq. ft. 45 40 35 Square Feet (mill.) 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD YTD 2011 2012 Annual Avg. Gross Absorption: 25.9 MSFSource: CoStar, Cassidy Turley Research © Copyright 2012 Cassidy Turley. All rights reserved. 15
  16. 16. New Space Dominates 2007 – Q3 2012, millions sq. ft. 20 15 10Square Feet (mill.) 5 0 District Northern VA Suburban MD -5 -10 -15 Total New Delivered New Space Absorption Relet Space Absorption © Copyright 2012 Cassidy Turley. All rights reserved. 16
  17. 17. Office Vacancy: Winners/Losers Percentage point change, 3Q 12 vs 3Q 11 Clarendon/Courthouse -4.1 Fairfax Center -2.2 North Rockville -1.9 50/66 -1.3 Improved Route 28 South -1.2 Herndon 3.2 Deteriorated Ballston 3.5 Route 7 5.5 I-395 9.9 Crystal City 13.5 -5 0 5 10 15*submarkets >1.5m sq ft © Copyright 2012 Cassidy Turley. All rights reserved. 17
  18. 18. Effective Office Rents Per Square Foot, Full Service $45 $42.46 $40 $35 $30 $26.36 $25 $21.55 $20 2000 1Q 2001 1Q 2002 1Q 2003 1Q 2004 1Q 2005 1Q 2006 1Q 2007 1Q 2008 1Q 2009 1Q 2010 1Q 2011 1Q 2012 1Q DC VA MDSource: REIS, Cassidy Turley Research © Copyright 2012 Cassidy Turley. All rights reserved. 18
  19. 19. Washington, DC Deliveries – Net Absorption – Vacancy 7 14% 6 12% Square Feet (million) 5 10% Vacancy Rate 4 8% 3 6% 2 4% 1 2% 0 0% f f f 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 New Deliveries Net Absorption Vacancy Ratef= forecast Annual 10 Yr Avg. Delivered: Annual 10 Yr Avg. Net Absorption:Source: Cassidy Turley Research 2.5 MSF 1.5 MSF © Copyright 2012 Cassidy Turley. All rights reserved. 19
  20. 20. Transaction DistributionDistrict of Columbia: # of Transactions © Copyright 2012 Cassidy Turley. All rights reserved. 20
  21. 21. Demand shifts back to the “Core” Net Absorption (sq. ft.) & Vacancy Rates 12.5% 9.8% 10.1% 4.1% 10.8% 6.9% 17.3% 7.4%500,000400,000300,000200,000100,000 0 CBD East End West End/ Capitol Hill NoMA SW Capitol Uptown-100,000 Georgetown Riverfront/ SE-200,000-300,000 2011 YTD 2012 © Copyright 2012 Cassidy Turley. All rights reserved. 21
  22. 22. DC Metro OutlookNext 18 Months• Weak job growth overall, though growth in – Lobbying, Corporate government relations – Healthcare – IT & Finance (suburbs)• Federal government & contractor reductions• Flat to falling effective rents• Strong demand/pricing for trophy properties2014 & Beyond• Return to normalcy: – 30-40k annual job growth – 4-5m sq ft annual office demand – Eroding vacancy – 3%+ rent growth © Copyright 2012 Cassidy Turley. All rights reserved. 22
  23. 23. © Copyright 2012 Cassidy Turley. All rights reserved. 23

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