by Brianna Crandall — April 12, 2013—A rise in preleasing activity and a slowdown in the development pipeline suggests the greater Washington, DC, office market is stabilizing, according to first quarter market reports released April 1 by Jones Lang LaSalle, a global financial and professional services firm specializing in real estate. The scope of the report extends as far as the Baltimore, Richmond and Hampton Roads areas.
“While many large tenants are being proactive and entering the market today well in advance of their 2015-2017 lease expirations, near-term tenant demand is limited,” said Mike Ellis, Mid-Atlantic Market Director for Jones Lang LaSalle. “This is creating uncertainty in the greater Washington leasing market and giving considerable leverage to tenants. As a result, rental rates have not changed materially over the past eight quarters and concessions remain near all-time highs.”
JLL’s Washington, DC Marketscape report indicates that challenges remain in the federal realm as the government has reiterated its intent to implement space reduction targets. Most recently, the Office of Management and Budget (OMB) mandated a “freeze the footprint” policy on all federal departments and agencies. OMB has issued a May 15 deadline for all federal tenants to submit three-year plans to reduce their occupancy, underscoring the sense of urgency that has been created within government to rein in expenses.
“Most of the large near-term lease expirations were spoken for in 2011 and 2012, and there are only a handful of large, unencumbered blocks available, so we expect attention to shift to small and mid-sized tenants that remain in the market,” said Scott Homa, Vice President for Mid-Atlantic Research, Jones Lang LaSalle. “In fact, smaller tenants, especially those searching for space in second- and third-generation buildings, have numerous space options.”
According to the report, landlords also continued to look to the technology sector as a source of tenants. Of particular interest are incubators, which are financially stable thanks to funding through public-private partnerships with the DC government.
NORTHERN VIRGINIA
As to the areas surrounding DC, demand in Northern Virginia remained slow as businesses awaited the impact of sequestration. As sequestration kicked in, government contractors prepared for cuts by rightsizing their workforce and shedding excess real estate. Jones Lang LaSalle expects the market will recover slowly and incrementally as the fiscal cliff and other milestones force some type of political action.
According to the report, deal flow and tour activity remained highly segmented across the suburbs and did not spread across all submarkets. Class B building in the Rosslyn-Ballston Corridor, which has rental rates in the high $30s to low $40s per square foot, saw relatively robust activity, while submarkets outside the Beltway languished.
Jones Lang LaSalle research recorded a slight uptick in tenant activity around Tysons Corner and Reston, as many tenants sought to recast leases in anticipation of rental rate increases tied to the Metro’s new Silver Line. However, concession packages remained near record highs. No office projects broke ground in Northern Virginia during the first quarter.
SUBURBAN MARYLAND
In suburban Maryland, leasing was dormant, according to the report. Activity in downtown Bethesda, typically the first mover in the Maryland market, was virtually non-existent in the first quarter, and the Silver Spring market saw a contraction in leasing activity in the first quarter.
“The commercial real estate market in Maryland reached a relative standstill in the first quarter, with an under-construction pipeline of less than 1 million square feet and a top lease that was less than 100,000 square feet,” said Sara Hines, Research Analyst for Jones Lang LaSalle.
INVESTMENT SALES
According to the report, Northern Virginia saw $485.1 million in investment sales volume in the first quarter of 2013, more than double the previous year’s total for the same quarter. Sales generally consisted of properties with low vacancies and few upcoming tenant rollovers. With the sale of the Air Rights Center in downtown Bethesda, suburban Maryland also saw a substantial year-over-year increase, added the firm.
While investment sales activity was slow in Washington in the first quarter, pending sales totaled more than $200 million, the report found. In addition, at least five properties are being actively marketed in the District, which should increase sales volume in the second quarter. Low interest rates and an abundance of buying power on the sidelines continued to bid asset prices to near all-time highs.
