by Shane Henson — January 31, 2014—Within downtown Washington, DC, the 1.5 million square feet of office product under construction is 79.2 percent preleased, an all-time high for the market, according to the fourth quarter office market report for the national capital region from global real estate services firm Jones Lang LaSalle (JLL).
The quarterly summary provides local economic and real estate market conditions for individual metro areas in the United States. The report also includes key market indicators, tenant and landlord perspectives, and future-looking analysis.
The graph and report offer data on key market indicators, including the direct vacancy rate.
(Click on image to enlarge)
Per the report, Washington DC Office Insight—Q4 2013, the overall construction pipeline in the metropolitan Washington region (including the Virginia and Maryland suburbs) is 58.5 percent preleased, significantly above the long-term average of 47.3 percent.
“The Washington market always tightens from the top down, and there are limited large blocks of new, efficient space,” said Mike Ellis, Mid-Atlantic market director for JLL. “While it won’t be a landlord market in 2014, we will see balance restored and a more even playing field as the rightsizing trend hits a tipping point.”
According to the report, the pullback in new construction will have a meaningful impact on the metro DC office market over the next 24 months. Although a few submarkets in the DC region, particularly Northern Maryland, have ample new space options available, most vacancy across the region is becoming concentrated in commodity Class A and Class B assets, buildings that are not well suited for efficiency-minded tenants.
From a tenant perspective, although defensive leasing decisions—including short-term renewals, consolidations and contractions—dominated transaction activity in recent years, the passage of a federal budget, scaling back of spending cuts and continued improvement in the economy suggest a resurgence in tenant demand could be around the corner. Many tenants have already adopted aggressive rightsizing measures and are operating in a lean and efficient manner. With corporate profits rising, tax and regulatory outlooks gaining clarity and companies sitting on record stockpiles of cash, capital investment in people and facilities could spark a rapid turnaround in the regional office market.
From a landlord perspective, competition among landlords remains fairly intense given stubbornly high vacancy rates and limited near-term, large-block space requirements. As a result, attracting new prospects and retaining existing tenants have required aggressive action. Renovations to add new amenities such as rooftop terraces and fitness facilities have been common among many second-generation buildings, and owners across the board continue to offer record levels of concessions to appeal to tenants’ cost-conscious motivations.
Also of note is that sublease space in the metro DC region fell to a 13-year low of 3.7 million square feet during the fourth quarter, says JLL. Meanwhile, growth of small and midsize tenants helped drive modest occupancy gains throughout Washington, DC, Northern Virginia and suburban Maryland during the fourth quarter.
JLL is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate.
