Washington, D.C. Office Market Year in Review for 2016
Washington, D.C. Office Market Year in Review for 2016
January 3, 2017
Co-Working Emerges As Key Demand Driver
Washington, D.C. –January 3, 2017 – CBRE Group, Inc. announced its 2016 fourth quarter and year-end review of the commercial real estate markets in the greater Washington, D.C.---Baltimore region. Despite an increase in leasing volume in Q4, overall velocity in the District was down 31% over the 10-year average of 10.3 million sq. ft.
With 51,800 sq. ft. of overall negative net demand in 2016, vacancy rates ended at 12.6%-- an increase of 120 basis points year-over-year, the highest since 1992. The rise in vacancy rates is primarily attributed to over 750,000 sq. ft. of vacant space being added to the market via seven building completions in 2016.
Contractions by the legal and government sectors were the primary drivers of occupancy loss for the year, accounting for negative absorption of 266,000 sq. ft. and 446,000 sq. ft., respectively. The financial services sector was a source of growth with 120,000 sq. ft. of net demand in 2016.
Washington, D.C.’s co-working segment continued to be the key driver of net occupancy gain, accounting for 7.6% of total leasing activity in 2016, up from 2% in 2015. Co-working in the District accounted for 324,000 sq. ft. of net absorption in 2016.
The top vacancies were in the East End and Uptown. Although the East End accounted for the most leasing activity in 2016, it has been the largest contributor of negative net absorption. Across the region, tenants continue to seek Trophy product, adding the largest amount of positive net absorption in 2016 at 829,000 sq. ft. Class B buildings counteracted that growth with 823,000 sq. ft. of negative net absorption. Several large tenants vacated Class B buildings in non-core submarkets and moved to higher quality space including the Department of Homeland Security Office of the Inspector General, the Federal Election Commission and Amtrak.
Nine buildings are currently under construction in the District with deliveries slated for 2017 and 2018. This includes 700,000 sq. ft. of space preleased to Fannie Mae at Midtown Center, over 500,000 sq. ft. to the Advisory Board at 655 New York Avenue, NW and the anticipated $2 billion project, “The Wharf,” where law firm Fish & Richardson will occupy roughly 60,000 sq. ft. Additionally, Four Constitution Square at 150 M Street, NE, broke ground in Q4 and is 100% preleased to the Department of Justice. Overall, office projects currently under construction in Washington, D.C. have an average prelease rate of roughly 60%.
“2016 was a slower year than anticipated, due to the decline in leasing velocity caused by uncertainty from the presidential election. However, the market remains highly segmented as tenants continue to seek space in the top sector of the market—trophy buildings,” said Revathi Greenwood, Director of Research, CBRE Washington, D.C.--Baltimore.
Q4 and 2016 Market Highlights
The fourth quarter ended with 58,000 sq. ft. of negative net absorption, bringing 2016 absorption down to negative 85,000 sq. ft. However, vacancy remains stable at 18.2% for the second year in a row as 22318 Glenn Drive, a new 182,000 sq. ft. project 100% preleased to the GSA, delivered in Sterling, VA to offset the additional space in the market.
Leasing and net demand was dominated by the technology and business/financial services sectors in 2016, accounting for nearly half of all leasing activity and all of the net demand in the Northern Virginia office market. The technology sector leasing has increased substantially, accounting for 23% in 2016 compared to 7% of total activity in 2015.
Major submarkets continue to dominate leasing as Tysons, Reston and the Rosslyn-Ballston corridor accounted for 60% of all activity throughout 2016 and almost 600,000 sq. ft. of positive absorption. Relocations to prime, amenity rich sites continued throughout the year as companies such as CSC and M.C. Dean moved operations closer to a metro-accessible location.
The suburban Maryland office market witnessed the highest investment volume since 2006, with $1.7 billion in sales in 2016. Regionally, it saw positive net absorption of more than 657,000 sq. ft. for the year, a vacancy rate of 16.4%, and a limited development pipeline which only delivered 327,000 sq. ft. of office space in 2016.
The GSA contributed 1.2 million sq. ft. in leasing in 2016, accounting for more than 27% of the total market activity. The largest deals signed this year were the National Institutes of Health’s 495,000 sq. ft. space and the Nuclear Regulatory Commission’s renewal of 348,000 sq. ft.
Job growth remained strong as the labor market expanded 1.4% over the year with the creation of 14,000 jobs in November, bringing overall employment to 1,012,300. Office-using sectors added 5,100 new jobs year-over-year for 2016.
Rents have remained stagnant for the past four to five years. With tenants looking to cut overhead costs, focusing on live, work, and play in transit-accessible locations, landlords are attracting and retaining occupants by offering rich concessions.
Baltimore office leasing recorded nearly 100,000 sq. ft. of positive absorption in Q4, bringing 2016’s net total to almost 250,000 sq. ft. With a leasing volume of more than 3.2 million sq. ft. in 2016, small to mid-size tenants drove activity with more than 70% of transactions under 10,000 sq. ft. The healthcare industry, which posted 1,067,600 sq. ft. of activity, accounts for more than 35% of all deals signed in 2016.
Investment sales experienced a decrease in volume, down 36% from last year as vacancy rates stabilized at 14.3%. Construction activity increased 71% from the same time last year and is expected to increase in the next 12 months as the market is set to deliver more than 1.3 million sq. ft. of new inventory.
The Baltimore office market continues to buck the national trend, as fundamentals in suburban submarkets outpaced the downtown core for the entire year. The suburban submarkets experienced 377,000 sq. ft. of positive net absorption and an overall vacancy rate of 13.5%, while the urban submarkets experienced 127,000 sq. ft. of negative net absorption and an overall vacancy rate of 15.9%.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.