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  • Washington, D.C. Office Market Sends Mixed Signals in Q3 2016: Negative Absorption Juxtaposed with Rise in Speculative Construction and Investment Sales

Washington, D.C. Office Market Sends Mixed Signals in Q3 2016: Negative Absorption Juxtaposed with Rise in Speculative Construction and Investment Sales

October 3, 2016
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Washington, D.C. –October 3, 2016 – CBRE Group, Inc. announced the third quarter office market overview for the greater Washington, D. C. region. Following seven quarters of positive net absorption, the District’s first taste of negative absorption, at almost 50,000 sq. ft. in Q3 2016, was due in part to the continued delay in leasing decisions, exacerbated by the upcoming elections. However, overall demand is still positive on a year-to-date basis at 177,000 sq. ft. Cumulative net absorption over the prior 24-month period to more than 882,780 sq. ft. 
 
Despite  shrinking demand this quarter, reflecting both overall positive demand and flight to quality, the District is witnessing a rise in speculative development in 2016. Of the six buildings that broke ground this year, three did so on a speculative basis. In all, there are 12 buildings currently under construction in the District of which nine began speculatively. These nine projects total 2.1 million sq. ft. and are currently 22% preleased. In addition, in the Central Business District, there are more than 2.84 million sq. ft. of planned redevelopment in the pipeline from 14 buildings over the next six years.
 
Washington, D.C.’s co-working segment continued to grow, with MakeOffices expanding operations to more than 45,000-sq.-ft. space in Uptown, marking its third signed lease in the District this year. The co-working sector accounted for 10% of leasing activity year-to-date, up from 2% in 2015.
 
Investment sales volume increased by almost 90% from the second quarter, including 11 closed transactions, totaling more than $1 billion in sales and 2.6 million sq. ft. of office space, but overall volumes are still below that of 2015.
 
“We are closely monitoring the shift from positive to negative absorption and it is indicative of the mixed signals the local real estate market is sending. On the demand side, companies are waiting and watching before making major real estate decisions,” said Revathi Greenwood, Director of Research, CBRE Washington, D.C.-Baltimore. “Concession packages are at an all-time high. However, we are also seeing a rise in speculative development, a reaction to the tighter market conditions in the trophy sector.”
 
Q3 Market Highlights:
 
Northern Virginia
The Northern Virginia office market is bustling with construction activity, recording a three-year high as three new projects broke ground this quarter, totaling more than 750,000 sq. ft. There are more than 3 million sq. ft. currently under construction with 62% preleased.
 
With more than 280,000 sq. ft. of growth over the previous quarter, technology and co-working continued to drive demand during Q3 2016, expanding by 255,000 sq. ft. Growth was driven by Applied Predictive Technologies (APT) expanding by more than 50,000 sq. ft. in their relocation to 4250 N. Fairfax Drive and WeWork executing its first lease in Fairfax Country for more than 90,000 sq. ft. at 1775 Tysons Boulevard. Additionally, a significant amount of properties have entered the market or remain available, with half of the 15 assets located in the Tysons submarket, further demonstrating strong demand for Metro-accessible product.
 
Despite two consecutive quarters of growth, year-to-date net absorption remains negative at more than 84,000 sq. ft. with a flat vacancy rate of 18.2%.
 
Suburban Maryland
The Suburban Maryland investment sales market rose 34% year-over-year, nearly doubling the five-year average to total $963 million. Private investors in the Suburban Maryland region have been the primary driver of this activity, representing more than 60% of the buyers.
 
The region saw positive net absorption for the fourth consecutive quarter, the first time since 2007, due to stabilized vacancy rates, a limited construction pipeline and current users such as WeddingWire Inc., 2U and Morgan Stanley Smith Barney expanding around the area. 
 
Job growth was a shining light in this market as the unemployment rate currently sits at 4.1%, lower than the overall state of Maryland and the national average. Additionally, the government sector added 6,000 jobs and professional and business services increased jobs by 2,200.
 
Baltimore
Leasing velocity in Baltimore increased as tenants continued to seek workplace efficiency and live-work-play opportunities, with more than 1.2 million sq. ft. of leasing activity market-wide, well above historical norms of 291,500 sq. ft.  In downtown Baltimore, much of this is due to volume in the Pratt Street Corridor, which has a current vacancy rate of 8.8%, significantly below the submarket average of 19.1%. 
 
Outside the Central Business District and Pratt Street, the Baltimore office market continues to buck the national trend, as fundamentals in suburban submarkets outpaced the downtown core for the sixth consecutive quarter with more than 56,000 sq. ft. of positive net absorption over the urban submarkets. 
 
Despite a decrease in investment sales volume this quarter, Baltimore still posts strong year-to-date transaction volume, nearly 75% of the annual five-year average. Market activity was marked by the relatively unusual absence of foreign investors in this market. Private and institutional investors create 82% of the total transactional volume.
 
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​.
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