Everything Old is New Again

Transcription

1 MARKET REPORT OFFICE Second Quarter 2016 Everything Old is New Again Market Indicators Q (Projected) While the global economy remains on its Jekyll and Hyde path, the District s commercial real estate market continues to show improving market fundamentals. The District had positive absorption and a decreasing vacancy rate despite delivering 284,000 square feet of new space to the market. Development has been spurred by stable market fundamentals and now registers more square feet under construction than any quarter since However, one of the differences from 2009 to 2016 is the type of development under construction. The majority of space being built in 2009 was new ground-up construction. In 2016, the construction is more of a redevelopment play. Aging Class B buildings converted to Trophy quality buildings, as is the case of 2001 M Street that delivered this quarter, has become more popular. After a strong first quarter when a number of larger leases were executed, deal velocity in the second quarter was both small in the average size and in the number of deals over 100,000 square feet. Typically, the second quarter has lower deal velocity than other times of the year. That being said, there are some concerns regarding the lack of new deals to the market this quarter. Economic Throughout the first half of 2016, office-using job has been lackluster, with roughly 3,000 jobs created this year. The two sectors that showed the most growth in the first half of the year were professional and business services, which include law firms and information technology, and the advocacy sector. They increased 1.8 percent and 1.1 percent, respectively. The combined 3,700 jobs created by these two industries were slightly offset by job losses in the financial and media sectors. The government sector has remained largely unchanged adding roughly 70 jobs since the start of the year. An unknown variable that occurred which may have far-reaching effects in both the global economy and the local commercial real estate market comes from the British exit from the European Union. In the short term, the Federal Reserve is expected to keep interest rates relatively stable. The uncertainty stemming from the followup of this decision will likely keep the Fed cautious about rocking the boat. From a local commercial real estate perspective, the uncertainty complicates an already tumultuous market. Once the fallout from the move is better understood, the local real estate market should continue to improve. In the short-term, however, it is likely that many tenants will not be as comfortable making long-term real estate decisions. Summary Statistics Q Office Market All Classes Class A Class B & C Vacancy Rate 10.7% 11.7% 9.1% Change From Q (basis points) Absorption (Square Feet) New Construction (Square Feet) Under Construction (Million Square Feet) Asking Rents Per Square Foot Per Year , , , , , Direct Asking Rates $52.24 $57.55 $43.75 Change From Q % 0.5% 1.2% Direct Asking Rental Rates By Class NET RENTAL

2 YtD 2016 Demand Net absorption for the quarter was 264,788 square feet, the highest since the third quarter of On the heels of the first quarter s negative absorption, the significant growth posted this quarter pushed year-to-date numbers to 223,111 square feet. The positive absorption was focused exclusively in Class A product where it rotated 586,773 square feet. Significant negative absorption came from both Class B and Class C spaces, registering negative 301,006 and a negative 20,979 square feet respectively. Demand in Class A product continues to outperform lower quality space as tenants move into blocks left by the multiple, large tenants which have opted for new build-to-suit spaces. The vast majority of the absorption occured in the CBD, which registered 465,000 square feet of absorption in the second quarter at the expense of the East End submarket (which produced 230,000 square feet of negative absorption). The recent redevelopment of the Southwest submarket reaped rewards from a demand standpoint, as the American Psychiatric Association move created just under 100,000 square feet of positive absorption M Street NW (Delivered Q2 2016) Supply The one building that delivered in the second quarter highlighted the larger trend starting to manifest in the District: the redevelopment of aging buildings into trophy office product. The 284,000-square-foot 2001 M Street, NW delivered with the anchor tenant Bracewell LLP. This project transformed a well located but dated office building into an all glass, trophy office building - the style that has become so popular over the last several years. In addition, roughly 50,000 square feet of space was added to the building by bringing the façade th Street, NW (Under Renovation, Delivering Q1 2017) Demand / Supply Fundamentals Net Absorption, Change in Supply, Vacancy % 3.5 Net Absorption (Millions SF) % 10% 9% Vacancy (%) Net Absorption Supply Overall Changes Vacancy Rate 0.0 8% Overall Vacancy Rate % 0% OFFICE MARKET REPORT SECOND QUARTER 2016 COLLIERS INTERNATIONAL

3 closer to the street. Though 284,000 square feet of space delivered this quarter, the commencement of the renovation of th Street, NW removed 107,929 square feet of space from the market. This is one of the reasons that despite considerable new construction and modest net absorption, vacancy rates have remained relatively stable and low. Vacancy Rates While vacancy rates have consistently been trending upwards outside of the District, inside it has remained relatively stable over the last several quarters. Overall, the District s vacancy dropped 20 basis points this quarter to end the first half of the year at 10.7 percent, the lowest it has been in nearly a year. Positive absorption and limited deliveries were responsible for the decrease. An increase in sublease space this quarter is of note. During the quarter, it rose 10 basis points to 0.7 percent, matching its highest level over the last four years. Rental Rates Direct asking rental rates remained unchanged from the first quarter of 2016 to finish the first half of the year at $52.24 per square foot on a full service basis. Rising taxes and other operating expenses along with increasing concessions have resulted in net effective rental rates remaining flat or decreasing for several years. However, Class A and Trophy rents have outpaced rising costs and shown significant growth. Class A rents have increased by 8.5 percent over the last three years and Trophy rents have risen by 27.5 percent over the same time period. This compares to the Class B rate, which has only increase by 2.5 percent over the three years. Outlook Uncertainty in the market has long been extremely detrimental the District s office sector. Thanks to a hotly contested presidential election and tumultuous global economy, current growth projections are less certain than they were at the beginning of the year. Because of this, tenants in the market may find it difficult to make long-term decisions until the impact of some of these issues are realized. The exit of Britain from the European Union has some interesting potential outcomes that could affect the Washington, DC market. As a potential positive, foreign investors from UK and the Euro zone may seek to place money in the relatively low risk US commercial real estate market. With consistent, if low, returns in the District, there are ample opportunities for money earmarked for the UK to land in Washington. Additionally, redevelopment of underutilized, lower-quality office product is expected to provide tenants with higher quality options in the market. The opportunity to build on raw land is almost completely gone in the District. However, there are a number of Class B and C options located in ideal area that are excellent redevelopment opportunities, and represent the future of construction in the city. District of Columbia Office Market Under Construction Q PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE RENTAL BASE AREA % COMMITTED 600 Massachusetts Avenue, NW Pre-Committed East End - Trophy Q ,172 SF 79.8% Uline Arena rd Street, NE Redevelopment NoMa - A Q ,000 SF 37.2% 1000 F Street, NW Speculative East End - A Q ,273 SF 8.6% th Street, NW Renovation CBD - A Q ,338 SF 9.2% 2000 K Street, NW Renovation CBD - A Q ,192 SF 2.8% 700 Pennsylvania Avenue, SE Speculative Capitol Hill - A Q ,920 SF 51.0% 800 Maine Avenue, SW Speculative Southwest - A Q ,450 SF 41.6% 2001 K Street, NW Redevelopment CBD - A Q ,417 SF 57.4% 99 M Street, SE Speculative Capitol Hill - A Q ,000 SF 7.5% th Street, NW Pre-Committed CBD - Trophy Q ,721 SF 86.2% 655 New York Avenue, NW Pre-Committed East End - Trophy Q ,024 SF 83.8% OFFICE MARKET REPORT SECOND QUARTER 2016 COLLIERS INTERNATIONAL

4 District of Columbia Office Market Largest Leases Q TENANT ADDRESS LEASE TYPE LEASED SAPCE Ernst & Young 1101 New York Avenue, NW Renewal 130,000 SF GSA - Federal Aviation Administration (FAA) L'Enfant Plaza, SW Renewal 65,734 SF Defense Nuclear Facilities Safety Board 625 Indiana Avenue, NW Renewal 60,133 SF Cornerstone Research 2001 K Street, NW Relet 40,000 SF Clark Hill 1001 Pennsylvania Avenue, NW Sublet 38,884 SF Thomson Reuters 1333 H Street, NW Renewal 34,074 SF Banner & Witcoff th Street, NW Renewal 33,715 SF GSA - Department of Housing & Urban L'Enfant Plaza, SW Renewal 33,214 SF Development (HUD) Harris Wiltshire & Granis 1919 M Street, ne Renewal 32,192 SF Fragomen th Street, NW Renewal/Expansion 30,132 SF TOTAL OFFICE INVENTORY 144.3M SF 3,700 OFFICE JOBS 6 MONTHS > PROFESSIONAL/ BUSINESS SERVICES GOVERNMENT FINANCIAL SERVICES MEDIA 90.8M SF 53.5M SF TOTAL INVENTORY BY CLASS CLASS A: 63% CLASS B & C: 37% CURRENT 10.7% 24,336 NET ABSORPTION Q1 RENT S $57.55 CLASS A $43.75 CLASS B OFFICE MARKET REPORT SECOND QUARTER 2016 COLLIERS INTERNATIONAL

5 District of Columbia Office Market All Classes Q MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Capitol Hill 5,438,339-14, ,920 65, , % $55.75 Capitol Riverfront 5,044, ,000 2,599-3, % $42.15 CBD 44,497, , ,722 1,202, , , % $53.81 East End 47,188,083-21,527 1,447, , , % $57.26 Georgetown 3,247, ,265-32, % $43.39 NoMa 10,873, , ,000-52,501-69, % $49.15 Southwest 12,256, , , , , % $47.91 West End 4,478, ,425 1, % $47.92 Uptown 11,315, ,139-60,316-64, % $40.55 TOTAL 144,339, ,000 1,145,430 3,628, , , % $52.24 District of Columbia Office Market Class A Q MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Capitol Hill 2,941, ,920 28,665 64, % $61.19 Capitol Riverfront 3,809, ,000 2,599-3, % $47.30 CBD 23,166, , ,722 1,202, , , % $59.83 East End 35,002, ,256,469 3,771-84, % $62.18 Georgetown 1,771, ,665-14, % $48.98 NoMa 9,552, , ,000-53,071-30, % $51.83 Southwest 9,221, , , , , % $48.27 West End 2,845, ,056 4, % $48.04 Uptown 2,521, ,963 20, % $40.53 TOTAL 90,834, ,000 1,109,657 3,413, , , % $57.55 District of Columbia Office Market Class B & C Q MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Capitol Hill 2,497,139-14,246-36,829 44, % $50.13 Capitol Riverfront 1,234, % $39.00 CBD 21,331, ,613 29, % $46.79 East End 12,185,147-21, , , , % $45.83 Georgetown 1,475, ,600-17, % $37.36 NoMa 1,320, , % $28.98 Southwest 3,035, ,165-20, % $46.29 West End 1,632, ,631-3, % $40.09 Uptown 8,793, ,139-90,279-85, % $40.55 TOTAL 53,505,678-35, , , , % $43.75 OFFICE MARKET REPORT SECOND QUARTER 2016 COLLIERS INTERNATIONAL

6 502 offices in 67 countries on 6 continents United States: 140 Canada: 31 Latin America: 24 Asia Pacific: 199 EMEA: 108 FOR MORE INFORMATION: Dave Parker Regional Managing Director robert.hartley@colliers.com Robert Hartley Director of Reseach robert.hartley@colliers.com REGIONAL AUTHORS: Andrew Wellman Research Analyst colliers.com/washingtondc $2.3 billion in annual revenue 1.7 billion square feet under management 16,300 professionals and staff About Colliers International Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is a global leader in commercial real estate services with more than 16,300 professionals operating from 502 offices in 67 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 10 consecutive years, more than any other real estate services firm. For the latest news from Colliers International, visit Colliers.com or follow us on Twitter (@ColliersIntl) and LinkedIn. colliers.com Copyright 2016Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.