Caution: Vacancy Increases Ahead

Transcription

1 MARKET REPORT DISTRICT OF COLUMBIA OFFICE Fourth Quarter 2016 Caution: Vacancy Increases Ahead Market Indicators Q (Projected) NET Despite year-to-date negative absorption, the Washington, DC offi ce market fundamentals improved in the fourth quarter. Demand ended the quarter at 535,259 square feet of positive absorption and the vacancy rate decreased by 37 basis points this quarter. There is a large amount of new space coming to the market and a relatively small amount of growth from the existing tenants. With conservative market assumptions, vacancy is expected to increase by more than 200 basis points within the next two years as speculative development already under construction outpaces tenant demand. RENTAL Summary Statistics Q Office Market All Classes Class A Class B & C Vacancy Rate 10.9% 11.7% 9.6% Economic During 2016, the District of Columbia s economy grew by 1.6 percent and generated nearly 30,000 new jobs. Of this growth, 67.6 percent or nearly 10,400 positions were created in office-using industries. While this was impressive growth, 39.3 percent or nearly 4,100 new jobs were generated by the Federal Government. Since the Budget Control Act of 2011, the Federal Government has been required to watch expenses. As a result, the GSA has implemented the shrink the footprint, policy resulting in virtually every renewing GSA lease decreasing its square footage. Any new Federal jobs created are either being accommodated by existing space but at higher utilization rates or by workplace strategies like hoteling or teleworking. As a result, only the private-sector, office-using industries have been fueling growth within the District of Columbia. Professional and business services firms contributed the most to the privatesector job growth. During 2016, these sectors added 4,700 new job of which just over 1,800 jobs were created be legal services firms. Advocacy organizations also added new jobs increasing payrolls by 580 positions. The media and information sectors of the economy were the only major office-using group to see falling levels of employment during In total, about 180 jobs were eliminated by these companies. Change From Q (basis points) Absorption (Square Feet) New Construction (Square Feet) Under Construction (Million Square Feet) Asking Rents Per Square Foot Per Year , ,363-22, , ,172 15, Direct Asking Rates $52.61 $57.82 $44.02 Change From Q $0.26 +$0.14 +$0.40 Asking Rate ($/SF) Direct Asking Rental Rates By Class $64 $59 $54 $49 $44 $39 $34 $57.82/SF $44.07/SF $42.97/SF $29 $24 Class A Class B Class C

2 District of Columbia Office Market Leasing Activity Q TENANT ADDRESS SUBMARKET CLASS LEASE TYPE LEASED SPACE National Committee for Quality Assurance (NCQA) Demand Job growth was extremely strong in 2016, but it has yet to result in absorption for the District. Net absorption in 2016 was negative 191,0124 square feet with the vast majority coming from the Coast Guard leaving the Transpoint office building located at nd Street, SW in the Capitol Riverfront submarket last quarter. The fourth quarter did, however, show signs of stabilizing with a strong quarter of positive absorption, which totaled 557,363 square feet. The largest driver to the positive absorption this quarter came from an expansion in the District from WeWork. WeWork, a shared office space provider, continued to be one of the largest and most active recent absorbers of space in the market. This industry has been growing in the market by creating a collaborative office environment for its clients while also giving companies a tremendous amount of flexibility with their real estate needs. It s one of a few industries that has been growing, not only in the District, but in the entire region. The Federal Government and the legal service industry, mainstays of net absorption in the past, have for the most part, downsized with every subsequent lease over the last several years th Street, NW East End-A Relocation 195,472 US International Trade Commission 500 E Street, NW Southwest-A Renewal 191,226 MacFadden and Associates th Street, NW East End-A Relocation 120,000 Federal Election Commission (FEC) st Street, NE NoMa-A Consolidation 98,681 FTI Consulting th Street, NW East End-A Relocation 93,507 Aspen Institute 2300 N Street, NW West End-A Relocation 92,602 Amtrack 1 Massachusetts Avenue, NW NoMa-A Relocation 82,154 WeWork 80 M Street, SE Capitol Riverfront-A New 68,673 Fish & Richardson 1000 Maine Avenue, NW Southwest-A Prelease/Relocation 60,372 United Healthcare Services, Inc. 701 Pennsylvania Avenue, NW East End-A Renewal 40,225 Supply Regardless of the lack of demand seen in 2016, new construction continues to move forward. The amount of new inventory coming to the market and the lack of positive net absorption in the near future will likely change the prevailing vacancy trend. Over 660,000 square feet of new supply was delivered to the market in the fourth quarter. Redevelopment and demolitions have kept the District from realizing sizable vacancy gains as of yet. The net increase to market inventory was just 162,342 square feet because of the demolitions and removals of buildings in the fourth quarter. Since the start of 2016, well over two million more square feet of construction broke ground in the District, which brought the total under construction to 4.9 million square feet. Roughly, half of the construction in the District is already committed. However, with the start of Capitol Crossing on a speculative basis, the pre-committed space decreased from 61.4 percent in the third quarter to 51.4 percent in the fourth. Eighteen buildings are currently under construction or significant renovation. In million square feet of spacec is expected to deliver. This compares to 1.8 million that delivered in Subsequently, 3.0 million square feet is expected to deliver in Much of the reason for this increased construction comes from significant redevelopment of city blocks like Capitol Crossing, rather than one-off redevelopments that have been more popular in the past. In most cases this new construction is more attractive to larger tenants in the market. Vacancy rates in those newly constructed buildings will be low but the associated move outs in the aging commodity A buildings will push the vacancy higher. TRANSPOINT CAPITOL CROSSING

3 Vacancy Rates The considerable net absorption in the fourth quarter lowered vacancy rates by 27 basis points to 10.9 percent. While decreasing slightly from the third quarter, vacancy posted the second highest level since the third quarter of 2014 and 52 basis points higher than the five-year average of 10.4 percent. Vacancy decreased in both direct and sublet space, the first time that has happened in over a year. Surprisingly, despite having strong positive absorption in the Class A space, vacancy held firm and ended the quarter at 11.7 percent, the same as the previous two quarters. The lack of movement in vacancy this quarter comes from the balance of strong net absorption and new deliveries coming online. Both the Class B and C space decreased in vacancy for the fourth quarter dropping to 10.5 and 4.0 percent, respectively. Rental Rates Average asking rents for the District increased slightly to end the quarter at $52.61 per square foot on a full service basis. As new higherend space delivered to the market, asking rental rates moved upward in the market. Both Class A and B rents rose in the fourth quarter while Class C rents dropped by over a dollar per square foot. The decrease in Class C rents is counter to dwindling supply and vacancy in that quality of space. Outlook With increased development activity occurring throughout 2016 and expected decreases in demand over the next several years, the vacancy rate in the District is expected to increase substantially. Vacancy is expected to top out at over 14 percent in The majority of that vacancy will come from commodity A space as tenants move to higher-end more efficient space that is currently under construction. It is expected, however, that the majority of the downsizing caused by tenant efficiency gains will be over by Post-2017 it is expected that job growth will more directly translate to absorption gains and declining vacancy rates. The largest question mark over the next several years will be the impact on the national economy of President elect Trump. Trump has arguably been a successful real estate developer. It would follow that many of his decisions on where to take the United States would be realestate friendly. Whether or not the economy continues to add jobs under Trump s new administration as it has for the last several quarters under Obama remains to be seen. District of Columbia Office Market Deliveries Q PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE RENTAL BASE AREA % COMMITTED 600 Massachusetts Avenue, NW Pre-Committed East End-Trophy 2016 Q4 401, % Uline Arena rd Street, NE Redevelopment NoMa-A 2016 Q4 244, % th Street, NW Speculative East End-B 2016 Q4 15, % District of Columbia Office Market Under Development Q PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE RENTAL BASE AREA % COMMITTED th Street, NW Renovation CBD-A 2017 Q1 115, % 700 Pennsylvania Avenue, NW Speculative Capitol Hill-A 2017 Q2 234, % 1441 L Street, NW Renovation East End-A 2017 Q3 176, % The Wharf Building I 800 Maine Avenue, SW Speculative Southwest-A 2017 Q3 241, % 2001 K Street, NW Redevelopment CBD-Trophy 2017 Q4 764, % 99 M Street, SE Speculative Capitol Riverfront-A 2018 Q1 235, % Square New York Avenue, NW Pre-Committed East End-Trophy 2018 Q2 761, % Midtown CenterFannie Mae th Street, NW Capitol Crossing 200 Massachusetts Avenue, NW The Wharf Building II 1000 Maine Avenue, SW Pre-Committed CBD-Trophy 2018 Q2 868, % Speculative Capitol Hill-Trophy 2018 Q2 408,156 0% Pre-Committed Southwest-A 2018 Q2 267, % One M-1 M Street, SE Build-to-Suit Capitol Riverfront-A 2018 Q3 130, %

4 Q4 RENTAL S TOTAL OFFICE $57.82 INVENTORY CLASS A 144.2M SF 91.1M SF CLASS A 53.1M SF TOTAL INVENTORY BY CLASS CLASS A: 63% $44.02 CURRENT CLASS B&C CLASS B&C 10.9% CLASS B & C: 37% 535,269 NET Demand / Supply Fundamentals Net Absorption, Change in Supply, Vacancy % Net Absorption Supply Changes % Vacancy (%) (Thousands SF) 600 Overall Vacancy Rate 10.5% % -600 Q Q Q Q Q Q Q Q Q Q Q ,000 Q %

5 District of Columbia Office Market All Classes Q MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING DISTRICT OF COLUMBIA Capitol Hill 5,338,925-14, ,077 15, , % $56.47 Capitol Riverfront 5,030, ,000 22, , % $42.40 CBD 44,223, ,825 1,708, , , % $54.35 East End 47,338, , ,826 1,136,368 75, , % $56.92 Georgetown 3,247, ,480 8, % $49.97 NoMa 10,980, , , , , , % $50.77 Southwest 12,258, , , , , % $48.10 West End 4,478, ,825 19, % $47.62 Uptown 11,264, ,140-12, , % $41.53 DISTRICT OF COLUMBIA TOTAL 144,160, ,299 1,729,832 4,907, , , % $52.61 District of Columbia Office Market Class A Q MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING DISTRICT OF COLUMBIA Capitol Hill 2,941, ,077-3,756 92, % $61.80 Capitol Riverfront 3,809, ,000 25,103-27, % $48.50 CBD 23,013, ,825 1,664, , , % $59.98 East End 35,166, , ,172 1,136, , , % $62.20 Georgetown 1,771, , % $58.28 NoMa 9,796, , , , , , % $51.67 Southwest 9,222, , ,010 62, , % $48.29 West End 2,846, ,895 13, % $47.62 Uptown 2,521, ,078-8, % $48.22 DISTRICT OF COLUMBIA TOTAL 91,089, ,172 1,678,932 4,840, , , % $57.82 District of Columbia Office Market Class B & C Q MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING DISTRICT OF COLUMBIA Capitol Hill 2,397,725-14,246-18,991 47, % $49.71 Capitol Riverfront 1,220, , , % $39.14 CBD 21,210, ,308-5,378 30, % $46.26 East End 12,172,224 15,127 36, , , % $45.84 Georgetown 1,475, ,808 14, % $36.85 NoMa 1,183, ,311-44, % $29.58 Southwest 3,035, ,531 26, % $47.06 West End 1,632, ,070 6, % n/a Uptown 8,742, ,140 32, , % $41.26 DISTRICT OF COLUMBIA TOTAL 53,071,078 15,127 50,900 67,448-22, , % $44.02

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