MARKET REPORT THIRD QUARTER Third Quarter Leasing Thrives Amidst Tepid Tenant Growth Q DISTRICT OF COLUMBIA OFFICE MARKET SUMMARY

Transcription

1 Q DISTRICT OF COLUMBIA OFFICE DISTRICT MARKET REPORT OF COLUMBIA Q OFFICE DISTRICT OF COLUMBIA OFFICE MARKET REPORT THIRD QUARTER 2014 Third Quarter Leasing Thrives Amidst Tepid Tenant Growth MARKET SUMMARY MARKET OUTLOOK Q Q4 2014* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE MARKET INDICATORS Q Q VACANCY RATE 9.9% 11.0% ABSORPTION YTD 607, ,525 DELIVERIES YTD 810,374 1,032,510 UNDER CONSTRUCTION 2,127,836 1,915,697 The third quarter con nued the strong leasing ac vity already registered in Of the top ten leases signed this quarter seven were over 100,000 square feet and three were over 250,000. However, the majority of leases con nue to be renewals with just 20 percent of the top 10 deals being reloca ons. Of those large renewals, Federal tenants con nued to be well represented with the Federal Energy Regulatory Commission and the U.S. Department of Jus ce accoun ng for the two largest deals of the quarter, respec vely. The Federal Energy Regulatory Commission (FERC), which regulates and monitors the interstate transmission of electricity, natural gas and oil ma ers renewed their lease at 888 First Street, NE in the NoMa submarket for just over 500,00 square feet. FERC s move into NoMa in the early 90 s was one of the first for government agencies in what has subsequently become a haven for Federal tenants. Prior to the emergence of the NoMa submarket as viable federal enclave, the majority of price conscious federal tenants were predominately located in the Southwest submarket. There are some federal tenants that remain in core markets as in the case of the U.S. Department of Jus ce who also renewed this quarter. While the government was behind the majority of the largest deals this quarter, the private sector signed some significant leases as well. Two substan al law firms signed: one for a renewal and the other in a new build to suit project. Morgan, Lewis, and Bockius, an interna onal, mul prac ced firm with 26 offices and 1400 lawyers renewed at 1111 Pennsylvania Ave, NW for 168,866 square feet. The other law firm to sign a lease in the third quarter was Venable, whose presence in the region is robust with five of their nine offices in Maryland, Washington DC or Virginia. Their new 245,000 square foot pre ASKING RENTS/SF $49.02 $51.26

2 NET ABSORPTION lease accounts for nearly 60 percent of the building being constructed at 600 Massachuse s Avenue, NW. Venable plans to occupy the space in the first quarter of 2017 when the building is expected to deliver. ECONOMIC OVERVIEW Na onal employment numbers remained strong throughout the third quarter. The unemployment rate declined to 5.9% at the end of September, the lowest it has been since June of The District has lagged behind na onal numbers and the third quarter unemployment rate for August was the highest it has been in 2014 at 7.6 percent. Both Maryland and Virginia registered increases in unemployment from July to August of 30 basis points to end the month, at 6.4 and 5.6 percent respec vely. ABSORPTION Both federal and private sector tenants downsized during the third quarter, causing significant nega ve absorp on in the District. Both the Federal Trade Commission and Environmental Protec on Agency returned sizable amounts of square footage, to the market. On the private sector side, PriceWaterhouse Coopers gave back roughly 20,000 square feet this quarter when they moved into th Street, NW. VACANCY Due to these downsizes in space, coupled with the delivery of Pillsbury Winthrop Shaw Pi man s new building and their subsequent move out of their old space, vacancy rose by 30 basis points to end the quarter at 11.0 percent. Specula ve construc on, which has historically been a cause for rising vacancy in the District, has been minimal. Addi onally those buildings that have started construc on without a tenant in place have had success in securing one prior to delivery of the building. However tenants con nue to take less space in their new build to suit buildings than they vacate. The space u liza on change from early to mid 2000 s to now has caused many large tenants to become leaner and need far less space than in the past.

3 DELIVERIES AND CONSTRUCTION Another build to suit construc on focused on the District s largest law firms, delivered this quarter. The 169,467 square foot, Class A building is located at th Street, NW and is the new home to Pillsbury Winthrop Shaw Pi man. Pillsbury took the top six floors of the 11 story building. The property has just under 70,000 square feet s ll available with a rental rate approaching $60 triple net. As a flood of mega law firms con nues to demand highly efficient buildings, the torrent of commodity A space the firms are vaca ng con nues to enter the market. DELIVERIES Just one other project is expected to deliver in An office building located at th Street NW in the uptown submarket is scheduled to deliver early in the fourth quarter. The smaller retail/office project has West Elm, a modern furniture and home goods store, as a tenant on the bo om two floors with office space on the two floors above. RENTAL RATES Overall direct rental rates in the District have hovered around the $51 mark for the majority of This quarter saw a slight rise of 4 cents to end the quarter at $51.26 per square foot. Both Class A and Class B rents rose from the second quarter to finish at $55.76 and $43.82 square foot, respec vely. Through 2014, thus far, rental rates and concessions have been rela vely stable. Limited supply in the trophy building market however, has created steady increases in net effec ve rents in this quality of building. Significant Deliveries Project Submarket RBA Lead Tenant TH, NW EAST END 169,467 PILLSBURY WINTHROP SHAW PITTMAN

4 Significant Q Construction Projects Project Submarket RBA Delivery Lead Tenant 900 G St, NW East End 111,466 Q None 400 6th St, SW Southwest 342,000 Q None 601 Massachusetts Ave, NW East End 478,882 Q Arnold & Porter LLP 660 N Capitol St, SW NoMa 200,000 Q None 800 Maine Ave, SW Southwest 210,000 Q None 600 Massachusetts Ave, NW East End 401,172 Q Venable LLP

5 Recent Lease Transactions Tenant Address Submarket Size (SF) Type Federal Energy Regulatory Commission 888 First St, NE NoMa 503,997 Renewal Department of Justice 600 E St, NW East End 298,179 Renewal Morgan, Lewis & Bockius, LLP 1111 Pennsylvania Ave, NW East End 268,866 Renewal Venable, LLP 600 Massachusetts Ave, NW East End 245,000 Pre-lease White & Case th St, NW East End 138,000 Renewal LOOKING FORWARD Leasing in the second half of 2014 started strong with a significant number of large new and renewal leases signed. However, while leasing has been strong, the vacancy rate con nues to climb as tenants downsizing con nued to be a strong trend in the market. We expect leasing to con nue to be strong throughout the remainder of 2014 as both the federal and private sectors become more confident in an improving local economy. Absorp on will improve significantly in the near future but will not be enough to lower vacancy with several new developments scheduled to deliver in A trend expected to persist throughout the rest of 2014 and 2015 is the trade up in space quality, and the subsequent holes that massive law firms are leaving with several years before their lease expira ons. Over the last several years tenants in the market have started to look and explore leasing op ons in the market far sooner than before. Part of this behavior is the willingness for owners to take on the remaining term in order to secure a premium tenant. Another piece has to do with the build me needed for new construc on in the District. With virtually no viable open space available for development, the construc on process for redeveloping a site is drama cally more complex than in the past. The normal 18 months of construc on for cleared ground up construc on has been increased by demoli ons ranging in complexity and can add as much as 6 months or more on to a build. This will con nue to occur in the District and the 18 month construc on me frame will become a thing of the past.

6 DISTRICT OF COLUMBIA Q3 MARKET STATS DISTRICT OF COLUMBIA Existing Properties Vacancy Activity Absorption Rents Class Bldgs RBA Direct Vacancy Sublet Vacancy Total Vacancy Total Vacancy Prior Qtr Leasing Activity SF* Net Absorption Current Qtr SF Net Absorption YTD Weight Avg Asking Lease A ,657, % 0.8% 11.9% 11.5% 1,729, , ,766 $ B ,120, % 0.3% 10.2% 10.4% 188,117-31,643-1,049,660 $ C 231 7,443, % 0.4% 4.5% 3.7% 298,000-82,033-39,631 $ All Classes 1, ,221, % 0.6% 11.0% 10.7% 2,215, , ,525 $ Existing Properties Vacancy Activity Absorption Rents Submarket/ Direct Vacancy Total Vacancy Total Vacancy Leasing Activity Net Absorption Net Absorption Weight Avg Asking Bldgs RBA Sublet Vacancy Class Prior Qtr SF* Current Qtr SF YTD Lease CBD A ,150, % 1.0% 12.6% 11.7% 222,757-64, ,201 $ B ,252, % 0.3% 7.9% 8.2% 60,228 57, ,337 $ C 35 1,452, % 0.0% 1.0% 1.2% - 3,250 10,422 $ All Classes ,854, % 0.6% 10.1% 9.8% 282,985-3, ,286 $ East End A ,405, % 0.8% 11.0% 10.7% 755, , ,855 $ B ,014, % 0.7% 13.2% 13.2% 45,749-74, ,820 $ C 38 1,790, % 0.5% 4.5% 2.7% 298,000-33,399-34,783 $ All Classes ,209, % 0.8% 11.3% 11.0% 1,099, , ,252 $ Capitol Hill A 13 2,941, % 0.9% 15.4% 9.3% 19, , ,816 $ B 26 1,952, % 0.3% 10.8% 10.6% 82,140-15,527-33,972 $ C , % 0.0% 8.2% 5.0% - -20,667-21,340 $ All Classes 65 5,524, % 0.6% 13.0% 9.3% 101, , ,128 $ NoMa A 28 9,352, % 0.3% 14.4% 15.0% 612,549 53,422 83,755 $ B 10 1,225, % 0.6% 15.9% 14.6% - -16,182-14,476 $ C 6 135, % 0.0% 7.8% 13.5% - 7,650 7,650 n/a All Classes 44 10,713, % 0.4% 14.5% 14.9% 612,549 44,890 76,929 $ West End A 12 2,845, % 0.7% 6.8% 6.2% - -16,308-76,848 $ B 12 1,007, % 0.7% 6.2% 5.1% ,146-62,036 $ C 5 625, % 0.0% 0.1% 0.2% ,420 $ All Classes 29 4,478, % 0.6% 5.7% 5.1% , ,464 $ Georgetown A 10 1,771, % 0.2% 9.1% 11.0% 61,736 34,303 23,373 $ B 30 1,258, % 0.0% 6.2% 6.1% - -1,605 17,270 $ C , % 0.9% 8.9% 8.9% ,991 $ All Classes 54 3,318, % 0.2% 8.0% 9.0% 61,736 32,698 24,652 $ Southwest A 23 8,859, % 0.5% 11.1% 11.9% 57,878 69,945 73,628 $ B 11 3,016, % 0.0% 5.3% 5.0% - -9,352-27,263 $ C 1 18, % 0.0% 0.0% 0.0% n/a All Classes 35 11,894, % 0.3% 9.6% 10.1% 57,878 60,593 46,365 $ Capitol Riverfront A 10 3,809, % 0.8% 18.7% 18.6% - -5,623-6,354 $ B 3 1,184, % 0.0% 18.3% 18.3% ,336 $ C 2 50, % 0.0% 12.7% 12.7% - - 6,509 $ All Classes 15 5,044, % 0.6% 18.6% 18.5% - -5, ,181 $ Uptown A 14 2,521, % 2.1% 4.3% 3.2% - -28,627 43,972 $ B 101 6,210, % 0.1% 13.6% 14.9% - 131, ,690 $ C 104 2,451, % 0.6% 5.9% 5.1% - -39,637 6,482 $ All Classes ,183, % 0.7% 9.8% 10.1% - 63, ,236 $ 39.65

7 DEFINITIONS OF KEY TERMS FOUND IN THIS REPORT Deliveries: Buildings that complete construction during a specified period of time. In order for space o be considered delivered, a certificate of occupancy must have been issued for the property. Direct Space: Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of a tenant) trying to sublet a space that has already been leased. Existing Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. It does not include space in building that are either planned, under construction or under renovation. Leasing Activity: The volume of square footage that is committed to and signed under a lease obligation for a specific building or market in a given period of time. It includes direct leases, subleases and renewals of existing leases. It also includes any pre-leasing activity in planned, under construction, or under renovation buildings. Rentable Building Area (RBA): The total square footage of a building that can be occupied by, or assigned to a tenant for the purpose of determining a tenant s rental obligation. This report tracks buildings with 10,000 square feet of more of space. Includes competitive space in Class A, B and C single - and multi-tenanted buildings. Excludes buildings that are owned and operated by the Federal Government. Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space. Vacant Space: Space that is not currently occupied by a tenant, regardless of any lease obligation that me be on the space. Inventory: Includes all existing multi or single tenant leased or owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). Does not include government owned buildings. Net Absorption: The net change in occupied space over a given period of time. Unless other wise noted, net absorption includes direct and sublease space. Weighted Average Asking Rental s: Average rental rates weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial services and utilities. Reports on an annual per square foot basis. 485 offices in 63 countries on 6 continents United States: 140 Canada: 42 Latin America: 20 Asia Pacific: 195 EMEA: 81.5 $2.1 billion in annual revenue 1.12 billion square feet under management Over 15,800 professional FOR MORE INFORMATION, CONTACT: Rob Hartley Director of Research robert.hartley@colliers.com TEL FAX Colliers International Tysons Corner 8045 Leesburg Pike Vienna, VA TEL FAX Accelerating success.