WASHINGTON, DC OFFICE EconomyIt is clear that after a lackluster year in 2014, the Washington, DC Metropolitan Regions economy has returned to above average conditions. The DC Metro continues to register one of the lowest employment rates among major metros in the United States4.6%. Since May of 2014, the region has added 59,000 non-farm payroll jobs, 15,400 of them in the office-using sectors of Professional and Business Services, Information, Financial Activities, and Federal Government. This is quite impressive considering about 35,000 net new jobs are added in a typical year and in 2014, the region lost approximately 12,000 office-using jobs. In the District of Columbia (DC), the unemployment rate dropped 40 basis points from 7.7% in January 2015 to 7.3% in May of this year while nonfarm job growth is up over 13,000 jobs compared to a year ago. The Federal Government, which accounts for over 25% of nonfarm payrolls in DC, has continued to stabilize after four years of contraction, adding 1,400 jobs from May 2014 to May 2015 while Professional and Business Services employment is up nearly 5,000 jobs.
Market OverviewAfter a modest start to the year, the District of Columbia experienced strong positive demand in the second quarter of 2015, driven by the two core downtown submarkets: the Central Business District (CBD) and East End. In fact, these two submarkets captured 69% of the demand across Washington DC during the quarter. The CBD boasted the strongest demand with 125,400 sf of positive absorption, while the East End registered 64,300 sf. The divergence of the East End and CBD that began in the first quarter of the year seemed to take a halt during the second quarter. The majority of deals signedboth new deals and relocationswere for space in the same submarkets where tenants leases were previously.
After three straight quarters of rising vacancy, the District of Columbias vacancy rate ticked downward 30 basis points to 11.0%. Vacancy in the CBD dropped below 10% for the first time since the end of 2008. Leasing activity in the second quarter was dominated by larger deals in new construction or renovated buildings. Kirkland & Ellis signed a prelease for 186,000 sf at 1301 Pennsylvania Avenue, NW in the East End. As is the case with several other large law firms, Kirkland & Ellis will downsize by more than 60,000 sf upon delivery of the Pennsylvania Avenue building in 2018. Another large lease in new construction was that signed by Bracewell Giuliani at 2001 M Street, NW currently undergoing a complete renovation. Following on the heels of its successful renovation of 799 9th Street which delivered in 2014 leased to two major law firms, Brookfields 2001 M Street, NW, has seen the most interest among all other major renovations throughout the District of Columbia. It is expected to deliver in 2016. Office buildings that are currently under construction are over 60% leased in the District of Columbia.
GSA activity was relatively light throughout the first half of the year, but is expected to pick up in the near future. A staggering 13 million square feet of federal leases are set to expire through 2019 in the District of Columbia and owners that can deliver large blocks of space that fit federal lease requirements are set to benefit. This activity could only have modest impacts on the overall vacancy rate in the District as most large prospectus level leases in the queue at this time are targeting space efficiencies in the 10 20% range with one for the Department of Education targeting a 42% space reduction.
Overall Vacancy
Net Absorption/Asking Rent 4Q TRAILING AVERAGE
Market IndicatorsQ2 14 Q2 15 12-Month Forecast
Overall Vacancy 11.2% 11.0%
Net Absorption (321K) 275K
Under Construction 1.5M 2.2M
Average Asking Rent $50.35 $50.12
Economic IndicatorsQ2 14 Q2 15 12-Month Forecast
DC Metro Employment 3.11M 3.17M
DC Metro Unemployment 5.0% 4.6%
U.S. Unemployment 6.1% 5.3%
$47
$48
$49
$50
$51
-1
0
1
2
3
4
2010 2011 2012 2013 2014 2015
Net Absorption, MSF Asking Rent, $ PSF
9%
10%
11%
12%
2010 2011 2012 2013 2014 2015
Historical Average = 10.7%
WASHINGTON, DC
Office Market SnapshotSecond Quarter 2015
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WASHINGTON, DC
Office Market SnapshotSecond Quarter 2015
TOTAL BLDG INVENTORY
SUBLET VACANT
TOTAL VACANT
VACANCY RATE
AVAILABILITY RATE
CURRENT ABSORPTION
YTD ABSORP-
TIONUNDER CON-STRUCTION
AVERAGE ASKING RENT
SUBMARKETCBD 250 38,500,760 266,496 3,793,243 9.9% 14.2% 125,445 344,970 541,023 $50.67
East End 203 39,812,897 333,515 4,561,593 11.5% 20.6% 64,365 (231,657) 932,371 $54.36
West End/Georgetown 58 5,921,127 25,905 706,882 11.9% 15.7% 3,214 28,680 0 $47.82
Capitol Hill 44 4,642,579 10,866 434,936 9.4% 16.2% 43,527 68,110 0 $56.88
NoMa 39 10,289,374 30,999 1,427,571 13.9% 15.6% 41,964 (1,215) 200,000 $48.20
Southwest 34 13,382,559 36,638 1,310,956 9.8% 16.3% (9,499) 45,002 553,879 $44.84
Capitol Riverfront/Southeast 11 3,736,758 10,800 405,213 10.8% 16.0% 44,514 57,396 0 $41.94
Uptown 99 6,564,289 62,886 922,343 14.1% 19.0% (38,397) (61,157) 0 $40.78
WASHINGTON, DC MARKET TOTALS
TOTAL 738 122,850,343 778,105 13,562,737 11.0% 17.0% 275,133 250,129 2,227,273 $50.12
Key Sales Transactions 2Q 2015
Key Lease Transactions 2Q 2015PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET
1301 Pennsylvania Avenue, NW 186,000 Kirkland & Ellis Prelease East End
1111 19th Street, NW 70,482 Undisclosed Tenant New CBD
1299 Pennsylvania Avenue, NW 56,500 APCO New East End
2001 M Street, NW 55,000 Bracewell Giuliani New CBD
2450 N Street, NW 43,100 Cogent Communications New West End
1001 G Street, NW 42,844 Quadrangle Development Corp. Renewal East End
955 L'Enfant Plaza, SW 34,000 Veracity Engineering New Southwest
900 G Street, NW 33,216 American Legacy Foundation New East End
preliminary
PROPERTY SF SELLER/BUYER PRICE SUBMARKET
1101 K Street, NW 291,500 Rockefeller JV Mitsubishi / UBS Realty $260,000,000 East End
1325 and 1341 G Street, NW 431,600 TIER REIT / Westbrook Partners $200,000,000 East End
1750 K Street, NW 165,800 Sumitomo Corporation / Mirae Asset Global Management $115,000,000 CBD
645 H Street, NE 84,700 Jair Lynch / Intercontinental Real Estate $51,400,000 Capitol Hill
1140 19th Street, NW 71,100 AREP / Rockrose $40,500,000 CBD
About DTZDTZ is a global leader in commercial real estate services providing occupiers, tenants and investors around the world with a full spectrum of property solutions. The companys core capabilities include agency leasing, tenant representation, corporate and global occupier services, property management, facilities management, facility services, capital markets, investment and asset management, valuation, research, consulting, and project and development management. DTZ provides property management for 1.9 billion square feet, or 171 million square meters, and facilities management for 1.3 billion square feet, or 124 million square meters. The company completed $63 billion in transaction volume globally in 2014 on behalf of institutional, corporate, government and private clients. Headquartered in Chicago, DTZ has more than 28,000 employees who operate across more than 260 offices in 50 countries and represent the companys culture of excellence, client advocacy, integrity and collaboration.
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Joseph Wood Research Analyst
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