SOUTHEAST SNAPSHOT, MAY 2010

Washington D.C. Office Market

The Washington, D.C, office market is currently experiencing positive job growth, which soared in the first quarter of 2010. District tenants absorbed 928,000 square feet — more then double the amount absorbed in 2008 and 2009 combined. Approximately two-thirds of the positive demand was due to new deliveries – pre-leases signed prior to the quarter. Even so, the first quarter results show that while the rest of the country is still shedding office space, the D.C. area is now absorbing.

Year to date, the office sector has seen $313 million in office sales volume. This year is on track to be similar to 2009, but the listings are up from the end of 2009, and there are a number of deals in the hopper that will close in the second and third quarters. Overall, the vacancy rate in D.C. decreased to 11.5 percent over the quarter — the first decline in vacancy since the second quarter of 2007.

Approximately one-third of the jobs in the D.C. market are government related; however, the area has seen huge growth in private sector jobs, including education and healthcare. By the end of this year, we will still be below normal historical levels, but we are moving in the right direction.

Cassidy Turley estimates that 50 percent of all new jobs created in the D.C. region will be in the office sector. Assuming 200 square feet per worker, we estimate 18.2 million square feet of demand in the pipeline. We estimate that this will bring office vacancy back to normalcy (i.e. the historical average of 9.5 to 10.5 percent) by 2012. As of the first quarter, the office vacancy rate in was 13.8 percent. From the increase in procurement spending, and assuming recovery in the U.S. economy is sustained, we estimate that 182,000 total new jobs will be created in the D.C. region by 2013, and as much as 50 to 70 percent of this will be direct growth related to increases in federal spending.

Given the uncertainty nationally surrounding the recovery, there is still reluctance to buy and an even greater reluctance to sell in this market, especially when it comes to value-add. Top-tier markets such as D.C. and New York did see a noticeable pick-up in activity in the first quarter of 2010, suggesting that money is beginning to move off the sidelines as some buyers take advantage of quality assets in quality markets. From a cap rate perspective, we have seen a little bit of stabilization.

During the first quarter, we have seen a variety of tenants sign leases in the D.C. Metro area. Some of the larger, non-renewal lease deals include both government and non-government entities, including the Federal Bureau of Investigation (180,000 square feet) and MicroStrategy (142,000 square feet). 

While the D.C. area is experiencing positive job growth and net absorption, most cities in the country are not. Most of the other submarkets of D.C. are seeing less improving demand, which we believe will continue. From a rent perspective, we do not see a lot of improvement through the end of the year. We are witnessing the flattening of incentives, which is a positive sign. We have a long way to go, but the road to recovery has begun.

— Jeffrey Kottmeir si the director of research, vice president with Cassidy Turley in Washington D.C.

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