CBRE: DC Office Market Opens Year Slow and Steady
The Washington, DC area office market ended the first quarter flat but stable with some submarkets seeing very slight growth, according to first quarter research reports released today by CB Richard Ellis.
In the Washington, DC office market, demand, as measured by net absorption, totaled the highest it has been since pre-recessionary levels, suggesting stabilization of the market. The federal government continued to be a major driver with 36% of the top transactions. However, activity in the private sector continued to increase, accounting for the majority of non-renewal leases in the top 25 of the quarter. In Northern Virginia, private sector leasing activity saw a slight increase with only 40% of the top deals executed during the quarter signed by the government or government contractors, compared to 80% of transactions in the last quarter of 2009. In Suburban Maryland, after three quarters during which renewals accounted for half of all lease transactions, the first quarter saw a drop to 30%, representing significant new growth for the first time since the onset of the recession.
"The road to recovery continues to be paved by the Federal Government and government related business but we are seeing some positive movement in the private sector. The market seems to be stabilizing," said Ernest D. Jarvis, Managing Director of CBRE's Washington, DC office.
Individual Market Summaries
Washington, DC
Ø Net Absorption
Demand in the District grew to 871,232 square feet during the first quarter and was the direct result of new federal government demand: specifically the Department of Justice which added 575,790 square feet of new growth and the Federal Bureau of Investigation which leased 180,000 square feet in southwest Washington for new space requirements. Private sector growth was fairly limited and isolated, and was offset by continued contractions in the marketplace.
Ø Vacancy Rates
The overall vacancy rate at the end of the first quarter was 12%. Class A vacancy fell over the quarter by 0.6 percentage points to 13.3%, whereas Class B vacancy climbed higher by 2.2 percentage points to 10.3%, suggestive of tenants' choice of flight Sublet vacant space decreased over the quarter minimally from 1.6% to 1.5%.
Ø Rental Rates
After declines in 2009, asking rates are holding steady. At the end of the first quarter, overall asking direct rental rates were $54.81 per square foot on a full service basis, while Class A asking rates were $58.29. This reflected the adjusted increased gross-up factor for triple net asking rates, which have become more prevalent around the city. Operating expenses for office buildings continue to rise as taxes increase. There were several instances in which space came on the market advertised for a triple net basis in a building that typically marketed full service rates.
Ø New Construction
Five buildings delivered during the first quarter of 2010 totaling 1.4 million square feet. The only building completion that was not fully preleased was the 162,268-square-foot project in Capitol Hill at 20 F Street, NW, which was 28.1% committed. The most noteworthy completion was the 575,790-square-foot Constitution Square Phase Two project in NoMa at 145 N Street, NE, which was fully committed by the Department of Justice. Just about 2.5 million square feet of office space is scheduled for completion through 2012, of which 40.9% is committed, compared to the 8.5 million square feet in the pipeline one year ago.
Northern Virginia
Ø Net Absorption
Overall demand was 48,585 square feet in the first quarter of 2010. While still active in the market, the government sector was not the driver of leasing activity in Northern Virginia in the first quarter that it was at the end of 2009, when 80% of leasing activity was from the government sector. Two building purchases and move-ins by Kaiser Permanente and Pragmatics combined approximately 280,000 square feet of net growth. However, these additions were offset by several mid-sized blocks of vacant space added to the market. The majority of tenant movement during the first quarter was in relocations that did not translate to net growth for the market.
Ø Vacancy Rates
Overall office vacancy rates increased slightly to 14.4% in the first quarter and is up from 13.4% from one year ago. Renewal activity remained at an elevated level, accounting for 40% of the top 25 transactions, providing stability to the market. For the first time in 10 consecutive quarters, the Class A vacancy rate fell slight from 15.5% to 15.4%. The Class B vacancy rate rose from 12.6% to 13.1% over the quarter. The overall vacancy rate remains below the 16.0% peak experienced 2002.
Sublet vacant space fell in the quarter to 10.1% of all vacant space from 11.3% in the fourth quarter of 2009.
Ø Rental Rates
The average direct full service asking price in Northern Virginia rose by $0.22 to $29.29. Class A asking rental rates continue on an upward trend begun in the third quarter of 2009, averaging $30.88 in the first quarter of 2010, an increase of $0.33 since the previous quarter. Class B rates trended higher in the quarter averaging $25.96, a slight increase over the fourth quarter 2009.
Inside the Beltway jurisdictions of Arlington County and the City of Alexandria saw the highest jump in Class A asking rates over the quarter, increasing by nearly $2 in Arlington and $1.63 in Alexandria.
Ø New Construction
Three projects, all located inside the Beltway, delivered in the quarter, totaling 530,144 square feet: two National Gateway Projects in Crystal City with no preleasing at the time of delivery and Edmonson Plaza in Old town Alexandria that is more than 50% preleased.
With less than 300,000 square feet remaining in the construction pipeline scheduled for completion at the end of 2010, and no product expected to deliver in 2011, Northern Virginia's development pipeline is the smallest it has been in recent memory.
Suburban Maryland
Ø Net absorption
Net absorption in suburban Maryland the first quarter of 2010 was essentially flat. Significant gains, such as Kaiser Permanente's purchase and move into 655 Watkins Mill Road in Gaithersburg and the three FDA leases signed in North Silver Spring and Rockville totaling approximately193,000 square feet were offset by a number of move outs in the 10,000 to 20,000 square foot range. The Bethesda/Chevy Chase submarket saw the loss of two significant tenants CoStar and Hanger Orthopedic. In total 102,944 square feet was returned to the market.
Ø Vacancy Rates
Overall Vacancy rates in Suburban Maryland remained unchanged in the first quarter at 15.0%. The sublease vacancy rate decreased slightly from 1.8 to 1.6%.
Ø Rental Rates
Concession packages remain high as many landlords try to lure tenants who would otherwise prefer not to incur moving costs. While overall asking rental rates increased in the first quarter to $26.92 per square foot on a full service basis, these rates remain below the overall rate of $27.30 a year ago. The Class A rates increased to $29.71 in the first quarter from $28.82 from the previous one, due to large blocks of space that came to market in Bethesda/Chevy Chase. Both Class B and C product saw declines in the first quarter.
Ø New Construction
No new buildings delivered in the first quarter, reflecting the continued slow down in new construction that has occurred in suburban Maryland in the last two years. There is just over 391,000 square feet in the construction pipeline, most of which is centered in Prince George's County.
For the complete First Quarter 2010 reports detailing the state of office as well as the industrial markets throughout the Greater Washington Region, go to http://www.cbre.com/USA/Research.