Washington DC is fast becoming a tenant’s market according to a recent report from commercial real estate firm, Newmark. Metro area asking rents, or “face rents,” which had been rising almost steadily since 2002, dropped $.20 per square foot to $36.76/sf for direct office space in the third quarter. Actual rents or “effective rents” were even lower and landlord concessions in the areas of rent abatement and rising tenant improvement dollars are up, Newmark said.
“We’re not yet seeing the concession packages of the early 90’s, but with diminished demand we are off and running in that direction,” Newmark said.
Right now there are approximately 11.2 million square feet under construction and renovation in the Washington metro area, with 7.7 million square feet of space in D.C. alone. In these conditions, landlords are unlikely to be able to hold the line on rents, explains Newmark Managing Principal Patrick W. Nalls.
Vacancies Up
Despite the opportunity, tenants aren’t yet jumping in. Total vacancy in the 362 million-plus-square-foot metro D.C. market hit 11.4 percent during third quarter 2008, and leasing activity has dropped some 40 percent year over year. Meanwhile, metro D.C. net absorption was negative by 600,773 square feet in the third quarter. This means that in aggregate, tenants gave up more space than they leased. By way of comparison, just one year ago, the vacancy rate was at 9.9 percent and net absorption was positive by 601,708 square feet.
“The economic downturn and freezing of the credit markets has tenants on hold and many are not willing to take on long term space commitments right now. “Tenants are cautious about making any moves, including relocation. For the most part they won’t take any action unless they absolutely have to,” Nalls explains. “What we are seeing is an increase in renewals, and short term extensions. Rightfully, people seem most interested in assuring their survival before trying to capitalize on real estate opportunities.”
Awaiting the Election
The political arena is a critical piece of any D.C.-area real estate discussion, says Nalls, who explains that a Republican win would likely result in increased demand for office space in Northern Virginia, where national defense-oriented businesses tend to cluster; while a Democratic win would generate more activity in the health sciences sector clustered in Maryland’s I-270 corridor. Nalls cautions that, given the current economy, it will be difficult to access money to spend in either situation.
“The local office market - like those in many other parts of the nation - may well be in for some rough sledding in the coming year,” says Nalls.
“We’re basically just two months into an economic crisis that is probably going to get worse before it gets better. 2009 is likely going to be a tough year, as we expect an employment reduction in the area and therefore diminished demand,” Nalls said.
Construction and Acquisitions Hurting
The DC construction and acquisitions markets are hurting. Four acquisition deals at contract failed to close on an inability to finance. There’s a strong aversion to risk and an unwillingness to fund vacancy. Builders, even with sizable commitments from credit tenants, are struggling to find financing as well. “Washington is buffered more than most markets in the country and tends to come out of these situations earlier. This will likely be the case again, but we have several years of inventory to absorb. This means that a recovery will likely happen more slowly,” Newmark says.
Newmark is one of the largest independent real estate service firms in the world. Headquartered in New York, Newmark and London-based partner Knight Frank Newmark operate from over 196 offices in established and emerging property markets on six continents. Last year, transactions were valued at more than $47.6 billion with annual revenues of over $962 million. With a combined staff of more than 6,900, this major force in real estate is meeting the local and global needs of owners, tenants, investors and developers worldwide. For further information, visit www.newmarkkf.com.