WASHINGTON, DC--As of the end of Q2, the District's office leasing market is 372,745 square feet in the hole. Or, to use the correct industry term, year to date its absorbency is a negative net 372,745 square feet, according to JLL figures. It's quite the comedown from the net positive 872,018 square feet delivered last year.

The good news is that the Washington DC area's office leasing market as a whole is performing well, or at least it is in positive territory. It absorbed a net positive 384,384 square feet (no, that number is not a typo) for the quarter. For year-to-date, according to JLL, it has a positive net absorbency of 351,824 square feet. Q2, obviously, was very good to Northern Virginia and suburban Maryland.

The suburbs, in short, have become the top generators of activity, not the normally robust District. And JLL Research Director Scott Homa believes this is a trend that will have legs, for several reasons.

New Supply Will Outstrip Demand

One reason is the 24-to-36-month timeline of new office deliveries. In Q2 alone, developers broke ground on eight new projects totaling 2.8 million square feet alone. All told there is 4.1 million square feet of new office product under construction, of which 39.1% is preleased.

The new supply will easily outstrip demand for space, Homa told GlobeSt.com.

In fact, he said, even the downtown trophy office market is at risk for oversupply.

“We've been in a paradigm in which smaller users had a lot of leverage but the big users didn't have many options. That is changing, even though pricing remains high.”

A Change Shift in Users

The core industries that are leasing office space has changed dramatically. Law firms have long stopped taking down large chunks of space, while the creative and emerging-tech sector has become very active.

Here's a telling factoid from JLL: In Q2 2016, growing tenants outnumbered shrinking tenants by a 6.6% margin. This has been an ongoing trend of the last eighteen months, with nearly half of the region's expansionary leasing activity coming from the coworking/incubator and so-called TAMI (technology, media, advertising, media, information) sectors, according to JLL. The growth of such co-working space providers as WeWork, MakeOffices, Spaces and Eastern Foundry now totals over 1.8 million square feet.

And here's another telling data point: Law firm leasing activity in the second quarter was confined to deals less than 50,000 square feet and only one law firm lease greater than 50,000 square feet was signed year to date.

And another: The pipeline of law firm lease expirations is thin until 2019 and the largest tenant in the market, WilmerHale, is expected to reduce its footprint from 500,000 to 300,000 square feet.

The problem is, of course, the industry segments that are growing -- the creative industries et al -- do not require large blocks of space to operate.

“I am anticipating the District to somewhat normalize based on small tenant demand and tightening of class B and class C properties, which are seeing a lot of leasing momentum,” Homa said. But the government give backs and law firm's relative lack of activity will probably mean the District will end up with a flat to slightly negative absorbency for the year, he continued.

This is what he is not anticipating: a return to four million square feet of positive absorption a year that the District regularly delivered pre sequestration. Not for a long time, if ever.

Northern Virginia, Southern Maryland's Growing Appeal

Meanwhile, growth drivers in Northern Virginia and Southern Maryland are attracting new tenants. That would be the life sciences industry in Maryland and, most recently in Northern Virginia, the jockeying for space along the Silver Line.

As JLL noted in its Q2 report:

The continued expansion of Capital One helped fuel over 200,000 square feet of occupancy gains in Tysons, with the company taking occupancy of 7900 Westpark Dr. in the second quarter. Reston-Herndon registered 87,500 square feet of growth in Q2, as tenants across industry sectors continued to migrate from off-Metro submarkets to Silver Line-served locations. Meanwhile, the I-270 Corridor benefitted from growth of the life sciences sector, and lab market vacancy fell to a historical low of 4.3%.

Novavax, Wellstat and Abt Associates each signed deals in excess of 100,000 square feet in Montgomery County, while a variety of technology companies, government contractors, nonprofits and professional services firms were active in Northern Virginia.

Instant Insights /

Negative Office Absorbency May Become the Norm for the District

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