WASHINGTON, DC–Recent stats for Q3 show that office leasing in the District suffered a setback for the third quarter, following seven quarters of positive net absorption. In previous cycles that would suggest very strongly that the city heading back to tenant market territory.

However, it is not that simple anymore.

First the stats:

The District posted almost 50,000 square feet of negative absorption, CBRE reports.

Separately, JLL reports that Class A vacancy across DC is at its highest level since 2010 at 15.3% and Class A asking rents have only grown by 1.2% over the past 12 months.

That said, the fundamentals behind these numbers can be read as positive.

CBRE says that part of the reason for the negative absorption was the continued delay in leasing decisions, exacerbated by the upcoming elections. More significantly — overall demand is still positive on a year-to-date basis at 177,000 square feet and that cumulative net absorption over the prior 24-month period is positive at more than 882,780 square feet.

As for the high vacancy rates and limited asking rent growth for Class A product, JLL attributes that to development activity throughout Washington, DC which has ramped up over the past 12 months. There is now 5.6 million square feet under construction, 3.3 million square feet of which remained available at the end of the third quarter.

“Recent ground breakings and plans for proposed projects have materialized largely to target large law firms with leases expiring in the 2020-2024 time frame,” it said in its analysis of recent activity.

And CBRE reports that speculative development is on the upswing here, with three of the six office buildings breaking ground this year doing so on a speculative basis.

In all, there are 12 buildings totaling 2.1 million square feet currently under construction in the District of which nine began speculatively. These 12 buildings are now 22% pre-leased.

So, weighing all these facts, is the District in a good place or not?

Mixed Signals

The market is sending mixed signals, Revathi Greenwood, CBRE's director of Research tells GlobeSt.com.

Companies are clearly waiting and watching before deciding to lease space especially large blocks of space, she said.

Some of the metrics are pointing to a tight market market, she noted, while others are pointing in the opposite direction. Another way to put it, Greenwood said, is that the market is currently polarized based on class, submarket and sector.

The City of High Concessions

One important fact to note is that DC has retained its title of the market with the highest level of landlord concessions, Greenwood added.

“The average is in in the $74 per square foot range but they can go as high as $100 to $110 per square foot.” Greenwood added she has heard of one or two deals in which concessions totaled $120 per square feet and there is talk of rent free concessions as well.

“It is too early to say if this is a rumor or truth or an emerging trend that will spread,” she said.

With fewer deals completed in the third quarter, it is just too soon to say, she said.

What's Going on in Class B

Meanwhile in the Class B space, conditions are tightening as the creative sevtor demand for space increases, Scott Homa, Senior Vice President and Director of Mid-Atlantic Market Research at JLL, points out.

That is one factor that distinguishes this cycle from previous ones, he told GlobeSt.com — usually the metro DC market tightens from the top-down with tenants driven by a flight-to-quality.

There has been a resurgence in Class B tenant demand downtown and the strong performance of second-generation space in Metro-proximate and walkable suburbs have been a direct result of the changing motivations within the regional tenant base, the JLL report noted.

“Tenants love the value that Class B space provides and are drawn to fact that most landlords will offer leases at three, five seven year terms,” he said

“The value and flexibility that Class B provides is very appealing. Layered on top of that are the existing B and C product owners that are doing strategic renovations in search of a rent pop.”

Landlord or Tenant?

All of this is to say that the answer to the question, 'is DC now a landlord or tenant market?' is, well, yes.

“It's a nuanced conversation that may get down to the building level,” Homa said.

“Larger tenants have fewer space options but they will get better concessions. But will also pay a high face rate.”

Conditions are more favorable for tenants in the B space, he added.

The trophy market, meanwhile, is more balanced, Greenwood said. “I wouldn't call it a landlord's market but it is definitely tighter, which is why you are seeing spec construction.”

Instant Insights /

Landlord or Tenant Market? DC's Identity Crisis

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