WASHINGTON, DC–Boston Properties is in active discussions with potential tenants for pre-leasing opportunities at 2100 Pennsylvania Ave., NW, according to comments its CEO Owen Thomas made during the REIT's recent earnings call. Last year Boston Properties struck a deal with George Washington University to redevelop that building and GWU's Rice Hall at 2121 Eye St., NW. That deal is subject to securing 480,000 square feet of entitlements, but once that happens Boston Properties will enter into a long-term ground lease with GWU to develop and own a leasehold interest in the property. According to Thomas:

This is one of the most attractive development sites in the Washington, DC CBD, and we have substantial pre-leasing interest for the project. Entitlements could be completed and development commenced in 2019 for a 2022 delivery.

Thomas' enthusiasm may seemingly be overstated based on the office supply and demand fundamentals that are coming to a head in the Washington DC area. The REIT naturally doesn't think so and we will get to in a minute.

JLL, in its Chart of the Week, estimates that class A vacancy will go beyond 20% in the next 24 months. Specifically, it says that the low pre-leasing activity at core redevelopments and off-core ground-up development sites will be the driver of the higher vacancies.

This is how JLL came to its conclusion.

From 1997 to 2006, office supply in Washington, DC increased by 16.9 million square feet. Meanwhile, local growth generated 19.4 million square feet of occupancy gains during that same time.

Since 2006, DC office supply has grown by 13 million square feet. But — the demand picture has changed thanks to rightsizing, consolidation and lackluster growth. Thus there have been limited occupancy gains of only 6.1 million square feet, a 69% decrease from the prior 10 years, causing vacancy to rise from 7.7% to 12%.

Yet despite this lower level of demand, speculative development continues to surge and construction activity has reached a cyclical high of 4.9 million square feet.

Voila — the perfect recipe for a 20% vacancy rate.

Boston Properties is well aware of these trends.

No Post-Election Bump?

Indeed, the one slim hope the local office market has — or is that had? — is that a new presidential administration would increase demand. Boston Properties president Doug Linde said in that same earnings call that CBD's office market fundamentals haven't seen any demonstrative positive change since the election. Of course, that could easily change — we haven't even closed on the first month of the Trump Administration.

But Linde pointed to one of the recent executive orders — a hiring freeze on significant portions of the federal government — which, he said, was probably unlikely to spur new GSA requirements. All in all, it is not a pretty environment, he said.

Landlords are still competing pretty feverishly on available space, and concessions in the DC market are pretty strong. 10 years or more leases are getting 12 months of free rent and at least $100 a square foot of tenant improvement allowances.

But then he added, “with the right product and the right locations, you can break away from the commodity leasing market and make a lot of money in DC” — 2100 Pennsylvania Ave., presumably, being one of those “right products.”

“You can still make money in DC,” Linde said a bit later in the call.

JLL's view does dovetail with Boston Properties' to a degree. In its Chart of the Week for DC, it noted that within the Trophy and Class A market, ground-up new developments will continue to capture a majority of demand, with preleasing levels registering 69% from 2014 to 2020.

However, JLL continued, redevelopment projects and quality, second-generation buildings are growing increasingly more difficult to lease due to inherent building flaws such as ceiling heights, column spacing and inefficient floorplate layouts.

Instant Insights /

DC Class A Office Vacancies to Top 20% in Next Two Years

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