Federal Government Is Losing Leverage With DC Landlords
JLL notes that space options for federal agencies that are greater than 50,000 square feet in Washington, DC have declined by 35% since 2015.
WASHINGTON, DC–A new research note from JLL concludes that the federal government is losing the leverage tenants typically have in this city with landlords. The reason? Space options for federal agencies that are greater than 50,000 square feet in Washington, DC have declined by 35% since 2015. At the same time, since the beginning of 2014, federal government net effective rents have increased by nearly 30%.
Driving this trend has been the rapid population growth and the delivery of new multifamily, retail and neighborhood amenities to the Southwest, NoMa and the Ballpark submarkets, leading developers to ditch their federal government leasing plans and shift focus to target the private sector at rates that are 10%-20% above the federal government’s prospectus cap, JLL said.
In addition to a limited pipeline, the General Services Administration must also content with the very big problem that among recently delivered buildings and those under construction, only one new building, Sentinel Square, is priced below GSA’s prospectus cap and can accommodate a requirement of greater than 50,000 square feet.
Another problem for GSA: many former government occupied buildings such as 1400 L and 1441 L are being repositioned to target the private sector.
A Better Environment in 2020-2021
JLL concludes that one bright spot for GSA is that as new product priced above the GSA’s prospectus cap floods the market, 2 million square feet of supply in the 2020-2021 proposed pipeline will likely focus on retaining or backfilling vacancy with federal agencies based on the supply-demand disconnect in the private sector development market.
But that won’t solve all of GSA’s space needs — there are 16 million square feet of federal government leases across the city expiring over the next five years. Leverage will continue to shift towards the landlords’ favor, JLL said. It writes:
With limited options and rising rents, the GSA may ultimately look at expanding their geographic focus or consider re-evaluating prospectus-cap levels Downtown or in Arlington County.