Politics may have trumped Washington, D.C.’s office growth, but at least one company has released research to show that there’s a potential “Spacegate” cover-up underway to keep news about the market positive and upbeat.
It’s known that Washington, D.C.’s political volatility is currently matched by its lackluster office performance. According to a recent first quarter report from NAI Global, the overall Washington, D.C. market recorded a net absorption of negative 1.2 million sq. ft. in the first three months of 2016, and ended the quarter with a vacancy rate of 15.2 percent. Budget cutbacks and sequestration have left tenants and investors uncertain about the future and unwilling to expand, and forced developers and owners to look elsewhere for safer returns. Even Vornado Realty Trust reportedly is looking to pull out of its office holdings in the District.
Because the nation’s capital has always been an office powerhouse, however, many firms remain positive about the D.C. market. First quarter reports from companies including CBRE have tried to put the best spin possible on the lackluster fundamentals, touting tenant diversification and co-working. Revathi Greenwood, CBRE’s director of research for the D.C. region, says she sees strong investment and absorption growth ahead.
“From a macro level, D.C. is in a relatively good position,” she notes. “While the cutbacks in 2013 hit us hard, we’ve recovered, and our forecast GDP and job growth for D.C. surpasses the national average. Where we had been underperforming, we’re now picking it up, in areas such as cybersecurity, health care and non-profits.”
However, tenant rep firm Savills Studley has released a dissenting report, titled “We Respectfully Disagree.” According to the Savills study, the amount of available space in the D.C. market is at about 13.6 million sq. ft., more than double the amount of space available 10 years ago. Last year, the market absorbed less than 700,000 sq. ft. total, and that followed two years of consecutive negative absorption. Law firms of all sizes are shrinking their space use, says Savills’ D.C. director Tom Fulcher. Covington & Burling, for example, shrunk its space by 7.0 percent to 420,000 sq. ft. when it moved to CityCenter in late 2014, cutting lawyer offices by as much as 40.0 percent. Many of the other major law firms in D.C. have contracted in size as well.
“I remember when we used to see floors available for about 25,000 sq. ft. and discard it as too small. Attorneys wanted 50,000-sq.-ft floorplates,” Fulcher says. “Now, a 30,000-sq.-ft. floorplate is too big. The new workers are realizing they just don’t need the big offices anymore, it’s more about collaborative spaces.”
Lease times have also doubled, according to the Savills study. A decade ago, the average amount of time before a deal was signed was about 10 months. Today, an average listing will languish for almost two years. Rents—signed, not asking—have decreased, according to Savills data, and concessions have increased.
Both reports by JLL and CBRE tout the 68,000 jobs added in D.C. in the first quarter as another positive sign. And there is lease activity: Co-working companies such as WeWork and Spaces added almost 170,000 sq. ft. in three separate leases in the first quarter. However, Fulcher says space given up and shadowed by law firms and other traditional D.C. tenants lessened the gains. There may not be enough demand movement any time in the future that could pull the market out of its funk, he notes.
“I’m not sure why we’d see any changes for the next two years,” he says.