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The District’s unemployment rate held steadyat 8.6% from January to February and postednet growth of 3,300 jobs; 4,700 private sector jobs were added, while public sector payrollswere cut by 1,400. With sequestrationcurrently taking effect, additional government job losses will hinderany significant growth over this year, yet signs point to a stabilizingprivate sector and increased economic clarity.
WEAKNESS IN CLASS B AND C KEEPS VACANCY UP
With little change over the last quarter, overall vacancy increased byone percentage point from the beginning of 2012 to 13.2%, markingthe seventh consecutive quarter of rising vacancy. At 14.3% class Aoverall vacancy is unchanged year-over-year, but has decreased by 0.4percentage points during this quarter as the flight to quality continues.Class B and C markets have seen overall vacancy increases of 3.6 and3.3 percentage points, respectively, over one year.Asking rental rates remain persistently high, increasing year-over-yearfor all classes, though contractions have been seen in recent months.At $60.36 per square foot (psf), the class A direct average askingrental rate decreased by nearly 2.0% over the quarter, while class Bdirect rents have contracted by 1.1% year-over-year. Concessions inclass A properties remain among the highest seen and are expectedto hold throughout 2013, averaging over $90 psf in tenantimprovements and around 12 months of free rent for new dealssigned this quarter with terms at or exceeding 10 years.
LEASING AND SALES OFF TO SLOW START
New leasing activity dropped by approximately 31% compared to thesame period last year with just under 900,000 square feet (sf) leasedthis quarter. Nearly all activity was in the core submarkets (East Endand CBD), as government and related demand has stalled in non-coremarkets with sequestration impacts.The appeal of new construction continues to reign supreme as dealsofficially signed for Pillsbury Winthrop Shaw Pittman LLP to take105,687 sf at 1200 17
Street NW (cutting nearly half its currentfootprint) and the American Hospital Association taking 42,000 sf atCityCenter. Approximately 83% of space currently underconstruction in the core markets has been pre-leased to date.Investment sales started off 2013 at a much slower pace than last yearwith only four buildings trading this quarter. Still, interest and pricingremains high for core and core-plus assets. The Portrait Building (7018
Street NW) sold to Clarion Partners for $98,500,000, or $733 psf,at an approximate 5% cap rate. Also notable, the NorwegianGovernment Pension Fund made its entrance into the U.S. market,purchasing a 49.9% interest stake in a portfolio of TIAA-CREF ownedproperties along the East Coast for $1.2 billion, two of which were inD.C. (the Evening Star Building and Franklin Square).
Vacancy is expected to increase further this year, but currentconcession levels coupled with a growing number of options inexisting buildings will make it hard for tenants to resist takingadvantage of a softer market, despite tepid first quarter demand.