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WashingtonDC Americas MarketBeat Office 3page Q22012 (1)

WashingtonDC Americas MarketBeat Office 3page Q22012 (1)

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Cushman & Wakefield of Washington, D.C.2001 K Street, NW, Suite 700Washington, DC 20006www.cushmanwakefield.com/knowledge
The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy orcompleteness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawalwithout notice, and to any special listing conditions imposed by our principals.© 2012 Cushman & Wakefield, Inc. All rights reserved.
Employment continues to grow in theWashington D.C. Metropolitan area with39,200 jobs added to the region over the pastyear. Leisure/hospitality has been the bestperforming sector, followed by education andhealth services, which is also experiencing strong growth on anational level. The office-using sector has been adding jobs, butgrowth is much less robust than last year. The District’sunemployment rate, based on employment status of D.C. residents,improved to 9.3%, its lowest level in more than three years.
New leasing activity remained sluggish during the second quarter, andyear-to-date has dropped by 34% compared to the same period lastyear. While many businesses are flush with cash, they are notimplementing growth strategies, be it through investment or newhiring, due to persistent global economic uncertainties. In addition toeconomic woes both at home and abroad, the potential for massivefederal budget cuts, or sequestration, starting on January 1, 2013 hasbusiness leaders on edge. Thus, the trend of short-term leaseextensions and renewals continues.The health of the legal services industry, a main driver of theDistrict’s economy, was once again put into question as the law firmof Dewey & LeBoeuf collapsed. Long-term trends in the industryincluding high price tags for recruits and aggressive growth throughmergers have led to a potentially highly-levered business, in general,causing landlords to focus on concession packages and correspondingsecurity deposit requirements.Over a year after Howrey collapsed, approximately 300,000 squarefeet (sf) of vacant space remains on the market at 1299 PennsylvaniaAvenue NW. The Dewey & LeBoeuf space will add about 140,000 sf of space to the East End submarket once it’s fully vacated within thecoming weeks and under the landlord’s control.No new leases over 100,000 sf were completed in the District. Thelargest lease was signed by the General Services Administration(GSA) on behalf of the Consumer Financial Protection Bureau forapproximately 72,000 sf in the CBD (FHFA sublease space). The newbureau was established by The Dodd-Frank Wall Street Reform andConsumer Protection Act of 2010. Dechert LLP committed torelocate its offices to 51,176 sf at 1900 K Street NW, reducing itsfootprint by about ten percent. Sullivan & Cromwell leased 49,549 sf at Carr Properties’ new project at 1700 New York Avenue NW,expected to deliver during the third quarter of 2013.
Overall vacancy rates in the District ticked up for the thirdconsecutive quarter, with 12.5% of office stock sitting vacant. Eventhe class A market, which had been steadily improving, experienced aslight increase in vacant space, due in part to the delivery of 1000Connecticut Avenue NW. While it was about 85% preleased, itsanchor tenant has yet to take occupancy.STATS ON THE GO
Overall Vacancy 11.5% 12.5%1.0 ppDirect Asking Rents (psf/yr)$51.40 $51.400.0%YTD Leasing Activity (sf) 3,163,349 2,099,566-33.6%
   5 .   2   4 .   5   5 .   8   4 .   8   2 .   1 YTD
  m  s   f
6.0%8.0%10.0%12.0%14.0%$46.00$48.00$50.00$52.00$54.002008200920102011Q2 12
  p  s   f   /  y  r
A Cushman & Wakefield Research Publication
Q2 2012
Cushman & Wakefield of Washington, D.C., Inc.2001 K Street, NW, Suite 700Washington, DC 20006www.cushmanwakefield.com/knowledge
The market terms and definitions in this report are based on NAIOP standards.No warranty or representation, express or implied, is made to the accuracy or completeness of theinformation contained herein, and same is submitted subject to errors, omissions, change of price, rental orother conditions, withdrawal without notice, and to any special listing conditions imposed by our principals.© 2012 Cushman & Wakefield, Inc. All rights reserved.
Absorption was slightly negative during the quarter, bringing the year-to-date total to negative 497,707 sf, with the core markets of theCBD and East End experiencing the greatest decreases in occupiedspace. During the second quarter, Ballard Spahr vacated a large block at The Homer Building in the East End. Space was also left behind bythe National Association of Manufacturers at 1331 PennsylvaniaAvenue NW and by Parsons at 1133 15
Street NW.Direct asking rents for all classes of space have remained flat over thepast year, at $51.40 per square foot (psf). Asking rents for class Aspace have increased by 2.6% from the same time last year and areaveraging $60.81 psf. In the CBD, class A asking rents increased by$2.35 psf since last quarter primarily due to a large block of spaceavailable for lease at the newly completed 1000 Connecticut AvenueNW.Asking rents certainly do not tell the whole story, however, aslandlords have been reticent to reduce them while remaininggenerous with concession packages. Tenant improvements in class Aspace have topped out at $110 psf in 2012, with an average free rentperiod of about 7 months, based on at least a 10-year term.
The 370,545-sf class A office property at 1000 Connecticut AvenueNW was completed during the second quarter, with Arent Fox as itsanchor tenant, leasing 254,475 sf, which it will occupy later in theyear. Tenant interest in the remaining availabilities in the building hasbeen strong.Carr Properties broke ground on 1700 New York Avenue NW withsubstantial lease commitments already in place: over 49,000 sf fromSullivan & Cromwell, LLP and about 30,000 sf from The Smith Group,who is designing the property. The 120,000-sf class A property,which will have sweeping views of the National Mall, is expected todeliver during the third quarter of 2013.Construction is moving along at City Center as Covington & Burlingsigned a letter of intent for about 415,000 sf. If the deal closes, one of the District’s largest law firms will move into its new space in the EastEnd in early 2014.Constitution Square Three has yet to secure a lead tenant. The400,000-sf spec property is scheduled to deliver at the end of nextyear in the tightest submarket in the District. Capitol Hill/NoMA hasa direct vacancy rate of just 8.5% for all classes of space.
Demand for office product in the District of Columbia remainedresilient through the second quarter. Year-to-date sales volumestotaled $1.6 billion, down from last year’s levels but significantlystronger than the suburbs. Foreign buyers continue to focusdowntown, particularly for trophy assets, although institutional andlocal/regional investors have also added assets to their D.C.portfolios. The highest price per square foot this quarter was paid by Jamestown Properties, who purchased 733 10
Street NW fromSkanska for $138.3 million, about $818 psf. The 171,171-sf property,built just last year, is nearly fully occupied. California-basedCommonwealth Partners closed on Hamilton Square (600 14
StreetNW), its first direct acquisition in the D.C. marketplace, for $198million, just under $800 psf. Both properties traded at sub-5% caprates. While pricing has been robust for trophy and class A assets, awidening gap exists between this product type and other officeproperty classes, with as much as a 150-basis point spread. Still,several core and core plus assets are currently under contract asdemand shows no signs of waning.
While there seems to be little argument that the office market in theDistrict is retrenching, prospects for the long-term are strong. Thenext 12-18 months will be challenging as businesses await theoutcome of the European debt crisis, the U.S. Presidential election,and the process by which Federal budget cuts are implemented.While government may be shrinking overall, the fact is that anybusiness which has dealings with the government, regulatoryinstitutions, or lobbyists, must have a presence here in order toachieve its objectives. The recent wave of law firms and educationalinstitutions setting up shop for the first time in the District illustratesthis point. While the tech sector has never had a stronghold in D.C.,the administration is taking active steps to attract and retain techfirms. A tax incentive package worth $32.5 million for Living Social toretain its headquarters here is well on its way to final approvals.Cushman & Wakefield expects vacancy rates to increase slightly,peaking at 13.0% next year before beginning a slow recovery.Elevated vacancy rates, caused by lackluster demand, reduced tenantoccupancy footprints, and new construction will cause rents tocontinue to decrease before they flatten out next year. While theoffice market will experience a period of negative growth, privatesector job growth is forecast for the region over the next severalyears. A stable job market coupled with a healthy housing marketexemplify a Metro Area which is in much better shape than manyother areas of the country.CLASS A VACANCY RATES BY SUBMARKETNEW CONSTRUCTION DELIVERIES
   8 .   4   %   8 .   6   %   1   1 .   1   %   1   1 .   9   %   1   7 .   8   %   1   9 .   3   %   2   0 .   8   %
GeorgetownNoMaUptownEast EndCBDRiverfrontSouthwest
   9   9   2   3   7   1   9   8   3   0
  s   f  t   h  o  u  s  a  n   d  s

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