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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.
STRONG TENANT APPETITE FOR NEW CONSTRUCTION
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.
SALES OF CORE PROPERTIES CONTINUE
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 %
CLASS A OVERALL VACANCY RATES
9 9 2 3 7 1 9 8 3 0
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