Washington DC Office Market: 2016 Forecast

Bolstered by a robust economic performance, the office market in Washington DC delivered a fine performance throughout 2015. Unemployment levels in the DC metropolitan area were at their lowest since 2008, reaching figures well below the US national average (4.3 per cent vs 5 per cent). These conditions have helped shape a real estate market that is predominantly favourable to landlords, as the following trends demonstrate:

  • Rental values continued their slow recovery throughout 2015 and are currently set around the $50 / square foot mark.
  • Availability rates for all types of office space went down to 16.3 per cent. Towards the end of 2015, approximately 13.2 million square feet of office space were vacant.
  • The most significant transactions involved lease renewals or re-lets, although there have been several large sale transactions taking place in the city’s East End too.
  • Annual absorption levels were high at 887,000 square feet, and construction activity increased by 22 per cent on a year-on-year basis.
  • However, here has modest decrease in vacancy rates, especially as far as Class A space is concerned. Vacancy rates for these types of office properties still remain relatively high at 11.5 per cent. Vacancy levels for Class B and Class C space in Washington were slightly lower at 10 per cent.
  • Washington DC Office Market: 2015 Key Facts & Figures

    During 2015, vacancy rates for all types of office space in Washington went down to 10.5 per cent, pretty much in line with the city’s historical average of 10.7 per cent. At the same time, net absorption levels increased by a staggering 185 per cent, going from 198,000 square feet in 2014 to 398,000 by December 2015. Nearly half of the transactions involved office stock in Washington’s CBD, which clearly outperformed all other sub-markets. This is attributed to the ongoing influx of new tenants relocating from secondary office locations into the CBD. This trend began to be evident in 2014 and has been solidified over the past 12 months.
    Average asking rates for Class A space were $50.69 / square foot, although as expected, they were slightly higher in Capitol Hill ($56.17) and in the East End ($55.20). In Washington’s CBD and in the West End, rental values stayed below average at $50.55 / square foot. The most inexpensive areas were Uptown ($41.27), Capitol Riverfront and Washington Southeast (both at $44.61), and Southwest Washington ($44.88). Average rental values for Class B & C space were also at their highest in Capitol Hill ($50.92 / square foot) and at their lowest in NoMa ($28.96).

    Washington DC Office Market: 2016 Forecast

    In the short term, the Washington DC office market is likely to consolidate its performance thanks to growing demand from new industry sectors and to the deliveries that are expected to come through the city’s development pipeline within the next 2 years. At the end of Q4 2105, there were 2.8 million square feet under construction in the Washington metro area. The majority of the city’s new office developments are clustered around Capitol Hill, where more than 966,000 square feet of Class A space will be soon added to the city’s office stock. Other areas expected to attract a high number of transactions in the near future include the CBD, Southwest Washington, and the East End.

    Another factor that will have a positive impact in the DC office market is the extension of the federal budget for an additional 2 years, which is expected to raise confidence levels among DC employers.

    Although rental growth may remain subdued given the relatively scarce presence of high-growth sectors (like IT and energy), strong demand is expected to come from the legal, B2B, and not-for-profit sectors.