Daytime view along busy Constitution Avenue, Washington DC. Cars and buses wait at red lights, the Capitol building providing a striking backdrop.

In addition to being the political center of the nation, the Washington DC metro area acts as the hub of a prosperous region characterized by a diverse economic base and solid infrastructure.

With a total population of more than 6 million people, the metro area is among the top 10 largest in the nation. Businesses established here benefit from access to a large potential customer base, a central location on the East Coast, and a business-friendly environment.

Washington, D.C. is listed as one of the top cities to start a company and one of the top global cities for entrepreneurial talent.

The city is accessible from other major US urban centers by train services, as it's home to the nation's second-busiest train station. Three airports serve the metro area and connect the city with major destinations in Europe, Asia Pacific, and the Americas.

Commercial and Business environment

The latest data shows a count of approximately 80,000 businesses, including 16 Fortune 500 companies, such as General Dynamics, Fannie Mae, Lockheed Martin, Capital One Financial, and Marriott International.

The city offers a supportive environment to small businesses, which make up more than 75% of total company count and provide approximately 49% of all jobs in the city. DC is also home to one of the best startup ecosystems at a global level.

The local economy has proven resilient in a post-pandemic environment, since many local businesses have been able to adapt to remote work. In fact, during the challenging years of 2020 and 2021, the city even witnessed an increase in the number of business applications.

The most important sectors by GDP contribution include information services, retail, manufacturing, transportation, technology, professional and business services, life sciences, and government.

Here, it's worth mentioning the strength of the FIRE sector (finance, insurance, real estate), with special emphasis on finance, since the city ranks in 14th place in the list of the world's most competitive financial hubs (2021 Global Financial Centers Index).

Commercial Property and Office Market

In D.C.'s metropolitan area, the main sub-markets are Northern Virginia and suburban Maryland, with important hubs in Bethesda, Arlington, Silver Spring, and Reston, in addition to the District itself. Total office space inventory is approximately 370 million square feet, of which 200 million are Class A space. Most office buildings are in Washington's CBD and in East End, with approximately 200 office towers each.

Post-2020, the office market has become more favorable to tenants, as rising vacancy rates and stable rents offer wider choice and affordability of commercial real estate for lease in Washington DC, especially to those looking to rightsize or downsize. As a result, the office market is especially active with relocations and lease extensions.

The city-wide vacancy rate averages at 18%. Within the District, the lowest vacancy rates are in NoMa and Southeast Washington, and the highest in Market District. In the metropolitan area, record-low vacancy rates are evident in Branch Avenue Corridor and Clarksburg (1% to 2%).

Average asking rents remain under $60 per square foot in the District, except in Georgetown and Capitol Hill, where they hold above-average values in line with previous years' rent growth trends. Class A rents in the District are just under $70 / sq ft, $50 for Class B, and $40 for Class C. The lowest asking rent across all classes is in Northeast DC, Columbia Pike, and Burtonsville, averaging $20 / sq ft.

As the political center of the nation, the government sector carries an important weight as the main occupier of office space, and is typically behind the largest lease transactions. Other important sectors in terms of occupancy are nonprofits, technology, legal and financial services, and flexible/shared office space operators.

On that point, it's worth noting that pre-pandemic, D.C. was one of the largest markets for flexible office space in the entire nation. The sector remains strong despite economic headwinds and the impact of the pandemic on all forms of office occupancy, mainly due to the fact that many D.C. firms successfully transitioned to hybrid or remote work models that require less space and make use of third-party office space.

Also contributing to the resilience of the flexible office market is the fact that this sector had grown sustainably pre-pandemic, only taking up 2% of all office inventory, so overall the market was less reliant on this type of asset.

Retail and industrial market

Washington is one of the top retail markets nationwide. Retail property fundamentals remain strong as tenants seize opportunities in rapidly expanding suburban markets, especially in Fairfax County, Alexandria, and Manassas.

In the metro area, vacancy rates average 5%, and asking rents average $30 / sq ft. Fundamentals and prospects are optimistic, even post-2020, and especially with regards to the entertainment and hospitality sectors. Grocery store inventory is also expanding post-pandemic, with some 50 new grocery shops opening since.

The industrial real estate market around Washington D.C. is mostly healthy due to the strength of e-commerce sales activity, a balanced absorption vs. deliveries ratio, and rising rents that reflect a strong appetite for industrial space in this area.

Businesses that conduct industrial operations in the D.C. area benefit from proximity to Baltimore's deep water port and excellent onward connections, as well as access to millions of high-earning consumers, given that the metro area has one of the highest median household income levels in the US.

This is an active market with a total inventory of approximately 211 million square feet, and more than 3 million square feet of space under construction, mainly in Dulles, Manassas, and Frederick County.

Rents are growing at rates of 16% per year, and the latest data shows averages of just under $12 / sq ft. Vacancy rates are at historical lows of 3.7% for warehousing and distribution space and barely 1% for manufacturing space, further confirming the buoyant status of D.C.'s industrial market.

Future Forecast

The outlook for commercial real estate in Washington D.C. presents some discrepancies in performance across different markets. For example, office space is likely to be marked by high vacancy rates outside of trophy buildings.

It's also worth noting the ongoing decline in employment numbers in office-using sectors (such as financial services), which may tip the office market in favor of tenants.

On the other hand, prospects for industrial space are much brighter over the short and medium term. Retail is also expected to perform well in markets where multi-family housing is expanding.

Despite the above, according to industry experts, market fundamentals in the downtown Washington D.C. commercial real estate sector, are likely to remain stable, as long as other factors and economic indicators remain positive, including a below-average inflation rate, moderate GDP growth, and an increase in employment within high-value industries.