For some time now I've been writing about the lethargic pace of D.C.'s office market and how particularly large tenants, when they move, are shedding 10 percent or more off their monthly rent checks.
That's been cause for some obvious pain for landlords (the trend, hopefully, rather than my articles), but fresh figures from the D.C. Office of Revenue Analysis show just how starkly landlords are hurting these days and why many are probably looking back to 2008 with an extreme sense of nostalgia.
The latest version of the D.C. Economic and Revenue Trends report, which my colleague, Mike Neibauer reported on from a broad lens on Friday, show the effective rent landlords are paying for office space in the District now hovers at $42.05 per square foot. That's down about a buck from last year, when it was $43.27 per square foot, and much more steeply from its 2008 peak of $51.25 per square foot.
The figures, based on data from Alexandria-based Delta Associates, are in a sense much bigger than the nearly $10-per-square-foot spread over a period of six years. It speaks more to the notion of how desperate landlords have become in the face of densification, a shrinking federal government, new construction and an extreme hesitancy of tenants to make big leasing decisions without direction from Congress on future budget bills. The reason for that is that landlords will tend to throw a raft of concessions at tenants, including months of free rent and tenant improvement costs, before lowering their rental rate.
Why? Simple economics. If a landlord says his building's average rental rate is $52 per square foot, that means his building is worth X when it comes time to refinance or sell. If he lowers it to $48 per square foot, he has to lower his buildings worth as well, perhaps put up more equity to refinance, or take less from a buyer for the property. That's part of the reason Studley ( now Savills Studley following its merger) reported landlords offered concession packages of $136 per square foot last year, up 13.5 percent from the year before.A stark indicator for how tough times are for D.C. landlords, and good for tenants
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Washington, DC SERI Report 2014 (PDF)