Landlords hoping for the market to turn their way might be waiting awhile
April 29, 2016

Representatives for tenant-rep brokerage Savills Studley and publicly traded real estate investment trust Boston Properties (NYSE: BXP) might not always see eye to eye, but on that point they are in lockstep — underscoring the strong possibility of a sluggish couple of years for leasing activity in the region.

Boston Properties President Doug Linde told analysts on an earnings call Wednesday that of all the markets where his REIT is active in, D.C. is showing the weakest level of activity. That's due to a mix of causes, including the densification trend, which led many of Washington's largest space users to sign new leases for less space years ahead of when their current leases were set to expire.

"We've seen a number of comments suggesting that the D.C. office market has turned a corner. Our view is that there has been no demonstrable change to the leasing environment," Linde said on Wednesday's call. "The Washington, D.C. [market] is a challenged market, and there is not much evidence of improvement."

Boston Properties recently lost Miller & Chevalier Chartered as an anchor tenant at Metropolitan Square, a nearly 590,000-square-foot office building at 655 15th St. NW. The firm was able to partially recover with a 117,000-square-foot lease in the same building to WeWork.

Linde's take overseeing a D.C. area portfolio of 10.8 million square feet is far from an isolated perspective, even though some brokerages have been pointing to the prospect of a turnaround for D.C.'s office market. I talked earlier in the week with Savills Studley Executive Vice President Tom Fulcher Jr., who said there are more signs that leasing activity will remain sluggish in the near term rather than pick up markedly.

"It's possible that, in a few years, things will shift, but I don't think we have a timeframe on that," Fulcher said. "We just don't see any industry sector that's going to drive that growth."

Savills Studley is working with a tenant looking for about 30,000 square feet in downtown D.C., Fulcher said, and his firm's search yielded nearly 40 viable options on in their target area east of the White House. What's more, he said, landlords are still dropping their rental rates and increasing their concession packages to get new tenants or keep the ones they have.

These are steps Fulcher said will need to start tapering before the region's office market shows any real sign of improving conditions. Total rents actually fell by 3.8 percent in D.C. last year, with concessions having increased by about $3 per square foot, according to the brokerage.

There are several data points that brokerages including Cresa, JLL and West, Lane & Schlager have highlighted that make the case for a market on the mend. There were roughly 62,000 new jobs created in the D.C. region last year, for example, and an uptick in tenant demand and rental rates. But Savills Studley Research Manager Anthony Jones said those stats, too, can be misleading.

"That sounds great on the surface, but what does that really mean?" Jones said. "We just don't see any industry sector that's going to drive that growth."

Of job growth, Jones said, roughly 57 percent of those new jobs were in sectors such as leisure and hospitality or educational and health services, sectors that don't tend to generate an increased demand for office space. The larger consumers of space, including federal agencies, big law firms and even associations and nonprofits, have been shedding space over the past few years and for the most part don't show any signs of significant growth plans in the near term...

Landlords hoping for the market to turn their way might be waiting awhile

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