Washington, DC’s office market has thus far failed to reach the heights of 2015’s robust leasing environment, which posted over 6.5 million square feet of activity after two quarters. This year, leasing activity totals just 3.5 million square feet at the end of the second quarter – a 46.1% decrease year-over-year. The very top end of Class A office product, especially space in newly constructed and trophy quality buildings, remains in demand but the rest of the market is lagging.
Owners of non-trophy Class A and B buildings are attempting to bridge the gap via several routes. They are making substantial capital improvements to their properties and offering abated rent periods and improvement allowances. So far, these escalating efforts have not had a significant positive impact on the overall market. This works to the advantage of tenants. Tenants can capitalize on a soft market, often moving to a new location that makes more financial sense and better suits their way of working, or they can restructure their existing deal and reduce their footprint. Tenants have been shedding space at an unprecedented rate, resulting in an availability rate that rose 0.4 pp from last quarter to 12.9% - the equivalent of nearly 600,000 square feet of space.
The District’s downtown core accounted for the majority of the market’s leasing once again this past quarter, totaling over 1.4 million square feet leased between the CBD and East End/Convention Center submarkets. The CBD was the site of Washington, DC’s largest lease of the quarter – a deal by the Board of Governors of the Federal Reserve System for 218,552 square feet at International Square. New construction in fringe markets has sparked interest in areas outside of the core, especially in Southwest where the International Spy Museum inked a deal for 140,000 square feet at a new building at 900 L’Enfant Plaza, SW.
Washington DC’s office market showed little positive movement to indicate that the tenant-friendly environment is fading. Many firms are still seeking early renewals and restructures to which landlords are more than happy to oblige, often offering more than one year’s free rent plus TI allowances. Owners of underperforming buildings throughout Washington, DC are being forced to spend substantial amounts of cash up front to bring their buildings up to the standards expected in a Class A building. However deals are not materializing at the rate seen in the last two or three years, compelling landlords to be aggressive in their pursuit of new tenants.