Strong leasing activity from the federal government continued to drive Washington, DC's office leasing market in the first quarter of 2011. As a result, the availability rate of prime office space in the areas of the city traditionally favored by government agencies, mainly Southwest and NoMa, continued to decline to historically low levels, according to a report issued today by international commercial real estate services firm Studley.
Despite the buoyancy of these non-core submarkets, the District's availability rate has changed little from the fourth quarter, declining less than one percent in the first quarter to 11.3 percent. This tepid level of growth can be attributed to a private sector that has yet to display a strong propensity for growth and expansion. The report further illustrates that availability rates in the Central Business District (CBD) and East End, home to the bulk of the city's private sector companies, have been nearly static over the last several quarters. The CBD's availability rate, currently at 13.5 percent is among the highest of an area in the District.
There are some encouraging signs as a limited number of law firms, associations, and start-ups like Living Social are beginning to demonstrate an appetite for more space. At the same time, other companies, particularly law firms, are still putting space on the sublease market in an effort to maximize the cost efficiency of their real estate. Add to this the nearly 350,000 square feet left behind after the dissolution of law firm Howrey in the East End, and it begins to become clear why the fundamentals of DC's downtown submarkets continue to favor tenants.
The relatively lackluster performance of the downtown DC submarkets especially presents opportunities for small to medium-sized tenants.
"As many tenants continue to 'right size' their spaces, there are multiple opportunities for second generation space which is often not reflected in current vacancy numbers," said Studley Executive Vice President Tom Fulcher.
Federal leasing has also reduced options for some of the largest tenants in the market.
"We're seeing that tenants with 150,000+ square foot requirements considering non-core submarkets have decidedly fewer options to choose from given the recent federal leasing activity, while tenants looking downtown have many more choices" said Christian Volney, Research Manager for Studley's DC office. Volney predicts that tepid private sector growth combined with the limited number of large leases rolling in the next several years will produce very few tenants with such large requirements.
"Of DC's top 50 law firms, for example, there are only three with leases expiring prior to 2014 that are currently in the market for space," said Volney.
The report also shows that, even with the relatively limited demand from the private sector, the Washington, D.C. commercial real estate market continues to be a top performer among major U.S. metro areas thanks to what have been up till now growing space needs and stabilizing presence of the federal government. The future outlook is less certain as the local market could lose a step in 2012 or 2013 if the fiscal restructuring seen at the local and state levels finally makes its way to Congress and the Administration in a meaningful way.
"If government leasing activity slows, the District will need to rely on a broad-based recovery in the private sector to support the commercial real estate market," noted Fulcher. "While substantial changes to spending and entitlement programs will be unlikely to affect the market until after the 2012 election, we will experience a bit of a lull in the number of large tenants with lease rollovers in the next several years which could impede rent growth and limit demand for new space."
The Q1 Studley Report is available online at www.studley.com.