Washington Metropolitan Area Market Shows Sluggish Activity

3 Oct, 2012, Washington, DC

Cushman & Wakefield today released its Q3 2012 statistics for the Washington metropolitan area office real estate market, reflecting slowing activity from growing concern about budget cuts, the outcome of the presidential election and the state of the global economy.

Vacancy rates in the third quarter increased slightly in the District, hovering around 12.7%. Northern Virginia saw stable leasing activity, but year-to-date absorption is still approximately negative 1.5 million square feet. Suburban Maryland, driven by renewals, also showed signs of lethargic activity in Q3 2012. Coupled with tenant right-sizing, absorption for the year is negative 267,000 square feet.

"We're seeing a significant flow of capital into the technology markets, like San Francisco, Boston and Seattle, and other gateway cities like New York," said Brian Dawson, Senior Managing Director and Washington Area Leader. "While we have been relatively recession-proof, for the first time since the economic downturn that started in 2007, the capital markets are shying away from D.C. because of the questions surrounding Federal spending, the government contracting industry and sequestration."

In Washington, D.C., market indicators remained essentially flat during the third quarter. Leasing activity continues to run at about one-third less than the same period last year, while total absorption stayed in the negative 500,000-square foot range. Closed deals are mostly taking place in the Core markets (CBD and East End), which have been responsible for 88% of all new leases this year.

Associations and non-profits were particularly active this quarter, such as the United Nations Foundation's lease for 85,000 square feet at 1750 Pennsylvania Avenue NW and the American Institutes for Research at 1050 Thomas Jefferson St. NW.

Potential sequestration, Federal government paralysis and a slowing leasing market have contributed to cautious investors and underwriting activity. Although demand for well-leased core assets in the District remains strong, there is very little product on the market. The largest sales price per square foot for the quarter was Carroll Square, which traded fully leased for $121.4 million, about $681 per square foot.

In Northern Virginia, tenants' attraction to new construction, in conjunction with the flight to quality, was evident once again as the largest deal of the quarter was signed for a project that has not yet begun construction. Government contractor LMI agreed to take 170,000 square feet at MRP's 7940 Jones Branch Drive in Tysons Corner.

After several quarters of sharp increases, the overall vacancy rate stabilized at 18.1%, up only ten basis points from last quarter.

"On the positive side in Northern Virginia, there was increased activity in the third quarter. This movement will result in increased deal flow in the first quarter of 2013," said Brian Tucker, Executive Managing Director and Northern Virginia Market Leader. "In addition, we are seeing vacancy rates stabilizing. In a cycle like this, with rental rates depressed, tenants have adopted a flight-to-quality attitude."

Year-to-date sales volume in the Northern Virginia market is down significantly, from $3.3 billion in 2011 to its current $1.2 billion. While only five office properties sold, investors are targeting core, stabilized assets, such as Reston Town Center's Fountain Square, in which Boston Properties acquired a 50% stake and JP Morgan purchased 1940 and 2000 Duke Street in Old Town Alexandria.

While renewals have been prevalent across the region, they are dominating the Suburban Maryland market, comprising 56% of all leasing activity. While Prince George's County is responsible for nearly all of the loss in occupied space, Montgomery County as a whole has seen no net growth in 2012.

"While markets like Downtown Bethesda, the Pike Corridor and Silver Spring are performing well, particularly class A properties," said Paula Munger, Director of Mid-Atlantic Research Services, "the activity has not been robust enough to offset downsizing and consolidations in both the public and private sectors - resulting in a stagnant market overall."

Investors are active, though, with two million square feet selling this year, totaling almost $350 million. Brandywine and Allstate Insurance's joint venture purchase of Station Square in Silver Spring was the largest transaction of the year closed to-date in Maryland, at $120.6 million.

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