D.C.’s central business district sees a cooling in offices and apartments

September 8, 2013

Real estate in the District’s once-hot central business district has cooled off some this year, as demand has failed to keep pace with the available supply of office space and apartment units. By contrast, the condominium market has benefited from limited availability.

Office market: Vacancy rates remain elevated

The central business district’s office market has 40.1 million square feet of inventory as of mid-year 2013. Net absorption of office space (the change in the amount of leased space) was positive 161,000 square feet in the second quarter of 2013 after falling by 162,000 square feet in the first quarter of the year. The direct office vacancy rate was 9.1 percent at mid-year 2013, up from 8.4 percent a year earlier. The overall vacancy rate (including sublet space) was 10.1 percent at mid-year 2013, up from 9.6 percent at mid-year 2012.

Effective office rents, for all classes of space in downtown, declined 1.7 percent during the first half of 2013, after declining 2 percent during all of 2012.

Concession packages are expected to remain more generous than normal during the remainder of 2013. Many potential tenants are hesitant about leasing space, given economic uncertainties, and additional space continues to come on the market. With the General Services Administration largely absent from the market and the private sector seeking ways to reduce occupancy costs, owners are offering an average of $85 per square foot for tenant improvements to Class A (top-tier) space.

We expect effective rents for all classes of space to decline 3 percent to 4 percent during 2013. Rents should remain soft during 2014 and we do not expect they will gain traction until 2015. Even with current declines in rent, the central business district should remain one of the Washington area’s premier office destinations in the long-term thanks to its proximity to government agencies and corporate headquarters as well as its accessibility via Metrorail.

Apartment market: Class A rents edging down

During the 12 months ending mid-year 2013, the Class A high-rise apartment market in central D.C. experienced a decrease in the average effective rent of 0.7 percent, while the stabilized vacancy rate (for properties no longer in the initial lease-up period) ticked up to 3 percent from 2.9 percent. The vacancy rate for all Class A high-rise units, including those in the initial lease-up period, decreased to 3.3 percent from 6.2 percent a year earlier.

At mid-year, the pipeline of new apartments in central D.C. totaled 1,788 units that were under construction and available, or planned and likely to deliver within 36 months. This is 634 units fewer than at mid-year 2012, which is a substantial decline compared to some other District neighborhoods during that period. By comparison, the District’s entire pipeline, on a net basis, declined by 570 units.

Although per annum effective rent has edged down since mid-year 2012, strong demand, receding new development, and relatively low concessions signal a bright long-term future for the central D.C. apartment market.

Condominium market: Low supply of new units

The new condominium market in central D.C., which experienced 165 sales during the 12 months ending in June 2013, is the only District neighborhood to increase the amount of units sold during that period of time compared with the year prior.

Since 2005, central D.C. has maintained the highest average annual percentage change in price, in addition to featuring a substantially higher price per square foot. The average effective price per square foot was $790 compared to the District average of $580.

With a 36-month pipeline of 685 units as of mid-year 2013, central D.C. represents 37 percent of the District’s future inventory. While new condominiums are on the way and some smaller apartment projects may be switched to condominium projects, the relative lack of new condominium supply has helped fuel resale activity across the District.

Joshua Cohen is an associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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