Washington’s recent temperature plunge wasn’t the only thing moving into negative territory. Office demand by government tenants across the region was also negative through the third quarter of 2013.
While the polar vortex quickly dissipated to give way to thawing temperatures, no warming trend is likely in the office leasing market for government tenants, judging by recent federal real estate guidelines.
Luckily for building owners, demand for office space within the private sector was strong enough to offset sluggish moves by the government, pushing overall absorption back into positive territory.
The federal government has been consolidating or shrinking its footprint since the automatic spending cuts known as sequestration took effect in March 2013, accompanied by the “Workspace Utilization Benchmark” issued by the General Services Administration in July 2012 that encourages “minimizing square foot usage by implementing innovative work space strategy, such as hoteling and teleworking.”
Despite the emphasis on doing more with less, federal tenants were active in some areas of the region. In Tysons Corner, federal tenants were responsible for 150,000 square feet of positive office space absorption for the 12 months ending September 2013. The private sector was also active in the Tysons area, leasing 240,000 square feet of office space during that period.
The District neighborhood known as NoMa was another area that attracted both GSA and private office users. Government tenants leased 180,000 square feet and private sector tenants took 1.5 million square feet during the 12-month period ending September 2013. In the city’s Southwest neighborhood, the net change in leased space was a positive 320,000 square feet, while the private sector shed 1.4 million square feet.
With many government leases coming up for renewal in the next few years, the GSA is expected to continue to economize and consolidate its office space in the region. We have already seen some federal agencies move to less expensive suburban locations, such as the National Science Foundation and the Fish and Wildlife Service did in 2013.
Despite some head winds, overall absorption for the Washington office market in 2013 remained positive, a welcome sign for the developers who have recently completed construction on new office buildings. However, the growth in supply is likely to outpace demand in 2014, leading to slight vacancy expansion — and more affordable office rents.
Maeve Gallagher is a real estate economist for CoStar Group.