The nicest buildings don’t necessarily fetch the lowest vacancy rates.
Of more than 2,300 office buildings within the District, 57 rank among the best of the best nationwide, earning a five-star rating. These five-star buildings, as defined by CoStar Group’s Building Rating System, feature the highest-quality materials, highest-quality design and construction, and supply the most-coveted amenities to their tenants. The majority of those prestigious buildings in D.C. fall within the central business district, East End and NoMa.
Analyzing the three neighborhoods with the highest number of five-star buildings, we see that the lower-rated buildings actually have the lower vacancy rates. This is not surprising, given that five-star buildings also tend to be the newest. In NoMa, developers recently added more than 652,000 vacant square feet between the completions of Sentinel Square II and Three Constitution Square. The two developments, built before tenants had been secured, inflated the five-star building vacancy rate to 17 percent, compared to a 4 percent average vacancy rate for three-star buildings in the same area.
The central business district and East End areas experienced a slightly less dramatic difference in vacancy among the differently rated buildings, showing a 6 percent and 7 percent difference respectively between the five-star buildings and those rated three stars.
With the different star ratings come similar differences in rental rates. Moving from a five-star building in the central business district, East End or NoMa to a four-star office property would save an average of more than $7 per square foot in asking rent. Tenants would see an additional $9- to $10-per-square-foot savings on average by moving to a three-star building. Of course, these savings come with a sacrifice to amenities, energy savings, space efficiency and prestige.
Although vacancy has decreased in five-star buildings located in the central business district, East End and NoMa areas over the past three years, rental rates have been on the rise as new developments reach completion. For now, more office tenants are choosing to lease or renew space in buildings with lower rental rates over the amenity-rich five-star buildings.
We may see rental rates level out as the five-star buildings constructed on spec in NoMa are leased.
Kirstie Boatright is a research manager with CoStar Group in Washington.
Source: CoStar Group
Exclusive Space Comes at an Exclusive Price
Different star ratings have different rental rates — with five-star buildings costing more per square foot than lower-rated buildings. The chart below shows vacant five-star space as a percentage of inventory and the average of rental rates by star rating for the central business district, East End and NoMa.