One of many conference rooms in the new offices of the international law firm Convington & Burling at One CityCenter, 850 10th St. NW, Washington, DC, December 10, 2014. The firm moved their offices this year after more then three decades on 1201Pennsylvania Ave. (Evy Mages/For The Washington Post)
A conference room in the new offices of the law firm Convington & Burling at One CityCenter, 850 10th St. NW. (Evy Mages/For The Washington Post)

For all the concerns about Washington-area commercial real estate, and there are many, there also are reasons to be optimistic about the market in 2015.

With a slowdown in leasing that began more than three years ago, tenants with expiring leases have had their choice of options recently. Competition for deals has bred heated competition among building owners, with landlords regularly offering to waive a month of rent or foot the bill for build-out of tenants’ space in order to sweeten a deal.

Local governments have not been shy about subsidizing companies to stay in or move to their jurisdictions either, as evidenced by public commitments that will keep the Corporate Executive Board in Arlington and RapidAdvance in Bethesda, as well as one that prompted satellite communications firm Intelsat to relocate to Tysons.

But things are not all bad for Washington building owners, as a year-end report from CBRE reminded by ranking downtown Washington as the 25th most expensive office market in the world. Only Midtown Manhattan, downtown San Francisco and downtown Boston ranked higher among areas in the U.S.

Washington is even ranked a couple of steps ahead of downtown Manhattan.

CBRE Global

Office vacancy rates are still at extremely high levels by local standards. Overall vacancy is at 17.1 percent region-wide, including 12.0 percent in Washington, D.C., 19.4 percent in suburban Maryland and 19.9 percent in Northern Virginia.

That’s higher than at any point of the recession.


But leasing has finally begin to pick up, producing some nascent optimism as 2015 arrives. In the fourth quarter, 800,000 square feet more space was leased than was vacated, according to year-end data from the services firm JLL. That marks the Washington region’s largest gain since early 2011, and it happened for a couple of reasons.

First, growth from tech firms began to make a difference.  Deals from Amazon, Google, Arlington-based health software and services firm Evolent Health and Cvent, a Tysons-based maker of events software all contributed to the growth. In all, JLL found that 29.8 percent of tenants that made deals in the fourth quarter were taking more space, while only 12.3 percent were shrinking or taking less space.

JLLTenants

Second, construction of new buildings has begun to taper. Developers in Washington were aggressive building new projects coming out of the recession, putting up new buildings in downtown D.C., the NoMa neighborhood behind Union Station, Arlington, Tysons Corner and elsewhere.

Since then builders have tightened the spigots considerably. In 2015 that tightening will be on display, with only 1.5 million square feet of offices being completed, most of it it in D.C., some in Maryland and almost none in Northern Virginia.

Only about 2 million square feet of new space will be completed the following year. Compare that to years during the boom, when 8 to 10 million square feet was being completed every year.

JLLconstruction

Not everyone is quite so optimistic, as the Washington area, and Northern Virginia in particular, are still undergoing a painful transition away from federal government and contracts.

There has been job growth in some non-government industries and employment areas, which is responsible for part of the expansion underway at the moment. Yet the region overall remains behind on a measure that most real estate folks consider essential: job growth.  According to the Alexandria research firm Delta Associates, Washington still trails most comparable major metropolitan areas on that mark.

DeltaJobs

Follow Jonathan O’Connell on Twitter: @oconnellpostbiz