CBRE Group, Inc. announced the second quarter office market overview for the Washington, D.C. region. Gross leasing activity totaled 4.1 million sq. ft. across the metro region, slightly down from the first quarter. While demand growth was seen in several tenant sectors, the expansion was overshadowed by one large government agency move-out in Northern Virginia, leading to an overall net absorption of negative 248,000 sq. ft. On the supply side, development activity remains robust with 9.6 million sq. ft. under construction or renovation, most of which is concentrated in the downtown area.    

“While overall demand for office space is holding steady, the market is seeing an uptick in construction and redevelopment activity,” said Wei Xie, Research Manager, CBRE Washington, D.C.—Baltimore. “The influx of new supply will likely intensify competition among existing buildings, new development and proposed projects.”

Q2 2017 Market Highlights:

District of Columbia

The downtown D.C. office market recorded 192,000 sq. ft. of positive absorption in Q2 2017, bringing the year-to-date total to 76,000 sq. ft. Business services firms were the primary driver of growth in the second quarter, accounting for 131,000 sq. ft. of net demand, followed by financial services and nonprofits contributing 55,000 and 39,000 sq. ft. respectively. Gross leasing activity and net demand were both propelled by small-to-medium sized tenants, while larger tenants continue to shed space and become more efficient with their workspaces.

The CBD, East End and Southwest dominated leasing activity in Q2, accounting for 87.7% of the total leasing volume during the quarter. The Southwest market activity was driven by the Department of Education’s 314,000-sq.-ft. lease extension, while the East End posted the most occupancy gain of 230,000 sq. ft. The CBD fundamentals continue to be skewed by tenants moving out of buildings set for renovation, resulting in 127,000 sq. ft. of occupancy loss.

Although there were no new deliveries during the quarter, developer confidence remains high as 14 buildings are under construction, totaling 4.6 million sq. ft. 500 L’Enfant Plaza SW, a 215,000-sq.-ft. project, broke ground at 63% preleased to the Urban Institute.

Following an active first quarter, investment sales saw a slowdown in Q2, totaling $687 million in eight transactions. In comparison, nine buildings sold for a total of $1.3 billion in the first quarter of 2017. However, activity is expected to pick up in the second half of the year, as four sales are currently pending for a total of $1.1 billion. Investors remain focused on best-in-class assets, with the sale of 900 16th Street, NW for $1,252 per sq. ft. breaking the D.C. market record for office sale price per sq. ft.

Northern Virginia

Overall leasing activity rose 41% over the quarter to 2.4 million sq. ft. in Q2 2017. The technology sector was the main driver of leasing activity, accounting for 36% of the total volume. This was followed by the aerospace and defense sector which contributed 18% of the overall leased space.

The government and defense sectors continue to give back, adding 881,000 sq. ft. of vacancy to the market in Q2 2017 and 1.1 million sq. ft. throughout the first half of the year. The Department of Defense vacated 615,000 sq. ft. at 200 Stovall Street, offsetting growth from a 401,000-sq.-ft. net new lease signed by a Fortune 500 technology company in Herndon. Subsequently, overall market vacancy rose 30 basis points to an all-time high of 20.1%.

Investment sales remained active in the second quarter with eight transactions closing for a total of $826 million. The largest transaction of the quarter was the acquisition of Waterview Tower at 1919 N Lynn Street in Rosslyn for $459 million, or $724 per sq. ft., marking the highest sale price and highest price per sq. ft. for office buildings in Northern Virginia.

Suburban Maryland

Although government activity has typically been a key driver of leasing activity in Suburban Maryland, the GSA was noticeably static in Q2 2017, signing only a handful of small renewals. The office market posted 56,000 sq. ft. of positive net absorption, with growth mainly coming from the business services, nonprofit and healthcare sectors.

Prince Georges’ County offered a boost to the market with the announcement of Kaiser Permanente’s 173,000-sq.-ft. build-to-suit lease in the Lanham/Landover area. In the past 24 months, Prince George’s County has undergone a resurgence, with three users taking more than 450,000 sq. ft. in the market.

Construction activity remains muted, with no new deliveries throughout the first half of the year. Of the 150,000 sq. ft. currently under construction, only 75,000 sq. ft. is set to deliver by the end of 2017. However, three Trophy-class projects are currently in the plans, including JBG’s 300,000-sq.-ft. office building at 4747 Bethesda Avenue, Carr Properties’ mixed-use development at 7272 Wisconsin Avenue, and Federal Realty Investment Trust’s 200,000-sq.-ft. office tower at 909 Rose Avenue in the Pike and Rose development.