D.C. Metro Office Markets Post Occupancy Gains During The Third Quarter

10/2/17

Both downtown and suburban markets in the Washington, D.C. metro region posted positive net absorption during Q3 2017, totaling 563,000 sq. ft., up from negative 248,000 sq. ft. last quarter and 251,000 sq. ft. the same time last year. Despite these positive numbers, the expansive development pipeline throughout the region is expected to further transform the supply landscape and escalate landlord competition over the next two to three years, according to third-quarter 2017 research reports released by CBRE.

“While it is encouraging to see demand growth across the metro region, we are also keeping a close eye on the record-level of development activity that is either ongoing or in the pipeline,” said Wei Xie, Research Manager, CBRE in the Washington/Baltimore Region. Xie stated that sustained tenant demand for high quality space has fueled a surge in both new construction and renovation activity. “With the amount of new supply coming online over the next several years, we anticipate a further increase in Trophy product leasing activity, overall heighted landlord competition, and tightening Class B supply for cost-conscious tenants in the CBD.”

In Washington, D.C.,

The construction pipeline is robust with 14 buildings totaling 4.5 million sq. ft. under construction and an additional 1. 3 million sq. ft. under renovation—a level not seen since 2009—setting the stage for heightened landlord competition.

Overall demand for space improved with 230,506 sq. ft. of positive net absorption; however, vacancy rates remain stubbornly static at 12.5%, held back by the delivery of 280,000 sq. ft. of unleased space. Trophy-class buildings, which comprise just 10.5% of the market, contributed 31.1% of the total space leased in the third quarter.

Secondary submarkets (NoMA, Southwest, Capitol Riverfront) outperformed the core markets (CBD, East End, West End) with solid leasing volume and net demand. Secondary markets accounted for 43% of the total Q3 leasing activity and all the quarter’s occupancy gain, but only 21% of the market inventory.

Year-to-date office sales volume topped $3 billion—up from $2.1 billion at the same time last year—with 69% of the capital coming from foreign investors.

Northern Virginia

1.3 million sq. ft. was completed in Q3 2017, with 2.2 million sq. ft. remaining under construction, of which four buildings totaling 990,000 sq. ft. are slated for delivery by the end of the year. In total, 2.4 million sq. ft. will be added to the market in 2017, a record high since 2.9 million sq. ft. delivered in 2009.

Private-sector tenants such as tech, business services and co-working drove occupancy gains. Notably, defense contractors—in recent years a source of contractionary activity—posted 146,000 sq. ft. of growth during the quarter.

High-profile mergers and acquisitions—and subsequent large-scale consolidations—continue to affect the headline numbers, despite underlying growth from small- to mid-sized tenant expansions. Spectrum/Charter Communications, which acquired Time Warner Cable last year, exercised early termination options, giving back 390,000 sq. ft. to the Herndon submarket.

Suburban Maryland

The market posted 259,057 sq. ft. of positive absorption in Q3 2017. The primary driver of growth came from the business services sector which contributed 145,000 sq. ft. of occupancy gain. Overall vacancy subsequently fell 20 basis points over the quarter to 15.7%, the lowest level since 2012.

Gross leasing volume totaled 2.2 million sq. ft., more than triple the amount from the previous quarter. The uptick was driven by the signing of two major preleases—Marriott's 825,000-sq.-ft. new headquarters in downtown Bethesda and USCIS’ 575,000-sq.-ft. prelease in Prince George’s County.

The Bethesda CBD is expecting 1.8 million sq. ft. of Trophy development over the next four years—includingMarriott’s new headquarters at 7750 Wisconsin Avenue and three speculative projects—which will transform the supply metrics in the urban core. Trophy CBD developments are also expected to widen the rent divide in the market, with their gross asking rates exceeding $60 per sq. ft.

Fo complete third-quarter 2017 reports detailing the state of office leasing markets throughout the greater Washington, D.C., visit

CBRE DC MarketView

Northern VA MarketView

Suburban MD MarketView

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com

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