Lack of Contiguous, Large Blocks of Class A Office Space Expected to Yield Suburban Spec Development Over Next 18 Month

Cushman & Wakefield today released second quarter 2018 office market statistics for the Washington, DC Metropolitan area. These stats reflect the major transactions and trends that influenced the commercial real estate market.

“While the market overall is still solidly in tenant-favorable conditions, a few large tech transactions into existing product are making suburban Class A contiguous blocks harder to come by, and this is expected to spark new speculative construction in the next 12-18 months,” said Nate Edwards, Senior Director of Cushman & Wakefield’s Washington, DC Region Research team. “Among contiguous blocks of 200,000 square feet (SF) or greater in Northern Virginia, there are six Class A options and seven Class B options available through 2020.”

DC First Quarter Market Beats

In addition to technology firms, the federal government completed significant transactions. Large-scale government consolidations were a hallmark of federal activity in 2017 as evidenced in transactions by the Federal Communication Commission, the Department of Homeland Security, the Transportation Security Administration, the Pension Benefit Guaranty Corporation, the Peace Corps and others. 2018 has seen the federal government’s search for value and efficiency continue with major consolidations by the U.S. Customs and Border Protection Agency and USAID.

Development activity is also at the top subject of market discussion.

“New construction continues to be a main topic of concern, particularly in downtown Washington, DC. But while the total amount of construction is notable – 7.4 msf regionally – so are the face rents being achieved in recent transactions,” said Edwards.

In the District, $64 NNN has been achieved, $70 full service (FS) in Bethesda, and mid to upper $50’s FS in Tysons and Reston Town Center. Keeping pace with the ample amount of construction and eye-popping rents are tenant concessions with both tenant improvement allowances and free rent ticking up yet again, regionally.

The broader local economy generally remains strong, with 23,500 jobs added in the first five months of the year, and the Professional and Business Services sector accounting for 11,000 jobs added year-to-date. The one sector of alarm was the federal government, which was down 7,000 year-over-year. The region’s unemployment rate, currently at 3.5% is at its lowest since July 2008.

“The only downside of a labor market this strong is the fact that it will be increasingly difficult for employers to find talent, and future job growth could be impacted,” Edwards said. “In addition, we still aren’t seeing the same level of office absorption per job created that we had prior to 2011.”