April 13, 2018
Washington – Transwestern today announces it has released its 2018 first-quarter outlook reports for Washington, D.C., Northern Virginia, Suburban Maryland and Baltimore.
DISTRICT OF COLUMBIA
The District of Columbia office market progressed modestly during the first quarter of 2018, with net absorption totaling positive 440,000 square feet and the direct vacancy rate remaining at 8.3 percent. In the first quarter of 2018, the federal government sector led the pack for leasing activity, representing 50 percent of the total square feet leased or renewed.
During the first quarter, sales volume totaled $715 million, or $722 per square foot, with more than half of the activity concentrated in the East End. The D.C. office pipeline contracted this quarter to 7.1 million square feet at 55 percent pre-leased. This compares to the 10-year average pre-lease rate of 40 percent.
“Although office-using jobs will continue to be added to the economy during this period, we expect net absorption will be negative in 2018 as large tenants vacate space, particularly in the East End,” said Transwestern Managing Research Director Elizabeth Norton. “This could cause the overall vacancy rate in the District, inclusive of sublease space, to rise to the low-14 percent range by December 2019 from 9.1 percent today.”
Northern Virginia office fundamentals improved during the first quarter, with net absorption more than three times the 10-year quarterly average. Class B and C office properties outperformed Class A during the quarter, and Crystal City/Pentagon City was the submarket leader in net absorption, with American Institutes for Research (AIR) leasing 87,600 square feet. The Northern Virginia office pipeline remains sizeable and is well pre-leased.
The flex/industrial market was stable during the first quarter, with three property deliveries. Average asking rents grew considerably during the first quarter, expanding by 2.3 percent.
Net absorption totaled positive 95,000 square feet during the first quarter of 2018. Class B led with 161,000 square feet of positive net absorption, while Class A lagged at negative 67,000 square feet. In the first quarter of 2018, the trade/transportation/utilities sector represented the largest share of leasing activity at 22 percent, followed closely by the financial services sector at 21 percent.
“The Suburban Maryland office market’s positive absorption and decrease in vacancy rates foreshadow our anticipated gradual improvement in the office market throughout 2018,” said Norton.
Concession packages remain elevated in Suburban Maryland. For deals signed during the first quarter of 2018, tenant improvement allowances averaged $66 per square foot with 11.5 months of free rent for a typical 10-year term on a new lease. This compares to $63 per square foot and 10 months during 2017.
Measured by square feet, the majority of the pipeline is concentrated in Bethesda/Chevy Chase at 4747 Bethesda Ave. and 7272 Wisconsin Ave.; however, the four other projects in the pipeline, which represent 466,000 square feet of development across Montgomery County and Prince George’s County, are scheduled to deliver by year-end.
“The Baltimore market had a slow first quarter, but fundamentals for office and flex/industrial product remain favorable relative to historical levels,” said Norton.
Move-outs outweighed leasing among all office property classes, yielding net absorption of negative 199,000 square feet. Investor interest in office product is strong, but properties in both the city and suburbs are trading to value-add investors at below replacement cost.
A large, vacant delivery impacted Baltimore’s flex/industrial market conditions during the first quarter. Baltimore’s flex/industrial space remains of interest to developers and investors, with a pipeline of 2 million square feet and six notable transactions during the first quarter.
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