Industrial Leasing Market Changes, Trends, etc. Q3 2025

Posted on by Ryan Rauner, CCIM
In Northern Virginia’s flex/industrial market, demand from data centers, AI/tech firms, and logistics continues to outstrip supply as of Q3 2025, with overall vacancy at 5.7% metro-wide (down slightly from Q1 highs) but much tighter in key NoVa submarkets (1.8-4.8%). Net absorption remains positive at 5.7M sf over the past 12 months (mostly in specialized/data center space), though logistics absorption has moderated amid economic uncertainty. Under-construction inventory is 15.1M sf metro-wide (down from peaks but still elevated, with 60% pre-leased), concentrated in NoVa submarkets like Rt 28/Dulles North (5.1M sf) and Rt 29/I-66 (1.8M sf). Macro factors like inflation-hedging and microeconomic issues (e.g., land/power scarcity in Loudoun and Prince William counties) favor landlords, leading to firmer lease terms. Non-data center tenants face increased competition for flex space, pushing hybrid terms in some deals. Below are some of the key changes in lease terms, concessions, etc.
 

Asking Rent vs. Contract (Effective) Rent:

Metro-wide asking rents average $18.29 psf (up 5.8% YOY), with NoVa submarkets ranging from $17.65 psf in Manassas to $19.97 psf in Rt 29/I-66 Corridor. Flex rents are higher at $20.56 psf metro-wide, while logistics average $16.57 psf (up 5.7% YOY in Manassas) and specialized (including data centers) at $19.58 psf. In tight submarkets like Rt 28/Dulles North ($18.60 psf for logistics, up 5.1% YOY), contract rents are very close to asking (0-3% discounts for prime flex/logistics deals), down from 5-10% gaps in softer periods pre-2024. Data center leases remain premium-priced at $200+/kW/month, with minimal discounts due to pre-leasing (e.g., 74% of under-construction space committed).
 

Rental Abatement (Free Rent):

Low vacancies (e.g., 1.8% in Rt 28/Dulles North, 2.0% in Manassas) have further reduced abatement to 0-2 months for flex/industrial leases (down from 2-4 months in 2023-2024), or none for data center-adjacent spaces. This reflects strong absorption (1.3M sf YOY in Rt 28/Dulles North) and landlords prioritizing cash flow amid rising costs.
 

Tenant Improvement (TI) Allowances:

With construction costs elevated, allowances have tightened to $10-25 psf for flex/R&D (down from $15-40 psf pre-surge), $5-10 psf for logistics/warehouse, and customized but limited for specialized builds (often shell deliveries shifting costs to tenants). In submarkets like Rt 29/I-66 (2.2% vacancy), tenants in smaller flex spaces (<100k sf, 4.7% metro vacancy) may negotiate slightly higher TI due to competition, but overall leverage favors landlords.
 

Annual Escalations:

Clauses have increased to 3.5-4.5% fixed annually (up from 2.5-3.5% prior), hedging inflation and volatility, as seen in YOY rent growth of 5.6-6.4% across NoVa submarkets. Fixed escalations dominate over CPI-linked in areas like Rt 28 Corridors, bolstered by sustained tech/government demand and land constraints.
 

Lease Term Lengths:

Standard flex/industrial leases, which were commonly 5-7 years pre-2023, are increasingly extending to 7-10 years or longer, especially for larger spaces or data center-adjacent properties. This shift allows landlords to secure stable revenue streams amid uncertainty in power grid expansions and economic volatility. For data center leases specifically, terms often span 10-15 years to amortize high build-out costs, influencing hybrid flex spaces repurposed for tech users. High pre-leasing rates (e.g., 74.3% of under-construction capacity committed metro-wide) further encourage longer commitments to mitigate development risks.
 

Power Allocation and Cost-Sharing Clauses:

With power scarcity a major bottleneck (e.g., utilities like Dominion Energy facing delays in transmission infrastructure), leases now frequently include specific provisions for power commitments, such as minimum usage thresholds, cost-sharing for grid upgrades, or contributions to capital expenditures. Tenants may face additional fees for reserved power capacity, and on-site generation options (e.g., natural gas fuel cells or partnerships like Bloom Energy with hyperscalers) are being embedded in lease structures to bypass grid delays. This is a departure from pre-2024 norms, where power was often treated as a standard utility pass-through without customized clauses.
 

Renewal Options and Expansion/Contraction Rights:

Renewal clauses are becoming less tenant-friendly, with landlords limiting automatic renewals or tying them to market-rate resets (often 5-10% above current rents) rather than fixed increases. Expansion rights, once more generously offered, are now scarcer due to land constraints from data center encroachment, pushing tenants to compete for options in competitive submarkets like Rt 28/Dulles North. Conversely, contraction options (allowing tenants to reduce space) are rarer, as landlords prioritize full occupancy in tight markets.
 

Operating Expenses and Triple-Net Structures:

There’s a trend toward stricter triple-net (NNN) leases, where tenants bear a higher share of operating costs, including rising utilities and maintenance driven by data center-related infrastructure strain. Pre-demand surge, modified gross leases were more common in flex spaces, but now NNN prevails to shift volatility (e.g., inflation in energy costs) to tenants. Environmental clauses are also tightening, incorporating sustainability requirements or noise/water usage limits in response to local backlash against data centers.
 

Assignment and Subletting Provisions:

These rights are more restricted, with landlords requiring stricter approval processes or prohibiting sublets to non-tech tenants to maintain property values amid data center spillover. Previously, in softer markets, tenants had broader flexibility for assignments, but high demand allows owners to curate tenant mixes for premium positioning.
 
These adjustments reflect broader macro pressures like AI-driven demand and microeconomic factors such as land scarcity in Loudoun and Prince William counties, where data centers have absorbed sites traditionally used for logistics/flex. While non-data center tenants (e.g., manufacturing or distribution) may still negotiate some flexibility in smaller deals, overall tenant leverage has diminished. If power constraints ease or demand moderates by late 2025, some concessions could rebound, but current trends suggest continued firmness.

Impacts of the One Big Beautiful Bill Act on Commercial Real Estate

Posted on by Ryan Rauner, CCIM

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, brings tax changes and incentives that affect commercial real estate (CRE), like office buildings, shopping centers, and warehouses. Below are the key impacts, explained simply, with real-world examples to show how they might play out.

 

Positive Impacts on Commercial Real Estate

1. 100% Bonus Depreciation for Property Improvements

  • What It Means: The bill lets businesses immediately deduct the full cost of certain upgrades (like new HVAC systems or interior renovations) instead of spreading the cost over years. This applies to assets placed in service after January 19, 2025, and is now permanent for many cases. It also includes a special 100% deduction for nonresidential properties (like factories) used for manufacturing if construction starts by 2028 and they operate for 10 years.
  • Real-World Example: Imagine Jane owns a small office building in Chicago. She spends $200,000 to install energy-efficient lighting and a new HVAC system in 2026. Normally, she’d deduct this cost slowly over 39 years. With the OBBBA, she can deduct the entire $200,000 in 2026, lowering her taxes and freeing up cash to renovate another floor, attracting more tenants.
  • Why It Helps: This gives Jane more money upfront, making it easier to upgrade her property and increase its value or rental income.

2. Increased Section 179 Expensing Limits

  • What It Means: Businesses can deduct up to $2.5 million (up from $1.25 million) for equipment or improvements in 2025, with the deduction phasing out if total purchases exceed $4 million. This helps smaller CRE businesses.
  • Real-World Example: Mike runs a strip mall in Texas and buys $1 million in new roofing and storefront upgrades for his tenants (a coffee shop and a gym). Under the OBBBA, he deducts the full $1 million from his 2025 taxes, reducing his tax bill significantly and allowing him to lower rents to attract new tenants.
  • Why It Helps: Mike saves on taxes immediately, giving him more cash to maintain or expand his property, making it more competitive.

3. Permanent Qualified Opportunity Zones (QOZs)

  • What It Means: QOZs encourage investment in struggling areas by deferring taxes on capital gains if you invest in properties there. The bill makes this program permanent, adds a 10% tax break after five years (30% in rural areas), lowers improvement requirements in rural zones, and updates eligible areas.
  • Real-World Example: Sarah, a real estate investor, sells a property in Miami for a $500,000 profit. Instead of paying taxes on that gain, she invests it in a rundown shopping center in a QOZ in rural Ohio. After five years, she gets a 30% tax break on her investment’s value, and her taxes on the original $500,000 are deferred until she sells the shopping center.
  • Why It Helps: Sarah can grow her investment in the shopping center without immediate tax hits, and the tax breaks make it more profitable, encouraging her to revitalize the area.

4. Boosted Low-Income Housing Tax Credit (LIHTC) and New Markets Tax Credit (NMTC)

  • What It Means: LIHTC gives tax credits for affordable housing projects, with a 12% increase in credits starting in 2026 and easier rules for mixed-use buildings. NMTC, now permanent with $5 billion yearly, supports community development in low-income areas.
  • Real-World Example: A developer, Tom, builds a mixed-use project in Atlanta with shops on the ground floor and affordable apartments above. The enhanced LIHTC covers more of his costs, and NMTC helps fund the retail portion. This makes the project financially viable, bringing new stores and jobs to a low-income neighborhood.
  • Why It Helps: Tom’s project is more affordable to build, benefiting CRE by supporting retail and office spaces in mixed-use developments.

5. Preserved Deductions and Exchanges

  • What It Means: The bill keeps the 20% Qualified Business Income deduction for businesses like real estate investment trusts (REITs) and allows tax-free property swaps (Section 1031 exchanges) without new limits.
  • Real-World Example: Lisa owns a REIT that manages several office parks. The 20% deduction lowers her taxes on rental income, increasing her profits. She also swaps an underperforming retail plaza for a warehouse using a 1031 exchange, deferring taxes on the sale and keeping more cash to invest.
  • Why It Helps: Lisa’s REIT has higher after-tax income, and the 1031 exchange lets her upgrade her portfolio without a big tax hit, keeping her business flexible.

6. Eased Interest Expense Rules

  • What It Means: The bill changes how businesses deduct interest on loans, using a simpler formula (EBITDA) that excludes depreciation, allowing more interest to be deducted. This helps highly leveraged CRE projects.
  • Real-World Example: John, a developer, borrows $10 million to build a new logistics center. The OBBBA lets him deduct more of the loan interest each year because depreciation isn’t counted against his income limit. This lowers his taxes and makes the project more affordable despite high interest rates.
  • Why It Helps: John can take on bigger projects with less tax burden, encouraging new CRE developments like warehouses or office complexes.

7. Overall Investment Surge

  • What It Means: These tax breaks encourage investors to pour money into CRE, boosting construction and property upgrades, especially in industrial and mixed-use sectors.
  • Real-World Example: A real estate firm in Denver uses the tax savings from bonus depreciation and QOZs to fund a new industrial park. The project creates jobs and attracts tenants like e-commerce companies needing warehouse space, increasing local property values.
  • Why It Helps: The firm can take on larger projects, spurring economic growth and improving CRE market activity.

These provisions generally make it easier and cheaper to invest in, develop, and manage CRE properties.

“Negative” Impacts on Commercial Real Estate

1. Loss of Energy and Green Incentives

  • What It Means: The bill ends tax deductions for energy-efficient building upgrades (Section 179D) after June 30, 2026, and phases out solar/wind credits by 2027. It also cuts funding for green retrofit programs.
  • Real-World Example: Emma owns an office tower in Seattle and plans to install solar panels and energy-efficient windows in 2027. Without the Section 179D deduction or solar credits, her costs rise by $100,000, making the upgrades less affordable. She might skip them, leading to higher energy bills for tenants.
  • Why It Hurts: Higher costs could discourage green upgrades, making properties less attractive to eco-conscious tenants and increasing operating expenses.

2. Higher Interest Rates from Deficit Growth

  • What It Means: The OBBBA is estimated to add $3-4 trillion to the federal deficit over a decade. This could push up long-term interest rates and inflation, making loans for CRE projects more expensive and potentially lowering property values, especially for office and retail spaces sensitive to rate hikes.
  • Real-World Example: David, a developer, wants to build a new office complex in Dallas. In 2026, he applies for a $15 million loan, but because the OBBBA’s deficit spending has driven up interest rates, his loan’s interest rate jumps from 5% to 7%. This adds $300,000 to his annual interest costs, making the project less profitable and harder to finance. If rates keep rising, his property’s market value might also drop, scaring off potential buyers.
  • Why It Hurts: Higher loan costs mean David might delay or cancel his project, and lower property values could hurt existing CRE owners, especially in markets like office spaces already struggling with remote work trends.

3. Other Challenges

  • What It Means: The bill introduces a few additional hurdles for CRE. It raises taxes on university endowments, which could reduce their investments in real estate. Supply chain and labor shortages may limit the ability to start new construction projects, even with tax incentives. Also, changes to QOZ maps (redrawing boundaries and stricter income rules) might exclude some areas that were previously eligible for tax breaks, disrupting planned investments.
  • Real-World Example: A university endowment in Boston, which owns several commercial properties, faces a higher tax bill due to the OBBBA’s endowment tax hike. To cover this, it sells off a retail plaza it owns, reducing CRE investment in the area. Meanwhile, Maria, a developer, plans to build a warehouse in a QOZ, but the new map excludes her chosen site in 2026. She loses the tax break and faces delays due to shortages of construction materials and workers, pushing her project back a year.
  • Why It Hurts: The endowment’s reduced investment means less capital for CRE projects, and Maria’s situation shows how QOZ changes and supply chain issues can stall development, especially in areas counting on revitalization.
In summary, the tax breaks and incentives (like bonus depreciation, QOZs, and interest deductions) make it easier for businesses like Jane’s, Mike’s, and Sarah’s to invest in and improve properties, spurring growth in industrial, retail, and mixed-use sectors. Critics would argue that the loss of green incentives (hurting Emma’s eco-friendly upgrades), higher interest rates from deficit growth (impacting David’s financing), and other challenges like endowment taxes and QOZ map changes (affecting Maria’s plans) create hurdles; however, I disagree.
Green “incentives” are merely subsidies for technologies that are not yet cost effective and the OMB’s deficit projections are flawed in that they do not accurately account for the impact of growth on federal revenue. Stimulating growth in the private sector by allowing people and businesses to keep more of their own money is always good policy. A rising tide lifts all boats. As for universities, they have been overcharging the government on grants for decades and increasing tuition at a rate well above the rate of inflation due to free money from the government in the form of student loans. These rising costs have not gone to improve education quality or standards but rather to increase the size and scope of university administrations and non-merit-based programs. In my opinion, these universities are getting what they deserve.

Seller Financing in Commercial Real Estate

Posted on by Ryan Rauner, CCIM

As a commercial real estate broker, advising clients on whether to request or accept seller financing is a critical decision that hinges on understanding its benefits, risks, and strategic fit. Seller financing—where the seller acts as the lender, allowing the buyer to pay part of the purchase price over time—can unlock opportunities in deals where traditional financing falls short, especially for unique properties or in challenging markets. For buyers, it offers access to capital with flexible terms; for sellers, it can expedite sales and generate interest income. However, it’s not without risks, such as buyer default or delayed liquidity. This article explores the mechanics of seller financing, its pros and cons for both parties, key considerations for sellers, associated risks, and protective measures to ensure informed decisions. As a broker, my goal is to guide you through these factors to determine if seller financing aligns with your financial objectives and market conditions.

What is Seller Financing in Commercial Real Estate Transactions?

Seller financing, also known as owner financing or vendor take-back financing, occurs when the seller of a commercial property (such as an office building, retail space, industrial facility, or multifamily unit) provides a loan to the buyer to cover a portion—or sometimes all—of the purchase price. Instead of the buyer obtaining full funding from a traditional lender like a bank, the seller acts as the lender. The buyer typically makes a down payment (often 20-30% or more in commercial deals), and the remaining balance is paid in installments over time, with interest, according to an agreed-upon amortization schedule and loan term. The seller retains a security interest in the property, usually through a mortgage, deed of trust, or promissory note, until the loan is fully repaid. If the buyer defaults, the seller can foreclose and reclaim the property.

This arrangement is more common in commercial real estate (CRE) than residential because commercial loans from banks often have stricter underwriting, higher interest rates, and longer approval times. Seller financing can bridge gaps when buyers face challenges securing conventional financing, especially for properties with unique characteristics or in softer markets.

Pros and Cons for Buyers

Pros:
  • Easier Access to Financing: Buyers with less-than-perfect credit, limited cash reserves, or unconventional business models may qualify more easily, as sellers can be more flexible than banks. This is particularly useful for small businesses or startups entering CRE.
  • Flexible Terms: Negotiable interest rates, repayment schedules, and down payments can be tailored. For example, interest-only periods or balloon payments (a large lump sum at the end) might be arranged to match the buyer’s cash flow from the property.
  • Faster Closing: Bypassing bank approvals can speed up the transaction, allowing buyers to seize time-sensitive opportunities.
  • Potential Cost Savings: Sellers might offer lower interest rates than banks to close the deal quickly, or buyers could avoid origination fees and closing costs associated with traditional loans.
Cons:
  • Higher Interest Rates: Sellers often charge premium rates (e.g., 1-3% above market) to compensate for risk, increasing the overall cost.
  • Shorter Loan Terms: Many seller-financed deals have terms of 5-10 years with a balloon payment, forcing buyers to refinance later, which could be risky if market conditions worsen.
  • Limited Equity Build-Up: Higher rates and potential balloon structures mean slower equity accumulation compared to longer-term bank loans.
  • Risk of Foreclosure: Defaulting could lead to losing the property and down payment, with sellers potentially pursuing personal assets if a guarantee is in place.

Pros and Cons for Sellers

Pros:
  • Attracts More Buyers: In a slow market or for hard-to-sell properties (e.g., those needing repairs or in niche sectors), offering financing can broaden the buyer pool and speed up the sale.
  • Higher Sale Price: Sellers can often command a premium price since they’re providing convenience, effectively turning the property into an income-generating asset.
  • Interest Income: The seller earns ongoing interest on the financed amount, potentially yielding higher returns than reinvesting sale proceeds elsewhere.
  • Tax Advantages: Under IRS rules, sellers can report the sale as an installment sale, spreading capital gains taxes over years rather than paying a lump sum upfront, which aids in tax planning.
Cons:
  • Delayed Full Payment: Capital is tied up in the loan, limiting the seller’s liquidity for other investments or needs.
  • Administrative Burden: Sellers must manage loan servicing, including collecting payments, tracking taxes/insurance, and handling potential disputes—tasks that could require hiring a servicer.
  • Opportunity Cost: If interest rates rise, the fixed-rate loan might underperform compared to other investments.
  • Emotional/Relational Strain: Dealing with a defaulting buyer can lead to legal battles and stress, especially if the buyer is a small business owner.

Things a Seller Must Consider When Determining Whether to Agree to Seller Financing

Sellers should weigh several factors before offering financing to ensure it aligns with their financial goals and risk tolerance:

  • Buyer’s Creditworthiness and Financial Stability: Conduct thorough due diligence, including credit checks, financial statements, business plans, and references. In CRE, assess the buyer’s ability to generate income from the property (e.g., via rent rolls or pro forma statements).
  • Property-Specific Factors: Evaluate the property’s value, condition, and marketability. High-value or income-producing assets (like stabilized retail centers) are better suited for financing than speculative developments.
  • Down Payment Size: Require at least 20-30% to ensure the buyer has “skin in the game,” reducing default risk and providing a buffer if foreclosure occurs.
  • Loan Terms: Decide on interest rate (typically 6-10% in current markets), term length, amortization schedule, and any prepayment penalties. Consider adjustable rates if inflation is a concern.
  • Legal and Tax Implications: Consult attorneys and accountants to structure the deal compliantly. For instance, ensure the agreement complies with state usury laws and Dodd-Frank regulations (which may apply if the seller finances multiple properties annually).
  • Seller’s Financial Position: If the seller needs immediate cash (e.g., for retirement or another purchase), financing might not make sense. Also, consider opportunity costs—could the proceeds be better invested in stocks, bonds, or other real estate?
  • Market Conditions: In a buyer’s market with high interest rates, financing can differentiate the listing; in a seller’s market, it might be unnecessary.
  • Exit Strategy: Plan for what happens if the buyer refinances early or defaults—will the seller retain the right to approve assumable loans?

Risks Associated with Seller Financing

While potentially lucrative, seller financing carries significant risks, primarily for the seller as the lender:

  • Default Risk: The buyer may stop payments due to business failure, economic downturns, or property issues, leading to costly foreclosure proceedings (which can take 6-18 months in CRE and incur legal fees of $10,000+).
  • Property Devaluation or Damage: During the loan term, the property could lose value (e.g., due to market crashes or tenant vacancies) or suffer damage/neglect, reducing its worth if reclaimed.
  • Interest Rate and Inflation Risk: Fixed-rate loans could lose real value if inflation spikes, or if rates rise, making the loan less competitive.
  • Legal and Regulatory Risks: Poorly drafted agreements could lead to disputes, invalidation, or violations of laws like the Truth in Lending Act. In CRE, environmental liabilities (e.g., contamination) could transfer back if foreclosed.
  • Liquidity Risk: Tied-up funds might force the seller to sell the note at a discount on the secondary market if cash is needed urgently.
  • Tax Risks: If structured improperly, the IRS might reclassify the transaction, accelerating tax liabilities.
  • Opportunity Risk: Foregoing a cash sale might mean missing better investment returns elsewhere.

Ways to Protect the Seller

To mitigate risks, sellers can implement safeguards, often with professional advice from real estate attorneys, brokers, and accountants:

  • Require a Substantial Down Payment: 20-40% ensures buyer commitment and provides equity cushion in foreclosure.
  • Secure the Loan Properly: Use a deed of trust or mortgage as collateral, recorded with the county to establish a first-lien position. Include clauses for acceleration (full balance due on default) and due-on-sale (loan due if buyer sells).
  • Obtain Personal Guarantees: For CRE buyers (often LLCs), require personal guarantees from principals to pursue their assets in default.
  • Conduct Rigorous Due Diligence: Verify buyer’s finances, run background checks, and appraise the property independently. In CRE, review leases, zoning, and environmental reports.
  • Mandate Insurance and Maintenance: Require the buyer to maintain property insurance (naming seller as loss payee), pay taxes, and keep the property in good condition, with seller inspection rights.
  • Structure Flexible Terms with Protections: Include late fees, default interest rates, and cross-collateralization (securing with other assets). Avoid subordination to other loans without control.
  • Use Escrow or Third-Party Servicing: Hire a loan servicer to handle payments and compliance, reducing administrative hassle.
  • Include Exit Clauses: Allow the seller to sell the note or call the loan early under certain conditions.
  • Diversify if Possible: If financing multiple deals, spread risk across properties to avoid overexposure.
  • Seek Professional Advice: Always involve legal experts to draft airtight contracts and tax advisors to optimize structure.

 

In summary, seller financing can be a win-win in CRE by facilitating deals that might otherwise stall, but it requires careful planning. Sellers, in particular, should view it as a lending business and proceed only if they’re comfortable with the risks and have protections in place. If considering this, consulting local real estate professionals is essential, as laws vary by state.

Real Estate Financing 101

Posted on by Ryan Rauner, CCIM

As a prospective buyer or seller in the dynamic world of commercial real estate, securing the right financing can be the key to getting deals across the finish line. Whether you’re an investor or owner-user, understanding the array of financing options available is critical to making informed decisions that drive success. From the stability of conventional loans to the flexibility of SBA programs, this guide dives into the essentials—down payments, interest rates, loan limits, and more—equipping you with the knowledge to navigate deals with confidence and maximize the potential of every transaction.

Conventional Commercial Real Estate Loans

 
These are traditional bank or credit union loans for purchasing, refinancing, or improving commercial properties like office buildings, retail spaces, or warehouses. They are typically recourse loans (personal guarantee required) and suited for established businesses with strong credit.
  • Down Payment: Usually 20-30% of the property’s value, though some lenders may go as low as 10% for owner-occupied properties.
  • Interest Rates: Vary based on market conditions, borrower credit, and loan terms; as of 2025, rates can start as low as around 5% but often range from 5-8% for fixed-rate options (influenced by factors like the prime rate or Treasury yields).
  • Maximum Limits: No strict cap; depends on the lender and property value, but often up to tens of millions for larger deals.
  • Term Lengths: Typically 5-20 years, with amortization periods of 20-25 years (may include balloon payments).
  • What Can Be Financed/Included: Property purchase, refinancing existing debt, renovations, equipment, and sometimes soft costs like appraisals or closing fees. Eligible for owner-occupied or investment properties.
  • Other Details: Requires minimum 2 years in business, annual revenue of at least $250,000, and good credit (score often 680+).
  • Pros: competitive rates for qualified borrowers
  • Cons: are stricter underwriting and longer approval times (30-90 days).

SBA 504 Loans

 
Another SBA-backed program, specifically for long-term fixed-asset financing through Certified Development Companies (CDCs). It’s structured as a partnership: 50% from a bank, 40% from SBA/CDC, and 10% equity from the borrower.
  • Down Payment: Typically 10% (borrower equity contribution), though it can be 15-20% for startups or special-use properties.
  • Interest Rates: Fixed; pegged to 10-year U.S. Treasury rate plus an increment (approximately 3% of the debt), often resulting in rates around 5-6% as of 2025. The SBA portion is below-market.
  • Maximum Limits: SBA portion up to $5.5 million; total project financing can be higher (e.g., $10-20 million).
  • Term Lengths: 10, 20, or 25 years.
  • What Can Be Financed/Included: Major fixed assets like land, buildings, new construction, renovations (e.g., utilities, parking), long-term machinery/equipment (useful life ≥10 years, including AI-supported manufacturing tools), and qualified debt refinancing. Cannot cover working capital, inventory, or speculative real estate.
  • Other Details: Eligibility: For-profit businesses with net worth <$20 million, average net income <$6.5 million (last 2 years), and meeting SBA size guidelines; must promote job creation/growth. Fees include servicing fees (~0.5-1%).
  • Pros: Low down payment and fixed rates help preserve cash.
  • Cons: Limited to owner-occupied (51%+ occupancy) and longer processing (60-90 days).
  • Great for manufacturing or retail expansions.

SBA 7(a) Loans

 
Government-backed loans through the U.S. Small Business Administration, designed for small businesses needing flexible financing. These can cover commercial real estate but also other uses, with the SBA guaranteeing up to 85% of the loan to reduce lender risk.
  • Down Payment: As low as 10%, making it more accessible than conventional options.
  • Interest Rates: Variable or fixed; as of 2025, capped at base rate (e.g., prime or SOFR) plus 3-6.5%, depending on loan size (e.g., +6.5% for loans ≤$50,000; +3% for >$350,000). Effective rates often 7-10%.
  • Maximum Limits: Up to $5 million.
  • Term Lengths: Up to 25 years for real estate; shorter (5-10 years) for working capital or equipment.
  • What Can Be Financed/Included: Commercial real estate purchase, construction, renovation, or refinance; also working capital, equipment, inventory, debt refinancing, and business acquisitions. Includes AI-related expenses like machinery.
  • Other Details: Eligibility requires being a for-profit small business (per SBA size standards), U.S.-based, with reasonable repayment ability and no access to other credit. Guarantee fees apply (e.g., 0.5-3.75% of guaranteed portion).
  • Pros: Lower down payments and longer terms.
  • Cons: SBA fees and paperwork can extend approval to 45-90 days.
  • Ideal for startups or expanding businesses in manufacturing or services.

Commercial Mortgage-Backed Securities (CMBS) Loans

 
These are securitized loans pooled and sold to investors, often for larger, stabilized income-producing properties like multifamily or office complexes. Non-recourse, meaning no personal guarantee.
  • Down Payment: Typically 25-35% (loan-to-value ratio of 65-75%).
  • Interest Rates: Fixed; as of 2025, often 5-7%, depending on property quality and market.
  • Maximum Limits: Up to $50 million or more for large portfolios; no strict cap but suited for deals over $2-5 million.
  • Term Lengths: 5-10 years, with 25-30 year amortization (balloon payment at end).
  • What Can Be Financed/Included: Purchase or refinance of stabilized commercial properties; may include minor improvements but not major construction.
  • Other Details: Requires property to generate sufficient income (debt service coverage ratio 1.25+).
  • Pros: Non-recourse, competitive rates for prime properties.
  • Cons: Rigid terms, prepayment penalties, and slower approval.
  • Ideal for investors with established assets.

Bridge Loans

 
Short-term financing to “bridge” a gap, such as during property acquisition, renovation, or until permanent financing is secured. Often from alternative lenders.
  • Down Payment: 10-20%.
  • Interest Rates: Higher, typically 8-12% as of 2025, often interest-only.
  • Maximum Limits: Up to $10-50 million, based on property value.
  • Term Lengths: 6-36 months.
  • What Can Be Financed/Included: Property purchase, renovations, or repositioning; can cover soft costs like permits.
  • Other Details: Asset-based underwriting focuses on property value over borrower credit.
  • Pros: Fast approval (weeks)
  • Cons: High fees (1-3% origination) and rates.
  • Suited for flippers or transitional projects.

Hard Money Loans

 
Private, asset-based loans for quick funding, often for distressed or high-risk properties. From hard money lenders, not banks.
  • Down Payment: 30-40% (loan-to-value 60-70%).
  • Interest Rates: 10-15% as of 2025, interest-only.
  • Maximum Limits: Typically $100,000 to $5 million.
  • Term Lengths: 6-24 months.
  • What Can Be Financed/Included: Property acquisition, rehab, or short-term needs; flexible for raw land or fix-and-flips.
  • Other Details: Minimal credit checks; focus on collateral.
  • Pros: Speed (days to close)
  • Cons: Very high costs and risk of foreclosure.
  • For experienced investors only.

Mezzanine Loans

 
Subordinate debt to fill equity gaps in larger deals, often combined with senior loans. Acts like a hybrid of debt and equity.
  • Down Payment/Equity: Provides 10-20% of total capital, reducing borrower’s out-of-pocket to 5-10%.
  • Interest Rates: 12-20% as of 2025.
  • Maximum Limits: $5-50 million, layered on top of primary financing.
  • Term Lengths: 3-5 years, aligned with senior loan.
  • What Can Be Financed/Included: Equity portion for acquisitions, developments, or recapitalizations; may include equity warrants.
  • Other Details: Higher risk for lenders, so higher returns.
  • Pros: Increases leverage
  • Cons: Expensive and subordinate to other debt.
  • For large-scale projects.

Construction Loans

 
For new builds or major renovations, disbursed in draws as work progresses. Often convert to permanent loans upon completion.
  • Down Payment: 20-30%.
  • Interest Rates: Variable, 6-9% as of 2025 (interest-only during construction).
  • Maximum Limits: Based on projected value; up to 80-85% loan-to-cost.
  • Term Lengths: 12-24 months for construction phase, then converts.
  • What Can Be Financed/Included: Land, materials, labor, permits, and contingencies for development.
  • Other Details: Requires detailed plans and builder approval.
  • Pros: Funds as needed
  • Cons: Higher rates and monitoring fees.
  • For developers with experience.
Note: Rates and terms can fluctuate with economic conditions; consult lenders for personalized quotes. For rural areas, consider USDA B&I loans (similar to SBA but for non-metro businesses, with guarantees up to 80%).

Loudoun & Prince William Office Update August 2025

Posted on by Ryan Rauner, CCIM

Loudoun County: The Tech-Savvy Wild Card on DC’s Fringe

Loudoun County, clocking in at around 22.7 million square feet of office space, is like the energetic upstart crashing the DC metro party—fueled by data centers, aerospace buzz, and proximity to Dulles Airport, it’s got that “next big thing” energy. Vacancy averages a manageable 8.5% (up slightly YOY but miles below the region’s 20.1%), with availability around 9%. Absorption’s a mixed bag: -44,200 SF in some areas, but positive elsewhere, netting mild negativity amid hybrid work and federal trims. Rents hover at $29-31/SF with 0.8-1.7% growth—affordable allure drawing defense contractors and cloud giants. Construction? Zilch underway, but proposals tease ~1.1 million SF, eyeing mixed-use vibes. Sales zipped to ~$130 million over ~900,000 SF ($144/SF average), cap rates ~10%, with smaller deals dominating. Ownership: Balanced between private (50%) and institutional (35%), heavy on tech players like AWS. Economy: 1.5% job growth from innovation hubs, but D.G.E. cuts could zap federal-dependent roles. Outlook: Thrilling potential as Loudoun morphs into a live-work-tech oasis; short-term hiccups from remote trends, long-term fireworks if infrastructure like Metro extensions ignite—imagine Virginia’s Silicon Vineyard hitting its stride.
Route 7 Corridor – This 4.1 million SF lifeline to Dulles is the bustling highway of opportunity—vacancy 8.1% (down 0.5% YOY, a win!), absorption +19,400 SF. Rents $31/SF up 0.8%. Under construction: 97,000 SF; proposed 40,000 SF. Sales $19.9 million over 140,000 SF ($142/SF).
Route 28 North – Spanning 9.0 million SF, it’s the data powerhouse corridor—vacancy 11.6% (up 0.2%), absorption -19,900 SF. Rents $28/SF with 1.4% growth. Proposed 974,141 SF, no current builds. Sales $28.8 million over 620,000 SF ($46/SF—deal-hunters’ paradise).
Combined – Approximately 13.1 million SF, vacancy ~10%, absorption -500 SF net. Rents ~$29.5/SF. Proposed ~1.01 million SF. Sales $48.7 million ($69/SF average). These routes are the adrenaline rush: Route 7’s connectivity sparks quick wins, Route 28’s data farms promise scale. Outlook: Electric if tech booms; but watch for speed bumps from over-reliance on cloud kings—could be the fast lane to fortune or a detour if AI hype cools.
Leesburg/West Loudoun – Out west in this 4.0 million SF slice, it’s the pastoral escape with urban edge—vacancy 5.7% (up 1.1%, still a regional envy), availability 7.3%, absorption -44,200 SF. Rents $29/SF climbing 1.7%. Proposed 78,850 SF at Hirsi Rd (three buildings starting Nov 2025). Sales $30.3 million over 140,000 SF ($216/SF). It’s the wine-country office haven, luring healthcare and small biz with charm and costs. Outlook: Cozy resilience shines; negative absorption a bump in the scenic road, but tourism and remote appeal could pour in growth—think cubicles with a side of cabernet, unless federal ripples sour the vintage.

Prince William County: The Value-Packed Sleeper Hit

Prince William’s ~5.9 million SF feels like the underrated underdog—scrappy, affordable, and punching above its weight with vacancy at a rock-bottom 3-4.5% (down YOY, crushing the metro’s 20.1%). Absorption glows positive at +79,600 SF, defying regional gloom. Rents $28-29/SF with 1.3-1.8% upticks—bargain central for defense, logistics, and growing e-commerce plays. No builds humming, but proposals hint at 144,000 SF. Sales ~$28 million over ~260,000 SF ($108/SF), cap rates 10%. Ownership private-led (60%), local roots strong. Economy: 1.2% job surge from Quantico and warehouses. Outlook: A feel-good story of stability; low metrics shield from storms, with VRE expansions as potential accelerators—could evolve from hidden gem to hotspot if metro refugees flock south, though federal axes might nick the momentum.
Route 29/I-66 – 3.3 million SF of commuter-friendly turf—vacancy 4.5% (down 1.9%—impressive!), absorption +62,700 SF. Rents $29/SF up 1.3%. No construction/deliveries. Sales $14 million over 130,000 SF ($108/SF). Active spots like 12811 Randolph Ridge show strong leasing.
Manassas – 2.6 million SF urban core—vacancy 2.8% (down 0.6%), absorption +16,900 SF. Rents $28/SF with 1.8% growth. Proposed 144,000 SF at Cannon Landing (starting Dec 2025). Sales $14 million over 130,000 SF ($108/SF).
Combined – Approximately 5.9 million SF, vacancy ~3.65%, absorption +79,600 SF. Rents ~$28.5/SF. Proposed 144,000 SF. Sales $28 million ($108/SF). Route 29/I-66’s accessibility pairs with Manassas’ grit for a dynamic duo—think logistics hubs meeting defense needs. Outlook: Keep the wins coming; value draws crowds, but watch for spillover from D.C. cuts—primed to be the affordable powerhouse if infrastructure revs up.

Overall Washington DC Office Market: A Tale of Turbulence in the Nation’s Capital

Posted on by Ryan Rauner, CCIM
The Washington DC office market, sprawling across a massive 518 million square feet of space, is navigating choppy waters in mid-2025. Picture this: a vacancy rate stubbornly perched at 20.1%—that’s higher than the 10-year average of around 15%, like an unwelcome guest who won’t leave the party. Availability hovers at 22.6%, bloated by a flood of sublease options as companies downsize amid hybrid work trends and federal belt-tightening. Net absorption? It’s a grim story, clocking in at -3.5 million square feet annually, fueled by remote work hangovers, economic jitters, and the Trump administration’s cuts via the Department of Government Efficiency (D.O.G.E.), which could ripple through the GSA’s 90 million square feet of managed space.
Rents are playing it safe, flat at 0.0% growth year-over-year, averaging $40 per square foot full-service gross. But don’t be fooled—effective rents are dipping thanks to juicy concessions like months of free rent and hefty tenant improvement allowances, especially in trophy buildings where 4 & 5 Star spaces command $46/SF. Sublets? They’re the bargain bin, often 30-40% off. Construction has hit rock bottom, with just 1.2 million SF underway (a fraction of the 10-year average), and only 1.1 million SF delivered recently—developers are hitting pause amid high capital costs and shaky demand.
Sales are a mixed bag: $4.1 billion in volume over 800 deals in the past year, slightly below the decade’s $4.4 billion average, with prices at $273/SF and cap rates around 9.5%. Distress is the name of the game, with assets trading 20-50% below prior peaks. The local economy chugs along with 1.1% job growth, buoyed by government stability, but D.O.G.E. layoffs loom like storm clouds. Outlook? Brace for more pain—negative absorption and climbing vacancies through 2026, unless urban revamps and non-federal tenants spark a comeback. It’s a market in flux, where opportunity hides in the shadows of uncertainty.
Tysons Corner: The Suburban Powerhouse Reinventing Itself
Tysons Corner, boasting 26.7 million square feet, feels like the ambitious suburb that’s shedding its old skin for a shiny mixed-use glow-up. Vacancy sits at 20.0% (a tick up from last year, still better than the region’s 20.1% but above its 10-year norm of 18.5%), with availability at 22.5%. Absorption’s in the red at -106,000 SF yearly, tallying -1.3 million over five years—blame the post-pandemic office exodus. Rents? A slight dip of -0.5% to $39/SF average ($43/SF for premium 4 & 5 Star spots), but new trophy leases push $55-65/SF amid concessions.
Leasing’s sluggish, though tech giants like Capital One are expanding. No fresh deliveries lately, but 1.1 million SF proposed, including the 378,000 SF G1 at Tyco Road eyeing a 2026 start. Sales hummed at $78 million over 822,945 SF ($95/SF average), highlighted by distress deals like 2100 Reston Parkway’s fire-sale at $85/SF. Ownership’s diverse: 35% private investors, 40% institutional. Short-term? More absorption woes. Long-term? Tysons’ live-work-play vibe could shine, unless federal cuts or recession dim the lights—think of it as a phoenix mid-rise.
Reston & Herndon: Tech Hubs Battling the Blues
Reston – This 19.2 million SF enclave, a cradle for innovation, is grappling with a 21.5% vacancy (up 1.0% YOY). Absorption’s negative at -150,000 SF yearly. Rents hover at $38/SF with a -0.3% nudge down. Fresh builds like 1880 Reston Row Plaza (210,000 SF) add flair, while proposals like 748,972 SF at Halley Rise signal optimism. Sales: $78.3 million over 822,945 SF ($95/SF), with active spots like RTC West showing flickers of life.
Herndon – Smaller at 11.5 million SF, but punchy—vacancy 18.0% (up 0.8%), absorption -80,000 SF. Rents steady at $35/SF. No recent deliveries; 614,793 SF proposed, including Willowbeck Tower. Sales: $50 million over 500,000 SF ($100/SF).
Combined – Together (30.7 million SF), vacancy ~20%, absorption -230,000 SF, rents $36/SF flat. Proposed 1.4 million SF hints at growth, sales at $128 million ($97/SF). These tech/gov-heavy spots are like startups in a downturn—resilient but rattled by hybrid work and federal trims. Outlook: Steady grind, with innovation as the wildcard; risks abound if D.C. jobs flee.
Merrifield: The Low-Vacancy Outlier
Merrifield’s 10.6 million SF shines as a relative bright spot, vacancy at 14.1% (up 0.6%, still below regional). Availability 15.6%, absorption -135,000 SF. Rents $33/SF with a rare +0.1% uptick. Deliveries: 125,000 SF; under construction: 270,000 SF (HITT HQ by 2027). Sales $87.5 million over 330,000 SF ($265/SF). Mixed-use charm fuels demand. Think of it as the steady performer in a shaky ensemble—low vacancy offers buffer, but federal risks could ripple in. Outlook: Pressures on rents if absorption stays negative; mixed-use evolution keeps it intriguing.
Ballston, Clarendon-Courthouse, Rosslyn: The Arlington Corridor Drama
Ballston – 0.5 million SF, vacancy 25.5% (up 1.5%—ouch). Absorption -110,000 SF, rents $42/SF down -0.5%. No builds, but 500,000 SF proposed. Sales $100 million over 400,000 SF ($250/SF).
Clarendon-Courthouse – Compact 4.2 million SF, vacancy 25.5% (up 2.0%). Absorption -27,100 SF, rents $41/SF (-0.5%). Zero construction. Sales light at $20 million ($200/SF).
Rosslyn – 12.3 million SF, vacancy 19.5% (up 1.0%). Absorption -44,700 SF, rents $43/SF (-0.9%). Proposed 523,000 SF at 1401 Wilson Blvd. Sales $143 million over 2.3 million SF ($62/SF, heavy on distress like Potomac Tower at $92/SF).
Combined – Approximately 27 million SF, ~23.5% vacancy, -181,800 SF absorption. Rents ~$42/SF slipping. Proposed ~1 million SF. Sales $263 million ($104/SF). This corridor’s like a bustling metro line derailed by remote work—vibrant potential in mixed-use, but federal shadows loom. Outlook: High drama with rising vacancies; urban allure could rebound if non-gov tenants step up.
Crystal City: The High-Vacancy Hotspot
Crystal City’s 12.1 million SF feels like the overlooked gem polishing up for a comeback, but vacancy’s a whopping 28.6% (up 2.2% YOY, region’s highest). Availability 26.6%, absorption -260,000 SF yearly. Rents steady at $42/SF (0.0% growth). No builds underway, but 1.1 million SF proposed. Sales trickle at $3.2 million over 2,600 SF ($1,231/SF—small deals skew high). Ownership mixed, 60% private. It’s the underdog story: Proximity to D.C. screams potential, but federal consolidations could exacerbate woes. Outlook: More upward vacancy pressure short-term; long-term, redevelopment might flip the script.
Old Town Alexandria: Charming Yet Challenged
With 5.3 million SF, Old Town’s historic vibe draws tenants craving walkability and lower costs—vacancy 15.0% (up 0.5%), availability 16.5%. Absorption -114,000 SF yearly (five-year: -1 million SF). Rents $35/SF (-0.2% growth). Net space removal (-650,000 SF in five years), no builds. Sales $136 million over 533,620 SF ($250/SF), e.g., Tavern Square at $225/SF. Ownership 60% private, top players like Abu Dhabi Investment Authority. It’s the quaint neighborhood bar in a rowdy market—affordable rents lure, but negative trends bite. Outlook: Stable with upside in redevelopments; watch for spillover from D.C. cuts pressuring fundamentals.

Washington DC Metro Area Retail Market Q1 2022: First Amazon then Covid. Can Retail Recover?

Posted on by Ryan Rauner, CCIM

Rentable Building Area
Malls: 32,977,663 SF
Power Center: 27,434,147 SF
Neighborhood Center: 83,723,176 SF
Strip Center: 11,867,739 SF
General Retail: 106,360,719 SF
Other: 2,662,276 SF

Market: 265,025,720 SF

The pandemic impacted commercial real estate across the board but with varying degrees and in different ways. Office space was decimated and the diagnosis for recovery is grim. Industrial space actually benefited. Lockdowns, telework, and voluntary social distancing/isolation naturally led to an increase in e-commerce (storage and distribution) and the associated data storage needs (data centers) with Amazon/Amazon Web Services leading the way. Retail was negatively impacted; in the beginning by government-mandated lockdowns (and even landlords prohibiting tenants from opening), then by arbitrary occupancy edicts, and finally by a mass-hysteria that has infected nearly half the country fomented by the fear-mongering, mainstream media. After 2 years and with approximately 75% of DC metro residents vaccinated, the retail market is on the road to recovery. Vacancy rates for most subtypes (malls excepted) appear to have peaked and rents have recovered; however, rent increases may be more attributable to inflation rather than increased leverage on the part of landlords. While Costar predicts the average market rent to exceed $30.00/SF (triple net) sometime in 2022; free rent, tenant improvement allowances, and percentage rent concessions common in deals today result in a significantly lower net.

Vacancy Rate/Availability Rate
Malls: 9.3%/5.8%
Power Center: 4.5%/5.7%
Neighborhood Center: 5.7%/7.8%
Strip Center: 5.0%/5.8%
General Retail: 3.5%/4.8%
Other: 7.2%/8.2%

Market: 5.1%/6.0%

Market Vacancy Change Past 12 Months: 0.1%

Market Net Absorption Past 12 Months: 243,893 SF

Net Absorption Current Quarter
Malls: 3,757 SF
Power Center: (2,326 SF)
Neighborhood Center: 151,328 SF
Strip Center: 7,404 SF
General Retail: 76,345 SF
Other: 0 SF

Market: 236,508 SF

The retail market within DC proper continues to be the hardest hit by the pandemic. Remote-work policies have hollowed out the District’s office buildings along with the daytime worker economy, relied upon heavily by ground-floor retail. Draconian lockdown policies and mandates have only exacerbated the problem. Mayor Muriel Bowser recently extended DC’s indoor mask mandate until February 28, 2022 with Montgomery County and Prince George’s County following suit with extensions to February 21, 2022 and March 9, 2022 respectively. As is often the case, DC’s and Southern Maryland’s losses are Northern Virginia’s gains. Recently inaugurated Virginia Governor, Glenn Youngkin, has proclaimed, “We will not have shutdowns, we will not have lockdowns – we will be open.” This stark policy difference will likely strengthen existing tailwinds generated by Amazon’s HQ2 at National Landing and completion of the Silver Line Metro (Reston to Ashburn). Tenants and investors are unlikely to forget the economic devastation caused by the arbitrary and authoritarian government edicts of the past 2 years, which should result in increased demand and capital investment in Northern Virginia over the next 4 years.

Costar claims that leasing activity in 2021 showed signs of recovery in both deal count and square footage leased, approximately 350 and 1.5M SF respectively; however, net absorption in 2021 was negative (292,170 SF). Malls were dying before the pandemic and continue to struggle as do certain national brands whose business model and associated real estate strategy made them particularly vulnerable to the rise of e-commerce giants like Amazon. Other retail subtypes and tenants have been able to pivot and a limited pipeline has reduced supply-side pressure on the vacancy rate. In fact, the number of projects breaking ground is at a 15-year low with deliveries continuing to decline over 2022.

Average Asking Rent (NNN)
Malls: $31.01
Power Center: $29.05
Neighborhood Center: $29.63
Strip Center: $27.78
General Retail: $29.36
Other: $30.48

Market: $29.56

Market Rent Growth Past 12 Months: 1.1%

Northern Virginia has led the metro in population, job, and median income growth over the past few years. As a result, it also leads the market in terms of development. Not just retail though, NoVA has seen dynamic single-family and multi-family housing development to accommodate its growing employment base. Amazon is building approximately 110k SF of retail and entertainment space at National Landing; however, with the future of office and urban living still uncertain, the delivery of Phase 2 of the Silver Line Metro may be the bigger story with greater, long-term impacts on the region’s retail market. In November 2021, the Metropolitan Washington Airports Authority (MWAA) announced that the project was substantially complete and would be open to the public in Spring of 2022 (only about year and a half behind schedule). The extension of the Silver Line will connect Reston Town Center, Dulles Airport, and Ashburn to the rest of the DC metro via public transit. The Herndon and Route 7 submarkets are poised to benefit greatly with increases in demand, rents, and asset prices likely over the next few years. There are multiple projects underway along Route 7 (Ashburn) comprising more than 225k SF. The pandemic signaled a monumental reversal in the submarket’s fortunes, which previously suffered from a dearth of daytime traffic due to the fact that most residents worked in the District or in submarkets like Reston and Tysons Corner. With many employees now working from home, local retailers, especially restaurants, are thriving as they absorb the business lost by their urban counterparts.

Under Construction
Properties: 59
Percent of Inventory: 0.5%

Preleased: 70.9%

Malls: 0 SF
Power Center: 55,000 SF
Neighborhood Center: 288k SF
Strip Center: 0 SF
General Retail: 1,083,077 SF
Other: 17,300 SF
Market: 1,442,959 SF

Delivered Past 12 Months: 1.5M SF

Rents for most retail subtypes have recovered, at least from a nominal standpoint. At 1.1%, rent growth over the past 12 months is slightly below the market average for the past 5 years but is welcome news compared to the -0.6% from just one year ago. Unfortunately, these numbers are about as accurate a representation of the strength of the retail market as the federal government’s purported unemployment rate. The dirty little secret, reported by brokers and asset managers, is that concessions like 12-18 months of free rent, high double-digit tenant improvement allowances, and tenant-friendly percentage rent terms result in deals that require 2-3 years to become cashflow positive. This means that inflation is the main driver behind rent increases rather than strong economic fundamentals.

Sales Past 12 Months
Properties: 848
Average Cap Rate: 6.4%
Average Price/SF: $299

Average Vacancy at Sale: 6.7%

Market Sales Volume: $2.1B

Q4 2021 Sales Price/SF
Malls: $244
Power Center: $417
Neighborhood Center: $177
Strip Center: $243
General Retail: $434
Market: $334

National: $229

Q4 2021 Cap Rate
Malls: 6.19%
Power Center: 6.25%
Neighborhood Center: 6.38%
Strip Center: 6.41%
General Retail: 6.13%
Market: 6.24%
National: 6.91%

In a similar vein, the DC metro market average sales price per square foot has risen above and market cap rate fallen below pre-pandemic levels. Costar reports that the pace is accelerating because investors are racing to finish deals. This may be the case but the reason behind the race is not actual value appreciation but rather inflation and the risk of rising interest rates. It’s yet to be seen if cap rates have lowered because investors are willing to accept a lower rate of return or because the Fed has pumped more dollars into the system in the past 2 years than ever in recorded history; leading to asset inflation. It’s probably a combination of the two, but the point remains the same: no one wants to be the last one holding the hot potato. Savvy investors are likely looking to dump assets in the People’s Republic of DC and Southern MD to invest in more business and tax-friendly markets.

Washington DC Metro Area Office Market Q1 2022

Posted on by Ryan Rauner, CCIM
Rentable Building Area
Market: 512,236,442 SF
4 & 5 Star: 267,374,370 SF
3 Star: 183,753,559 SF

1 & 2 Star: 61,108,513 SF

It has been 2 years since I provided a snapshot and forecast of the DC metro area office market, which at the time looked so bright it had to wear shades. The date was January 15, 2020, nearly 2 months to the day before “2 weeks to slow the spread.” At the time, the nation was experiencing the longest period of sustained growth on record and, with no glaring/imminent threats on the horizon, it appeared that vacancies would continue to fall and market rents rise, at least along trendlines. Then a black swan from China fed by a contentious election year and nurtured by power-hungry and authoritarian politicians and bureaucrats fundamentally changed the way we live, work, and play. Teleworking was not a new concept at the time. Many companies allowed employees some measure of flexibility in being able to work from home, but the growing consensus seemed to be that having employees work in the office was a net positive. The practical and psychological impacts of the pandemic changed all that. Demand for office space is on life support, vacancies are at historic highs, and rents are falling. Barring some unforeseen catalyst, a “white swan” if you will, it’s hard to see how the office market recovers.

Even the combined might of the federal government and the area’s many Fortune 500 companies was insufficient to save the DC metro office market from the scourge of Covid-19. At 15.2% the market vacancy rate is the highest in recorded history; however, this belies the truly dire state of office demand. The availability rate is a more accurate representation of the supply of office space competing for tenants and that number is at 18.8%; the result of 7 straight quarters of negative net absorption. It gets worse when considering recent demand trends towards transit-oriented, 4 & 5-Star properties. The vacancy and availability rate for that class of office buildings is at 17.9% and 22.8% respectively.

The federal government has been a major driver and stabilizing force in the DC metro office market and when Amazon announced that it would make National Landing the site of its HQ2 in 2019, the area was poised for the explosive growth associated with big-tech. Unfortunately, these 2 juggernauts are unlikely to aid in the recovery of the market. Policy changes at the General Services Administration, will result in the federal government reducing its footprint with private landlords and federally owned buildings over the coming years. Many of the area’s largest employers are moving into their own headquarters, i.e. Amazon, Capital One, Marriott, which means the impact on absorption will be a net neutral. Both are exploring hybrid schedules and remote work, which will have a larger impact on overall demand than the sum of their parts.

The pandemic saw the greatest transfer of wealth in human history, mainly caused by government policies and lockdowns. Amazon and Google can afford to have their employees work from home indefinitely while continuing to pay for office space. Small to medium-sized businesses, on the other hand, cannot necessarily do the same, as evidenced by the largest inventory of sublet space in history. Amazon will continue to develop the 6 million SF that it must “occupy” in order to take advantage of tax benefits offered by state and local governments, but it is unlikely to take a leading role in getting employees back in the office. By driving other tenants out of the market, the area’s largest companies will only increase their leverage and competitive advantage.

Vacancy Rate/Availability Rate
Market: 15.2%/18.8%
4 & 5 Star: 17.9%/22.8%
3 Star: 14.2%/16.3%

1 & 2 Star: 6.6%/8.0%

Net Absorption Past 12 Months
Market: (1,523,080 SF)
4 & 5 Star: (932,256 SF)
3 Star: (531,519 SF)

1 & 2 Star: (59,305 SF)

Vacancy Change Past 12 Months

Market: 1.5%

Just 2 years ago, the big story in leasing was Amazon’s HQ2 and the potential for explosive growth led by big-tech. The opposite is now true and rather than fueling demand for office space, big-tech is leading the teleworking charge; adjusting their leasing strategies to the new remote-work paradigm and getting richer in the process. Amazon’s remote-work policy is currently in flux and Capital One has pushed back its return-to-office policy (employees will be required to be in the office Tuesday-Thursday in 2022). Small to medium-sized businesses will likely be required to follow suit and adopt similar policies in order to compete for talent; however, as stated earlier, Fortune 500 companies can afford the expense of leasing office space while absorbing any loss in productivity associated with not having their employees physically in the office. In fact, this may be a strategy to monopolize negotiating leverage and talent acquisition.

If you’re looking for the federal government to drive the recovery, think again. Instead, the GSA will further disrupt a return to normalcy. The new commissioner of Public Building Service at the GSA, Nina Albert, plans to reduce the federal government’s leasing footprint with private landlords and move to flexible, remote policies. The impact on the office market could be catastrophic as approximately 60% of federal leases expire in the next 5 years.

Costar lists notable leases as the Securities and Exchange Commission relocating and expanding from 700k to 1.2M SF at 60 New York Ave NE (but not until 2025), the American Banker’s Association relocating from 3-Star space in the CBD to 1333 New Hampshire Ave, , and the National Institute of Health leasing additional space in North Bethesda (2115 E Jefferson St). It’s interesting to note that these and the overwhelming majority of significant leasing activity was from government, government-funded, i.e. Raytheon, and non-profit tenants. The government never runs out of money even if ordinary for-profit businesses do.

What little leasing activity there was followed the existing trend of flight-to-quality and consolidation into premier and emerging submarkets. The East End, Reston, DC’s Central Business District (CBD), NoMa, and Tysons Corner were the top 5 submarkets in terms of overall leasing activity in 2021 with Crystal City, Capital Riverfront, and Bethesda reporting notable but more deal-specific wins. These trends are likely to continue as rising construction costs make renovations and/or redevelopments in secondary and tertiary (suburban) submarkets cost prohibitive. Despite 4 & 5-Star properties absorbing nearly all demand, they have almost 61M SF available for lease across the metro area.

Average Asking Rent
Market: $38.79/SF
4 & 5 Star: $45.78/SF
3 Star: $32.00/SF

1 & 2 Star: $27.40/SF

Rent Growth Past 12 Months: (0.7%)

Existing, long-term leases have buffered against the devastation caused by the pandemic; however, market rents have not been immune to the law of supply and demand. Landlords may still be collecting rents for already leased space but, as evidenced by the 9.9M SF of sublet space on the market, tenants are looking to offload space rather than lease it; creating additional competition for struggling landlords. As a result, rents are falling and landlords are making other significant concessions, i.e. free rent, tenant improvement allowances, etc. to lease up properties. A real life example can be seen at 1875 Pennsylvania Ave, which after losing its anchor tenant (WilmerHale), was marketing space around $29.00/SF, triple net compared to the CBD/submarket average of $65/SF, full-service. The fact that this is for a 15-year lease with free rent and tenant improvement allowance included reveals a shocking and frightening insight into landlords’ perception of the future of office demand.

Northern Virginia, once the leader in rent growth for the DC metro, saw rents decline more than the market average due to large tenant relocations to build-to-suit headquarters, and Southern Maryland, previously 3rd in terms of leasing activity and rent growth, saw the most absorption over the past 12-months, which unsurprisingly was Covid-19 related and due to its reputation as a bio-tech hub. Despite this, rents still fell in Montgomery County with a notable exception being a large lease signed by TCR2 Therapeutics, which received significant funding from federal, state, and local governments.

Under Construction
Properties: 44
Market: 10,482,678 SF
4 & 5 Star: 10,438,678 SF
3 Star: 44,000 SF

1 & 2 Star: 0 SF

Percent of Inventory: 2.0%

Preleased: 68.5%

Delivered Past 12 Months: 2,100,000 SF

The construction pipeline for the DC metro office market is one of the largest in the country but, luckily, the amount currently under construction is small in comparison, equating to only about 2% of the existing inventory. A significant portion of the projects underway are build-to-suit, corporate headquarters, i.e. Amazon, Capital One, and Marriott, and while this mitigates supply-side increases in the vacancy and availability rates, it removes some of the market’s largest tenants, further reducing demand and exacerbating the vacancy epidemic. Pre-pandemic demand and development trends continue to be transit-oriented/metro-accessible and typified by leasing less space in nicer buildings (flight-to-quality); accelerating the functional obsolescence of many of the metro’s submarkets and buildings (3-Star and below). It is yet to be seen how the pandemic will impact the use of public transit and preferred housing density, but many employees that have the ability to work from home are relocating to more affordable areas, even out-of-state. In normal times, this might have been a boon to suburban submarket; however, due to increased construction costs (both labor and materials), it will be some time before renovations and/or multi-tenanting floors/buildings) become economically viable.

Sales Past 12 Months
Properties: 910
Average Cap Rate: 7.0%
Average Price/SF: $302/SF

Average Vacancy at Sale: 16.7%

Sales Volume: $5,900,000

Costar claims that investor confidence is rising as evidenced by sales activity in the 3rd quarter of 2021, which topped $2.5B and was the highest quarterly total since the pandemic. The DC metro office market is apparently one of the most liquid in the nation due to its stable tenant base, notably the federal government. Indeed, the common factor in the majority of the major transactions was federal, state, and/or local government tenants. This is a sound strategy, at least in the short term. The government never runs out of money, making it the best/most reliable tenant in uncertain times; however, if the GSA follows through with its plan to reduce the amount of space it leases from private landlords, what we’re likely seeing is a game of hot potato where the final investor holding the property gets burned. Indeed, some owners like Washington Real Estate Trust are jumping ship entirely. The company sold a dozen office buildings in key submarkets (Ballston, CBD, Old Town Alexandria, Rosslyn, and Tysons Corner) for $766M to free up capital for its transition into multi-family investment.

Two interesting sales were of distressed properties. The largest was the purchase of 1350 I St NW by an affiliate of MetLife. The 400k SF, 4-Star office building in the CBD last traded in November 2010 for $517.84/SF. The recent sale of $120.5M equates to a mere $301.25/SF and represents a 42% reduction in value. The 2nd largest foreclosure sale was of 1500 Wilson Blvd. The 261k SF, 4-Star office building located in Rosslyn last sold for $351.31/SF in July of 2015; however, because this was part of a portfolio sale the per square foot market value of the property on an individual basis was likely higher at the time. An affiliate of the Meridian Group purchasing the building for $58.3M or $223.06/SF, a reduction in value of over 36%. Even market sales like Hines Global Trust’s purchase of 1015 Half St SE in the Capitol Riverfront submarket for $215M ($508/SF) are indicative of falling values. The common theme in all of these sales is the discount to replacement for each property, which means that one could not build the property for the purchase price.

DC Metro Office Market: Pandemics, Lockdowns, & Elections

Posted on by Ryan Rauner, CCIM

 

We are now 6 months into “15 days to slow the spread.” Many small businesses have closed for good and the survivors are either teleworking or downsizing; leaving many to speculate about the future of office space. The economic devastation caused by the lockdowns is clearly reflected in changes to market fundamentals across the board; however, the psychological impact of the virus will have greater, long-term effects. As demand plummets, tenants are constantly asking if this will be reflected in proportionate decreases in rents… “good deals.” As we enter the 4th quarter of 2020, where are we and what can we expect in the future?

Rentable Building Area

  • Market: 507,641,251 SF
  • 4 & 5 Star: 257,547,778 SF
  • 3 Star: 188,690,068 SF
  • 1 & 2 Star: 61,403,405 SF
  • Deliveries Past 12 Months: 3,800,000 SF

The Washington DC metro area has traditionally been insulated from economic downturns due to the presence of the federal government and, with West Coast-based companies continuing to expand their footprint, the region has become a major East Coast tech hub as well. The Dulles Technology Corridor has been home to big tech firms for years. With its extensive fiber infrastructure, reasonable energy costs, and tax incentives, Ashburn, VA has evolved into the top data center market in the nation; hosting over 70% of the world’s internet traffic and earning the name: Data Center Alley. Historically, the area’s tech industry has centered around the needs of the federal government with a focus on integration versus innovation; however, with Amazon’s decision to locate its HQ2 in National Landing in 2018, big tech is now driving demand and has accounted for some of the largest leases in the past year.

The DMV has not been immune to the effects of the pandemic and government lockdowns. Approximately 230,000 jobs were lost since March 2020 and, while office users were able to adapt more easily by allowing their employees to work from home, many were still furloughed or laid off. Demand is down across the board, vacancies are up, and rent growth has flatlined. Small businesses are likely to delay leasing decisions at least until after the November election, the result of which could have a major impact on the national and local economy due to potential changes in tax rates and defense spending. Furthermore, Montgomery County, Prince George’s County, and Northern Virginia were slower to reopen than the rest of the country and, while this was in part due to the number of Covid-19 cases, the partisan nature and extent of the lockdowns cannot be ignored.

Vacancy Rate

  • Market: 13.8%
  • 4 & 5 Star: 15.8%
  • 3 Star: 13.4%
  • 1 & 2 Star: 6.5%

Availability Rate

  • Market: 17.8%
  • 4 & 5 Star: 20.8%
  • 3 Star: 16.5%
  • 1 & 2 Star: 9.3%
  • Net Absorption Past 12 Months: (1,400,000 SF)
  • Vacancy Change Past 12 Months: 0.7%

At 13.8%, the vacancy rate in the DC metro area is the highest its been in 4 years. Net absorption is at negative 1,400,000 SF over the past 12 months with the District being disproportionately impacted with over 1,000,000 SF being vacated since March. A more telling statistic is the availability rate, which reflects the actual amount of space on the market. At 17.8%, the market availability rate is 4% higher than the vacancy rate. This is the result of over 1,500,000 SF being added to the market since the beginning of the year, an increase of 25%. The gap is further pronounced (5%) in 4 & 5-Star properties with the area’s premier submarkets (East End, CBD, Tysons Corner, and Bethesda/Chevy Chase) accounting for nearly 50% of all available sublease space. As of this date, there is over 8,300,000 SF of sublease space on the market. Whether from struggling businesses seeking to reduce costs or healthy businesses reevaluating their space needs, this presents a troubling outlook for office market fundamentals.

The twin pillars of big tech and the federal government have accounted for some of the largest leases in the past year; however, many of the government-related deals were renewals rather than relocations or expansions. Large West Coast-based firms are driving demand as evidenced by Microsoft’s lease of nearly 400,000 SF at 11955 Freedom Dr in Reston Town Center in May, an expansion of its existing 150,000 SF footprint in the submarket at 12012 Sunset Hills Rd. The company plans to create a new software development hub, adding 1,500 new employees. Reston is also home to fellow tech giant, Google, which leased approximately 165,000 SF within the past year.

These leases reflect a tale of 2 economies. Large, multi-national companies are more easily able to weather the economic turmoil brought about by the pandemic while small businesses struggle to stay afloat. In fact, Google, Microsoft, and Facebook have all announced that employees may work from home indefinitely. Add to that the uncertainty surrounding the November elections and most firms will be delaying leasing decisions for the foreseeable future.

Average Asking Rent

  • Market: $38.47/SF
  • 4 & 5 Star: $45.68/SF
  • 3 Star: $32.14/SF
  • 1 & 2 Star: $26.67/SF
  • Rent Growth Past 12 Months: 0.2%

High vacancy rates have been the main impediment to significant rent growth in the DC metro area in recent years, a trend that will be further exacerbated by the reduction in demand for office space and increased availability of sublease space as a result of the pandemic. Wholesale discounts are not widespread yet at least in the form of lower asking rents; however, large concession packages especially in high vacancy submarkets are revelatory of the true state of the market. One example is Dweck Properties’ lease of 12,162 SF at 1050 17th St NW in DC’s Central Business District submarket. The lease rate of $52.00/NNN reflected a 9% discount from the $57.00/NNN asking rate. When combined with the $135/SF tenant improvement allowance and 12 months free (assuming a 132-month term and 3% annual escalations) the resulting average effective rent over the entire lease term is only $43.55/SF/yr. Landlords will also have to compete with a glut of sublease space on the market which is, on average, about 13% lower than direct market rents.

Unfortunately, the pain has only just begun with forecasts predicting a 4.5% decrease in rents by mid-2021; however, rent growth and/or losses will likely vary by submarkets. National Landing is positioned for strong rent growth as home to Amazon’s HQ2 and due to its proximity to the Pentagon. The Dulles Technology Corridor should also perform well as big tech firms continue to expand in Reston and Herndon. The expansion of the Silver Line has leveled the playing field for these suburban submarkets which offer new, 4 & 5-Star product at a discount compared to closer-in urban submarkets. Reston and Herndon are also able to offer an often overlooked but economically poignant amenity: ample free parking. This may signal an emerging trend in office demand towards more affordable, suburban submarkets in general. With the increase in teleworking, companies may abandon or decrease their presence in urban areas and move to a “hub-and-spoke” model with multiple, smaller satellite offices in closer proximity to their employees’ homes.

Under Construction

  • Market: 9,057,194 SF
  • 4 & 5 Star: 8,972,317 SF
  • 3 Star: 84,877 SF
  • 1 & 2 Star: 0 SF
  • Percent of Inventory: 1.8%
  • Preleased: 74.4%

There is nearly 9.1M SF currently in the pipeline and while this may seem like a significant amount of space it is actually the lowest total since 2016 and represents only 1.8% of the existing market inventory. Due to strong pre-leasing this new supply will not be overly detrimental to the overall market vacancy rate but upon closer inspection a growing trend and demand shift away from the District is becoming evident. Despite accounting for over 1/3 of the new product under construction, the Reston and Chevy Chase/Bethesda submarkets are 80% preleased. This includes the 785,000 SF build-to-suit new Marriot headquarters at 7750 Wisconsin Ave, 7272 Wisconsin Ave (362,643 SF) which is 67.7% preleased to a diverse group of tenants, and the Reston Gateway Twin Buildings where Fannie Mae preleased 1,200,000 of the 1,400,000 SF. Government agencies contributed to strong preleasing activity further bolstering suburban submarket performance. The Transportation Security Administration recently moved into its new 623,000 SF headquarters at 6595 Springfield Center Dr in Springfield, VA, the Department of Homeland Security will relocate its headquarters to Camp Springs, MD where it will occupy 575,000 SF, and the Institute for Defense Analyses will lease 370,000 SF at 730 E Glebe Rd in Potomac Yard one block down from the future Virginia Tech Innovation Campus. Conversely, the District’s upcoming projects have an availability rate of 45% with the entire 226,000 SF at 1255 Union St NE in the Capitol Hill submarket and 165,000 SF at 699 14th St NW in the East End still available.

Sales Past 12 Months

  • Sales Volume: $8,400,000,000
  • Market Cap Rate: 7.2%
  • Average Vacancy at Sale: 18.2%

The effects of the pandemic on the commercial real estate market can most easily be seen in its impact on investment sales. The $600,000,000 in sales in the 2nd quarter of 2020 marked a 75% decrease from Q1 (70% of the quarterly average for the past 2 years). Office prices have been decreasing since 2015 and, with the exception of some premier properties which can trade at over $1,000/SF, many deals involve repositioning strategies such as Dallas-based private equity firm Velocis’ purchase of 1530 Wilson Blvd or long-term bets like JBG’s investment in Crystal City (in retrospect). Perhaps the greatest and most startling example of the pandemic’s destructive impact was the sale of 8283 Greensboro Dr in Tysons Corner. Originally under contract for $63,400,000 in February, the property sold for over $6,000,000 less ($57,000,000). This was a particularly good deal for the Meridian Group, which purchased the building in addition to 2 others in the overarching Boro Project, and a bad one for Washington Real Estate Investment Trust which purchased the property in 2011 for $73,500,000. With the future of office demand in question, prices are likely to continue to fall as investors require a higher return/cap rate to justify their increased risk. Add to that the fact that many older office properties will require large capital investments to attract tenants in a competitive, high vacancy environment and office sales are likely to decline in overall volume in addition to price per square foot.