Georgetown Submarket Overview Q1 2019

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Georgetown is home to lobbyists and politicians, high-end shops and restaurants, and to the University that shares its name. Georgetown is one of Washington, DC’s oldest and most prestigious neighborhoods with waterfront real estate. Despite all this, Georgetown has struggled in recent years to adapt to changing trends and competition from other submarkets in DC.

Lack of metro access combined with excessively high retail rates have led to negative net absorption over the past 3 years, this despite no supply-side pressure. Historic preservation groups make it extremely difficult to build in Georgetown evidenced by the fact that there has not been a new delivery here since 2006 nor are there any scheduled for the next 2 years. The majority of Georgetown’s office inventory is within a quarter mile of the intersection of Wisconsin and M, is roughly 4,100 square feet, and was built in the early 1900s.

Rents in Georgetown are among the highest in the DC metro area at around $50 per square foot but finally saw an end to their roughly 3% annual growth from 2014-2017 and were negative in 2018. This trend may continue as landlords attempt to backfill recent vacancies.

For detailed information on the Georgetown submarket please contact Ryan Rauner, CCIM at Ryan@RealMarkets.com.

Lease Terms: Shorter than 3, Longer than 10, and In-Between.

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When leasing commercial space companies must decide on the length of lease term. This decision is influenced by a number of factors, including but not limited to, growth projections, continuity of operations, build out needs, economic conditions, etc. Market conditions, outside the tenant’s control can also have an impact. For example, retail landlords generally require minimum 5-year leases and during the early years of the Great Recession landlords were willing to agree to nearly any length of lease term (sometimes as short as 1 year) just to get their spaces leased.

In this series I will be discussing the most common/traditional lease terms: 3-year, 5-year, and 10-year, but will also touch on less conventional terms shorter than 3 years, between 5 and 10 years, and longer than 10 years. I will touch on the What (you can expect in concessions as a result), Who (generally prefers which), and Why (tenants may choose one over another).

Less than 3 years

Most landlords are not willing to agree to lease terms of less than 3 years. Only in rare cases and/or dire economic conditions might a landlord choose to do so. Options for shorter than 3-year lease terms primarily take the form of subleases. Subleases can be great opportunities for tenants looking for shorter term leases as they are often offered below market rates for comparable properties and can also include furniture.

Between 5 and 10 years

The main reason for a lease term between 5 and 10 years is that the landlord requires a longer term over which to amortize the costs of the tenant’s improvements/allowance. As construction costs rise so to will the prevalence of 6 and 7-year leases. Another reason for an “in-between” lease term may be due to the need for space being tied to a contract, franchise agreement, etc. The lease term is then made coterminous with the factor which necessitates the requirement for the commercial space.

Longer than 10 years

Similar to terms less than 3 years, most landlords will not agree to terms in excess of 10 years. They may not want to encumber their space for that long and/or want the opportunity to reset the rent at the then market rate at the end of the term. Renewal options are used as ways to provide tenants with the security of knowing that they will still have the ability to keep their space and allows the opportunity to increase the rent if the tenant’s rental rate at the end of the lease term is below market (landlords’ preferred language is “the greater of market or the then escalated rate”). Ground leases are the exception and can be as long as 99 yeas depending on the municipality in which the property is located. Generally ground leases need to be from 50-99 years for a new development to make sense.

***Did you know Tysons Corner is on a ground lease?***

It’s always recommended to seek the advice and services of an experienced commercial real estate broker when leasing commercial space. For more more information on representation, please contact me at Ryan@RealMarkets.com

Tysons Corner Landlords Invest in Hand Sanitizer

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When Phase 1 of the Silver Line was finally approved, we learned that the Tysons Corner metro stations would not have parking. Who cares though?

I don’t plan on riding the metro. It’s dirty, crowded, and unreliable. Daily parking and rides during rush hour add up. Unless you live in walking distance to a station you also have to drive, find parking, walk to the station, wait for the train, endure multiple stops, then walk to your place of business. Basically, it takes longer to get to work and is more expensive to ride the metro than it is to drive. So yeah, no thanks.

Guess what though, you may not have a choice.

Every commercial property has a parking ratio. They vary depending on use and building square footage but minimal requirements are dictated by the County. Typically office buildings in Fairfax County are required to have a minimum 3 parking spaces per 1,000 square feet, but with the metro that’s all changing. Based on proximity to mass transit (metro) developers can request an increase in density or FAR (floor to area ratio), which means they can build a more building on less land. They can also request a reduction in their parking ratio, which means fewer parking spaces.

*Many buildings in Arlington have less than 2 spaces per 1,000 square feet.

In addition, depending on their proximity to the metro, existing buildings may now be forced to adopt permitted parking to prevent metro riders from parking in their building’s parking lot and taking away spaces from paying tenants. Commercial real estate broker or not, we all know that you can fit more than 3 people in 1,000 square feet. So why wasn’t parking an issue before? A few reasons…

One, because it was free and unreserved; unreserved being key. When you reserve parking only those for whom it’s reserved can park there. You park there you get towed. We’ve all been frustrated driving around a parking garage passing empty space after empty space looking for one that’s not marked “Reserved.” Another reason is that many buildings aren’t 100% leased so naturally there would be excess parking and even if a building were 100% occupied some people may be on vacation, home sick, on the road, or simply didn’t come to work leaving enough parking for tenants and visitors.

Those days are now over.

So what does that mean? It means that all of us that don’t want to give up our cars and suffer the metro daily are out of luck. Well, some of us are out of luck. See, when you permit parking you can’t provide more permits than you have parking spaces. A landlord with a 3 parking spaces per 1,000 square feet parking ratio can’t give a tenant 5 parking permits (spaces). The math doesn’t work. And when you have 5 people and only 3 parking spaces you get 2 people riding the metro. So where do you fall in the hierarchy of your company? Are you parking permit worthy?

While there is over 20 million square feet of office vacancy in Fairfax County the only 2 markets most companies want to be in are Reston and Tysons Corner. Naturally that’s leading to rising rental rates in these markets. It’s basic supply and demand and the rules of supply and demand don’t stop there. You start with free and unreserved parking then you get permitted parking and then… you got it! Paid parking.

Because of the metro, tenants may eventually have to factor parking costs into their monthly budgets. Parking charges will most certainly not be as high as say Arlington, at least not initially, but depending on the amount of space and people you have the amount may not be negligible. And, come on, it’s Tysons Corner. I’ve been parking here for free, forever. I already get irritated having to pay for parking at Towers Crescent or Tysons Blvd, and now I may have to worry about that on Greensboro Dr and Spring Hill Rd? Give me a break.

People will try and make the case that Tysons is becoming a work, live, play environment and to a certain extent that’s true or at least becoming true. But how long do we have to wait for that day and what do we do in the mean time?

Executives will need to analyze where they’re drawing their workforce from and factor that into their decision on where to lease space. If you’re millennial heavy this may not be a problem. Companies will want to locate their offices in close proximity to the metro as a way of attracting a more urban, tech savvy employee base.

If you have a more traditional employee base that loves their cars though you’ll want to stay away from buildings within walking distance to the metro that will be forced to permit their parking. Many of these buildings will have shuttles running rides to and from the metro during regular business hours, which may still allow them to attract metro riders.

Finally, when in lease discussions you can try and negotiate free parking for the initial lease term and any renewal terms (less likely). This landlord concession, like all others, will be directly to your company’s square footage footprint; the more you take the more you get. However, when it comes to paid parking landlords oftentimes will outsource management of the parking facilities to 3rd party companies, which means it’s out of their hands.

The point is times are changing and Tysons Corner will experience the associated growing pains. One day Tysons Corner will resemble Arlington. It will be walkable. At least that’s the plan. In the meantime though, load up on hand sanitizer and buy some good books because you may be spending a lot more time on the Silver Line than you’d thought.

10-Year Leases: Who, What, & Why

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When leasing commercial space companies must decide on the length of lease term. This decision is influenced by a number of factors, including but not limited to, growth projections, continuity of operations, build out needs, economic conditions, etc. Market conditions, outside the tenant’s control can also have an impact. For example, retail landlords generally require minimum 5-year leases and during the early years of the Great Recession landlords were willing to agree to nearly any length of lease term (sometimes as short as 1 year) just to get their spaces leased.

In this series I will be discussing the most common/traditional lease terms: 3-year, 5-year, and 10-year, but will also touch on less conventional terms shorter than 3 years, between 5 and 10 years, and longer than 10 years. I will touch on the What (you can expect in concessions as a result), Who (generally prefers which), and Why (tenants may choose one over another).

10-Year Lease

Why?

There are a number of reasons that tenants may prefer a 10-year lease. One is continuity of operations. If a tenant’s use requires customers or patients to visit their space they have an interest in those customers and patients knowing where they are located; fearing that they may lose some of those customers/patients if they were to change locations. Similarly, if a location is highly desirable a tenant may want to “lock it in” for as long as possible so that the landlord cannot lease the space to a competitor or other business. In the same vein, if tenants have the opportunity to lease space in a tenant’s market, categorized by high vacancies (high supply/low demand) which puts downward pressure on rental rates, they may want to “lock in” that rate in hopes of paying below market rates for the duration of the lease term. Finally, depending on the extent of the tenant’s build out needs/costs, they may need a longer lease term over which the costs of their improvements/allowance can be amortized.

Who?

Doctors and dentists almost exclusively sign 10-year leases (if purchasing is not an option). Retail users are also prime candidates for 10-year leases due to the importance that their location within both a submarket and retail project impact their success.

What?

Ten year leases are longer enough to amortize the costs of most build outs. Interestingly though, improvement allowances seem to be affected by the law of diminishing returns. If a 5-year lease gets a tenant a $50/sf improvement allowance a 10-year lease will not likely result in a $100/sf improvement allowance. There is a dollar per square foot amount, different for each landlord, market, etc. over which landlords are not willing to go. They want to know that a tenant has some “skin in the game” to reduce the risk of default. Landlords may provide other economic concessions such as free rent as an incentive for tenants to sign up for a 10-year lease term as opposed to cash.

It’s always recommended to seek the advice and services of an experienced commercial real estate broker when leasing commercial space. For more more information on representation, please contact me at Ryan@RealMarkets.com

5-Year Lease Terms: Who, What, & Why

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When leasing commercial space companies must decide on the length of lease term. This decision is influenced by a number of factors, including but not limited to, growth projections, continuity of operations, build out needs, economic conditions, etc. Market conditions, outside the tenant’s control can also have an impact. For example, retail landlords generally require minimum 5-year leases and during the early years of the Great Recession landlords were willing to agree to nearly any length of lease term (sometimes as short as 1 year) just to get their spaces leased.

In this series I will be discussing the most common/traditional lease terms: 3-year, 5-year, and 10-year, but will also touch on less conventional terms shorter than 3 years, between 5 and 10 years, and longer than 10 years. I will touch on the What (you can expect in concessions as a result), Who (generally prefers which), and Why (tenants may choose one over another).

5-Year Lease

Why?

Five year leases are the most common lease terms and, in many cases, the reason is simply because it’s the default lease term. Many landlords require a minimum 5-year lease term (retail particularly). In addition, 5 years is both short enough and long enough for companies to forecast and make accurate projections. Finally, if a company wants or needs to modify/customize their space a 5-year lease generally provides enough term over which improvement allowances can be amortized.

Who?

Most (established) businesses lease commercial space for 5 years. As previously mentioned, retail tenants are generally required to enter into a minimum 5-year lease.

What?

Depending on the asset class, nature of the tenant’s business, and extent of the build out (and finishes), a 5-year lease can get you a brand new, turnkey space. This applies mostly to office space where layouts/office configurations are relatively uniform, reusable by subsequent tenants, etc. Due to the uniqueness of retail and industrial tenants’ uses and associated infrastructure and build out needs the amount of money in the deal may or may not be sufficient to cover the cost of their improvements. Retail rates are relatively high compared to office and industrial rents in the same market, which in theory would afford a higher improvement allowance, but because each retail tenant’s business has proprietary specs their build outs are generally more expensive. Industrial spaces are generally leased in larger square footage blocks with a relatively small portion of the space actually being built out. Thus the impact of the improvement allowance is magnified. For example, an industrial tenant that leases 20,000 sf at $10 per square foot (triple net) and receives a (meager) $5/sf tenant improvement allowance has $100,000 to spend towards build out. If they only require a 2,000 sf showroom/office space that improvement allowance actually equates to $50/sf ($100,000/2,000 sf).

It’s always recommended to seek the advice and services of an experienced commercial real estate broker when leasing commercial space. For more more information on representation, please contact me at Ryan@RealMarkets.com

3-Year Lease Terms: Who, What, & Why

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When leasing commercial space, companies must decide on the length of lease term. This decision is influenced by a number of factors, including but not limited to, growth projections, continuity of operations, build out needs, economic conditions, etc. Market conditions, outside the tenant’s control can also have an impact. For example, retail landlords generally require minimum 5-year leases and during the early years of the Great Recession landlords were willing to agree to nearly any length of lease term (sometimes as short as 1 year) just to get their spaces leased.

In this series I will be discussing the most common/traditional lease terms: 3-year, 5-year, and 10-year, but will also touch on less conventional terms shorter than 3 years, between 5 and 10 years, and longer than 10 years. I will touch on the Who (generally prefers which), What (you can expect in concessions as a result), and Why (tenants may choose one over another).

3-Year Lease

Why?

Perhaps the most common reason tenants may prefer a 3-year lease is flexibility. Three years is a relatively short time in business. Tenants may want the ability to move to another building or submarket. In uncertain economic terms, many businesses may not want to lock themselves into a “long” term obligation and be on the hook for rental payments if the business fails. Another reason may be time. If a tenant needs to lease space quickly for whatever reason, i.e. their current lease is expiring, and they did not give themselves enough time to thoroughly evaluate their options, negotiate the most advantageous terms, etc. they may want to minimize the amount of time they are in a less than optimal space. Three year leases are generally the shortest lease term that landlords will allow.

Who?

Many new businesses or start-ups find 3-year leases appealing. They are still testing out their concept and may not have tools, data, etc. to make accurate projections for growth, revenue, etc. They don’t want to bite off more than they can chew; making a 3-year lease an easily digestible lease term.

What?

Landlords amortize the costs of tenant improvement allowances over the term of the lease and 3 years is simply not long enough for landlords to be able to offer much money and still offer competitive market rates. Concessions can range from paint and carpet (flooring) and some minor demo to nothing. This is another reason why 3-year options are a preferred choice to tenants that are in a hurry. The build out process requires architectural drawings, permits, construction, etc. which can take months. Paint and carpet do not require permits and can thus be done “over the weekend;” allowing tenants to move in quickly.

It’s always recommended to seek the advice and services of an experienced commercial real estate broker when leasing commercial space. For more more information on representation, please contact me at Ryan@RealMarkets.com

Capitol Hill Area Multi-Family Market Q1 2019

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H St/NoMa Submarket Overview

For a submarket that delivered more than 6,700 units and quadrupled its inventory this cycle, fundamentals are extremely resilient. Demand continues to keep up with new deliveries, thanks to the flood of renters moving to H Street and NoMa. This has kept vacancies in check, and even when vacancies do spike, strong demand results in only a handful of quarters of elevated vacancies. Another 800-plus units are expected in 2019, but based on recent trends, current performance is likely to continue.

Year-over-year rent growth last year surpassed the recent peak in 2015 and was closer to the peaks last seen in the first year of the cycle. Rents should continue to grow as the initial shock of brand new luxury apartments continues to wane. Because almost all of the inventory is new, most rent gains and investor interest comes from the first wave of supply back in the midyears of the cycle. Sales volume cleared $200 million in those years, as early investors took a chance on this emerging submarket, but was quiet the past two years.

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Capitol Hill Submarket Overview

The identity of this iconic Washington, D.C. neighborhood is slowly changing. Developers added a significant number of high-end, luxury units to the streets of Capitol Hill this cycle, expanding the apartment inventory by 25%. Developers like Foulger-Pratt and Donatelli Development are transforming entire blocks with the additional supply underway.

Demand for apartments is untested because this type of inventory has never historically been available. Most renters opt for an English basement, which helps explain why developers never built here. With the popularity of H Street to the north and Navy Yard to the south, Capitol Hill is becoming a viable option for development. But it is taking time for these recently delivered projects to stabilize. The vacancy expansion in 2017 was notable, and the two properties that delivered that year averaged just seven to eight units leased per month.

Strong fundamentals led to significant rent gains in the early years of the cycle, but recent weakness slowed that growth. The high-end market was particularly soft, as 4 & 5 Star properties underperformed relative to 3 Star properties. But that could likely be explained by the significant gap between 3 Star rents and 4 & 5 Star rents. Owners in older properties have more room to push rents, while the influx of competition in 4 & 5 Star rents hamstrings owners.

Sales volume is typically low because of the limited inventory. When properties do trade, like the handful of deals last year, pricing is reflective of the smaller apartment complexes. Institutional players being priced out of H Street, Downtown, and Southwest/Navy Yard were able to find a few opportunities earlier this cycle. And with even more projects delivering in the coming years, Capitol Hill might remain in their focus.

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Southwest/Navy Yard Submarket Overview

Vacancies were down considerably last year, as strong absorption and a lull in supply allowed new deliveries to fill. Over the cycle, vacancies haven’t completely unraveled, remarkable for a submarket that added more than 6,000 high-end units in nine years. Occupancies were even above the three-year average at the end of 2018 thanks to record net absorption. Landlords continue to benefit from a growing base of young, wealthy renters willing to pay higher rents for better access to neighborhood amenities.

Another substantial wave of projects should deliver in the coming years, again raising questions of over-supply. But based on this submarket’s recent past, new supply has done little to slow rent gains and the sale of the Onyx early last year is the first trade in more than three years, signifying optimism not just for developers, but also for other investors.

Capitol Hill Submarket Q1 2019

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Overview – The Capitol Hill Submarket has consistently maintained vacancies lower than the metro’s, due in no small part to its proximity to the seat of American power. Much of the employment (about 55%, according to the census) is categorized as “public administration”— or government work. Office space here rents at a premium to nearby submarkets like NoMa and Capitol Riverfront, due largely to supply limits in the Judiciary Square area, where asking rents regularly exceed $55/SF. In fact, rents in Capitol Hill are the second-highest in the metro, behind only those in the East End. Sales have been strong for the past few years, though volume has decreased each year since 2015. This year ended up being the weakest since then, as just over $50 million was recorded for the year.

Leasing – For most of the cycle, this submarket has been spared the wave of supply that has hit other urban submarkets. That, paired with strong demand drivers, has allowed Capitol Hill to maintain steadier fundamentals than most submarkets in the urban core.

Several recent deliveries have caused vacancies to increase, but they are still below the metro average. Even though the construction pipeline is the busiest it has been in years, strong demand is expected from government agencies that make up more than half of office-using employment, along with the law firms and lobbyists that maintain office space near the Capitol building. Those private users, along with tenants such as the Citizenship and Immigration Office, Department of Education, and Department of Justice—all with significant footprints in this submarket—are not likely to shut down in the near term. However, the submarket is not without risk. The GSA is not afraid to go looking for a better deal, as demonstrated by the Bureau of Prisons’ move to 115,000 SF in L’Enfant Plaza, which left 500 First St. NW completely vacant in its wake.

In a supply-constrained area of the Capitol Hill Submarket, Property Group Partners chose to build a platform over I-395 to support Capitol Crossing, a three-phase, five-building development projected to add 2 million SF of office space to the submarket. The first phase, two spec office buildings, will create the submarket’s second- and fourth-largest office properties, at 560,000 SF and 425,000 SF, respectively. The American Petroleum Institute announced a 74,000-SF lease at 200 Massachusetts Ave., the smaller of the two buildings, which delivered in summer 2018. This was the first lease signed at Capitol Crossing and will bring the trade association to the Capitol Hill Submarket from its current office in the East End. The next most important project is 700 Penn, a 235,000 SF office building that is part of the Hine Junior High School redevelopment, a630,000 SF mixed-use development. Co-working company the Yard was the first tenant to sign on for the project, taking 32,000-SF. As of 18Q4, the property was roughly 70% leased.

Rent – The Capitol Hill Submarket has the second-highest rents in the metro, behind the East End. This is partially due to the limited supply near Judiciary Square and Union Station, where rents average roughly $55/SF, compared with a submarket average closer to $53/SF. Despite the lack of recent supply, rent growth has struggled. Growth the past two years was about 2.5%, significantly stronger than the average annual gains from 2014–16, which were roughly 0.5%.

Southwest (Washington, DC) Submarket Q1 2019

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Overview – The federal government is a staple tenant in the Southwest Submarket, limiting redevelopment opportunities close to the National Mall. But building near the waterfront surged as the Navy Yard and Nationals Park construction sparked revitalization of underused land and catalyzed office development. The revitalization has spread to Southwest, too, with the completion of phase one of the Wharf and Audi Field, home to the MLS team D.C. United. Demand has already shown signs of life, as well. Recent demand momentum continued into 2018, with USAID taking down the biggest block of available space in the submarket, but the impact of that move will be muted because it is consolidating between buildings within the submarket.

Consolidation isn’t the only thing weighing on office demand here—the U.S. Department of Agriculture recently announced that it will relocate two of its agencies, both of which are in Southwest, outside of the Washington, D.C., metro. Only four investment-grade properties traded from 2013–16, but sales picked up in 2017, with seven transactions generating $775 million in volume. And last year, two sales had recorded, putting volume at $170 million.

Leasing – Vacancy is still in the double digits, but it is almost half the recession peak. Recent move-outs, including those by the U.S. Department of Energy and the Administration for Children and Families, have put pressure on fundamentals of the highest-quality buildings. As a result, rent growth has stagnated for 4 & 5 Star properties over the past few years. And more bad news is on the horizon: The U.S. Department of Agriculture recently announced that it will relocate the Economic Research Service (ERS) and the National Institute of Food and Agriculture (NIFA) outside of the Washington, D.C., metro area by the end of 2019. This is a huge blow to the Southwest Submarket, since the ERS occupies more than 361,000 SF at Patriots Plaza (355 E St. SW), and NIFA occupies roughly 126,000 SF at Waterfront Centre (800 9th St. SW).

Demand struggled in late 2015 and some of 2016, causing vacancy to increase significantly, but a couple of high-profile deals combined with consistent demand in the 5,000–10,000-SF range helped this submarket recover last year. Demand from big-footprint tenants has been consistent, and since 2014, 10 leases for more than 100,000 SF have closed, although five were renewals.

In one, the Federal Bureau of Prisons moved from Capitol Hill to 115,000 SF at 370 L’Enfant Plaza SW last year. In late 2016, the Urban Institute signed a 120,000- SF lease at JBG Smith’s 500 L’Enfant Plaza SW development, which delivered early this year. The Urban Institute will relocate to its new space from from 2100 M St. NW (in the CBD) in 19Q2. More recently, the Pension Guarantee Benefit Corporation agreed to take 432,000 SF for 15 years in the Portals II. The current tenant, the FCC, will relocate to Sentinel Square III in NoMa in 2020, and the Pension Guarantee Benefit Corporation is expected to take occupancy in 2021. The most recent deal of note was USAID’s 348,000-SF lease at 500 D St. SW, although it is giving back some space at 400 C Street NW.

The downsizing of the GSA’s leased-office footprint in Southwest D.C. could continue to hamper absorption. Government is by far the largest employer in this submarket, its scale clearly evident in the space it uses. Government tenants occupy close to 7 million SF, more than half the submarket’s inventory. The who’s-who of federal agencies that make the Southwest Submarket home include the FCC, NASA, ICE, the SBA, the Department of Agriculture, the Department of Education, HUD, the FHA, FEMA, the FTC, and more.

Rent – Struggling fundamentals weighed on growth in the earlier years of the cycle, but recent performance is stable. Year-over-year growth at the end 2018 was about 1.1%, down about 160 basis points from that time last year. Still, this indicates nearly three years of positive gains, something landlords missed during the declines in 2012-14.

Regardless, at about $50/SF, rents in Southwest are among the highest in the metro. As of 18Q4, Southwest was the fifth most expensive submarket in the metro, behind submarkets like the East End, Capitol Hill, and the CBD.

NoMa Submarket Q1 2019

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Overview – New development has increased NoMa’s office stock by one-third over the course of this cycle, and that development, along with an influx of apartment supply, makes this one of the most rapidly changing submarkets in the metro. Demand has generally kept up, and while vacancy increased in the middle years of this cycle, strong absorption helped it compress in 2017 and 2018. GSA tenants have been the major driver of office demand here, and the Peace Corps’ announcement that it is relocating its headquarters to NoMa was just the latest example.

The plethora of green 4 & 5 Star buildings here with rents cheaper than those in core office submarkets helps NoMa attract and retain federal tenants. The Department of Justice moved into 345,000 SF at Three Constitution Square early last year and will occupy nearly 500,000 SF in Four Constitution Square when it delivers later this year. Other GSA tenants in NoMa include the Federal Energy Regulatory Commission, the Department of Education, the Securities and Exchange Commission, the Internal Revenue Service, and Customs and Border Protection. The D.C. government also uses space in NoMa for the D.C. Housing Authority headquarters.

Leasing – After a 15-year period of explosive development, heavy tenant migration, and poor absorption from 2015–16, NoMa joined the expansive group of Downtown D.C. office submarkets with vacancies above 10% in the middle years of the cycle. However, leasing has trended in the right direction recently—about 430,000 SF was absorbed in 2017 and another 400,000 SF in 2018, allowing vacancies to recover slightly. The U.S. Department of Justice moved into 345,000 SF at Three Constitution Square last summer, and the FCC and Peace Corps both announced moves to NoMa, accounting for an additional 473,000 SF and 176,000 SF, respectively.

The most recent buildings to open—Three Constitution Square, Republic Square II, Sentinel Square II, and Uline Arena—added more than 1 million SF to the submarket’s inventory, and several sat empty for years before recently finding tenants. For example, Three Constitution Square delivered in January 2014 and was vacant until last year, when the Justice Department took the entire building. Republic Square II was roughly 37% vacant at the end of last year after delivering in early 2016, and the GSA signed a lease in 2017 to occupy more than half of Sentinel Square II, which had been 100% empty since delivering in November 2013.

Construction of the submarket’s newest delivery, Uline Arena, finished in 17Q1, and about 70% of its space is still available for lease. Antunovich Associates, the architecture firm that redesigned Uline Arena, recently announced that it would relocate to the building from Clarendon, expanding its footprint to 9,000 SF. Furthermore, Goodwill of Greater Washington will also be taking space at Uline Arena. The non-profit is relocating its headquarters from 2200 South Dakota Ave. NE and will occupy roughly 24,000 SF.

Government agencies and nongovernment organizations seeking more affordable space than that offered in Downtown have been driving office demand in NoMa. From the beginning of 2014 to the end of 2018, government tenants alone have accounted for more than 50% of space occupied. At about $49.50/SF, average rents are cheaper than in the CBD, East End, and Capitol Hill Submarkets.

NoMa’s plethora of green buildings with cheaper rents should help it to retain federal tenants. The risk of GSA space givebacks looms because the agency has announced plans to reduce its footprint of leased office space, which could undercut demand gains from the private sector in the near term. Since some federal agencies are mandated to occupy green space, buildings that lack LEED certification or Energy Star ratings are most at risk of losing GSA tenants. The submarket contains more than a dozen Energy Star or LEEDcertified office buildings, totaling 9 million SF. These rent for an average of about $50.50/SF, which is right around the GSA rent ceiling of about $50/SF for new leases in the District.

Rent – Rent growth has been subdued this cycle, in stark comparison to the strong gains posted from 2005–08. Relatively low rents and below-average vacancy are apparently not enough to give landlords the leverage needed to achieve meaningful growth. Gains in 2017, which were just below 3%, provided a sign of hope, but rent growth in 2018 slowing to 1.2% means a return to more normal levels.

NoMa contains a plethora of green 4 & 5 Star buildings with rents lower than those of green office space in other core D.C. submarkets. That helps NoMa attract and retain federal tenants such as the U.S. Department of Justice and the FCC, which are major boons for the submarket. However, other submarkets in the District, such as Southwest and Capitol Riverfront, have been more competitive recently, with mixed-use developments like the Wharf attracting large tenants such as the Washington Gas Light Company.