Capitol Hill Area Multi-Family Submarket Q4 2018


Capitol Hill Multi-Family 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. Last year’s vacancy expansion was notable, and the two properties that delivered averaged just seven to eight units leased per month.

Competing for renters is difficult. The submarket is sandwiched between H Street and Navy Yard, enticing renters away from Capitol Hill to these trendier neighborhoods. Apartment owners must also compete with residents who come to the area to buy a home. Capitol Hill homes are among the most desirable in D.C., and the wealthy residents pay the premium for living here.

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 this 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.

H Street/NoMa Multi-Family Submarket Overview

The H Street/NoMa Submarket is a darling among real estate developers chasing the increasing number of young, high-earning renters moving to the area. This attracted an influx of new supply that kept this cycle’s vacancy rates well above the metro average, which peaked at over 30% in 2013. The submarkets transformation was extraordinary. More than 6,000 units delivered this cycle, the most to any single submarket. The inventory quadrupled and rents are now among the metros highest. Millennials continue to drive the strong demand needed to help vacancy recover as construction continues unabated. Occupancy volatility hampered both rent growth and sales volume performance recently. Years of 1,000-plus unit deliveries prevented landlords from pushing rents as competition at the top of the market was tight. Investors are wary of these slow rent increases, as well as high vacancy rates in many new deliveries. More units were underway at the start of the 18Q4 and it may take time before vacancy reaches equilibrium.

Southwest/Navy Yard Multi-Family Submarket Overview

Fundamentals are outperforming, remarkable for a submarket that added more than 6,000 high-end units in the last 10 years. Occupancies are above the three-year average thanks to record net absorption. Landlords 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. The sale of the Onyx earlier this year is the first trade in more than two years, signifying optimism not just for developers, but also for other investors.

Capitol Hill Area Submarkets Q4 2018

Capitol Hill Area Submarket Cluster

Capitol Hill Submarket 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, and though volume has decreased each year since 2015, it still hit $196 million last year. This year may be end up being the weakest since then, though; just under $50 million was recorded through the first three quarters of the year.

Southwest Submarket 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. Absorption was lackluster from 2013–16, causing an increase in vacancy and hurting rents, but 2017 was a solid year, following the uptick in metro-wide absorption. And the 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 last year, with seven transactions generating $775 million in volume. As of mid-October, only one sale had recorded for 2018, putting volume at $118 million.

NoMa Submarket Overview

New development has increased NoMa’s office stock by about 33% 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, keeping vacancy below the metro average. 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 earlier this year and will occupy nearly 500,000 SF in Four Constitution Square when it delivers next 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.

Capitol Riverfront Submarket Overview

GSA consolidation and Base Realignment and Consolidation (BRAC) fallout pushed vacancies above 20% in the middle years of the cycle. In fact, with over 40% of its office space occupied by GSA and contractor tenants, Capitol Riverfront ranks in the top-five submarkets in the metro for federal office exposure. Besides the U.S. Department of Transportation and Naval Sea Systems Command, other major office tenants include the District Department of Transportation, Lockheed Martin, Computer Science Corporation and Parsons Corporation.

In the largest lease signed in the past five years, the National Labor Relations Board moved into 151,000 SF at 1015 Half St. SE, relocating from D.C.’s East End in 2015. More recently, the National Association of Broadcasters (NAB) signed a 130,000 SF lease at Monument Realty’s 1 M St. SE. NAB plans to relocate its 150-person headquarters here from DuPont Circle when the project delivers next year. These leases have absorption on the mend, and vacancy is beginning to recover, even if it remains elevated. Still, investors haven’t been active here, and volume has been negligible since 2014.

Commercial Real Estate 101 – Chapter 4: Additional Rent (2 of 2)

A lease abstract is a document that summarizes specific, key information from a lease agreement. Leases can be lengthy documents with confusing legalese. Lease abstracts allow users to easily reference and review fundamental lease terms to ensure that both the tenant and landlord are in compliance with applicable obligations, timeframes, etc.

This series will go through a typical lease abstract and explain the various terms and what is important for a tenant to understand.

Landlord’s Insurance

  • Insurance carried by landlord to protect against loss or damage to the subject property.
  • What’s important – Lease/rental structure, what is/is not covered. Insurance requirements and coverage may very depending on ownership structure, i.e. fee simple vs. condo and/or rental structure, i.e. full service vs. triple net lease.

Tenant’s Insurance

  • The types of coverage and amounts required of tenant. Generally include commercial general liability, business interruption, worker’s compensation, etc. Tenant is typically required to include landlord, mortgagees, etc. as additional insureds.
  • What’s important – Types of coverage and amounts may vary based on landlord requirements, tenant’s use, negotiation, etc.


  • Insurance coverage protecting against financial loss due to property damage or personal injury by tenant.
  • What’s important – understanding what is covered. Level of coverage may be a point of negotiation.


  • Insurance coverage protecting tenant’s business property in the case of damage or loss.
  • What’s important – understanding what is covered and in which cases, i.e. gross negligence.

Rental Loss

  • Insurance coverage protecting landlord’s loss of rent in the case of fire or casualty damage which renders the subject property untenantable.
  • What’s important – While this insurance covers landlord the cost is charged to tenant under operating expenses.


  • Services provided to the subject property such as electricity, gas, water, sewage, telephone/internet.
  • What’s important – In full service leases, utilities are included under the basic annual rent/tenant’s base year. In some modified gross leases and in all triple net leases, tenant is responsible for paying utility charges directly to the service provider.


  • Heating, ventilation, and air conditioning.
  • What’s important – Power source, i.e. gas, electric, etc., responsibility for maintenance, repair, and replacement, party responsible for providing services (landlord or tenant), hours of operation. In full service leases, charges for HVAC services are included in the basic annual rent/tenant’s base year under operating expenses. In modified gross and/or triple net leases tenant may be responsible for maintenance, repair, and replacement. Landlord should be required to covenant that all building systems are in good working order. Many industrial spaces are not conditioned (heat only).

Tenant Repairs/Maintenance

  • Lease provision detailing tenant’s responsibilities with regards to the leased premises and subject property. Tenant’s responsibilities generally include keeping the lease premises and its equipment and fixtures in good order and returning to landlord as such, reasonable wear and tear excepted, and repairing any damage caused by tenant or its agents.
  • What’s important – Understanding which fixtures/equipment are tenant’s responsibility, i.e. HVAC units.

Landlord Repairs/Maintenance/Services

  • Lease provision detailing landlord’s responsibilities regarding its ownership and operation of the subject property. Generally lists services that landlord is required to provide, i.e. heat and air conditioning, elevator service, janitorial services, etc. Also describes the portions of the subject property that landlord is responsible for maintaining and/or repairing, i.e. parking lot, bathrooms, etc.
  • What’s important – understanding cases in which landlord is exempt from repairs, i.e. damage caused by tenant; hours that services are provided; terms governing interruption of services, etc.


What’s a Personal Guaranty?

In commercial leasing landlords will sometimes require a prospective tenant to personally guarantee the lease. This means that the guarantor(s) will be personally responsible for the tenant’s lease payments. In the case of default, the landlord can go after the personal assets of the guarantor(s).

Why would anyone agree to put their personal assets on the line? Sometimes a tenant has no choice. Personal guaranty requirements have increased dramatically since 2008 as a result of the Great Recession. They apply primarily to new businesses and reflect the landlord’s estimation of risk regarding the tenant. The terms governing personal guarantees can be negotiated and limited in both scope and size. An increased security deposit can also sometimes be negotiated in place of a personal guaranty, but that means having to put down cash, capital that might otherwise have been used to grow the business.

Perhaps the best and easiest comparison is a bank lending someone money. The bank will look for collateral to secure the loan. In the event of default, the bank can foreclose on the collateralized asset. Like a bank the landlord is loaning the use of their property to the tenant in exchange for rent payments. The landlord incurs a similar risk and thus will require certain assurances that their damages will be mitigated in the event of default.

While it can be a bit scary to put one’s personal assets on the line a personal guaranty is only a piece of paper if the tenant lives up to the terms of the lease. Both parties are entering into an agreement and simply need to do what they said they would do. Also landlords are generally required by law to mitigate their damages in the case of a tenant default. Always have your attorney review the terms of a personal guaranty to ensure that they comply with the laws in the subject jurisdiction.

loosening necktie

The Great Recession’s Impact on the Office Market

The Great Recession caused interesting and identifiable changes in the commercial real estate industry, particularly the office space market. A tenuous economy coupled with technological advances caused companies to reevaluate the way they do business, which in turn had significant impacts on their decision-making with regards to taking space. In the short term, many businesses were unwilling to sign up for long-term leases due to fear over the fate of the economy. Over the long term though, tenants sought to lower costs and maximize efficiency by altering the way they operated, even questioning the need for office space altogether.

While not a unique product of the Great Recession, outsourcing certainly increased in prevalence as a result. The Affordable Care Act’s requirement to provide healthcare to full-time employees also greatly contributed to employers outsourcing certain roles and services. Why hire a full-time accountant, for example, when you only need part-time accounting work? Companies were able to lower costs by hiring less full-time/overhead employees and as a result required less office space.

Another change that occurred during this time was a move towards more open office layouts*. Collaboration was all the rage and companies wanted their employees to be able to communicate and share ideas more easily. The number of individual offices dramatically decreased; giving way to cube farms and team spaces and “war rooms.” The old, high-profile cubicles were abandoned in favor of low-profile, smaller cubes or even long tables or desks. This change allowed companies to increase their employee density. In office intensive environments employers would typically budget 200-250 square feet per employee. This included each employee’s share of the common areas of the building and space, i.e. kitchen, bathrooms, conference rooms, etc. With the more open plan concept, employers were able to lower their employees’ footprint to 150 square feet or less. As in the case with outsourcing, this change allowed companies to take less office space thus lower their costs.

*The move towards open office layouts appears to be a failed experiment as many employers are trending back towards individual offices; citing lack of privacy as an impediment to employee productivity and morale.

Advances in telecommunications and connectivity led to an increase in the viability and desirability of telecommuting. Many functions can be performed remotely; allowing employees to work from anywhere. Companies now had the option to allow certain staff to work from home or only require them to come into the office a few times a week or month; leading to cost savings from decreased space requirements. “Phone booth” offices and hoteling became popular alternatives to permanent space for telework employees.

Coworking spaces have been growing in popularity since 2008 particularly with newer and hipper options such as WeWork and MakeOffices entering the marketplace. Most people were familiar with the 800-pound gorilla, Regus, and what they offered: short-term office rentals, access to conference room space on an hourly basis, and receptionist services. Sensing an unmet demand, these new companies presented a slightly different offering. Instead of the maze-like, office intensive environment of their competitors, they provided a more collaborative environment with modern finishes that appealed to millennials. Furthermore, Regus’ a la carte services led to many a client being shocked when they received their monthly bill. Newer options provided many more amenities such as beer/wine, black and white copies, game rooms, etc. for free.  One reason that they were able to offer more for less was due to the additional money they were able to generate by reducing office sizes and increasing hoteling options.

While it is yet to be seen if the changes to the commercial office market brought about by the Great Recession are temporary or permanent, the present effect has been a decrease in square footage per tenant and increased vacancy rates. This has led to a prolonged tenant’s market with landlords being forced to offer increased concessions and additional amenities to attract tenants.


Downtown DC Submarkets Q4 2018

Downtown DC Submarket Cluster

Central Business District (CBD) Submarket Overview

Employment in the CBD is diverse, spanning many sectors from law, to tech, to government. The legal services sector comprises a substantial portion of the submarket’s office demand, and those tenants are occupying less square footage per employee than in previous cycles but remain important anchor tenants that drive new construction. Professional and business services, healthcare, information, and government tenants have a presence as well. And like law firms, those organizations are generally opting to occupy higher-quality space, which is often used as a recruiting tool. Many of D.C.’s marquee employers, including the International Monetary Fund, the World Bank, the National Education Association, the Federal Reserve System, the U.S. Chamber of Commerce, and the U.S. Department of the Treasury, have set up shop here and are unlikely to leave in the near-term, creating a stable base of demand.

Renovations, along with new construction, have been a major factor in the increase of 4 & 5 Star supply in the submarket. Premium real estate in a central location comes at a price, though, and the CBD boasts some of the highest rents in the metro. The combination of high rents and increased competition from submarkets like Capitol Riverfront and NoMa has caused a slowdown in rent growth over the past few years. Still, this submarket is an investor favorite—volume in 2017 reached a cyclical high just below 2007 levels, the previous cycle’s peak. Sales have slowed this year, though, with volume just below $570 million as of early October.

 East End Submarket Overview

Vacancies in the East End were roughly in line with the metro average as of late October, though several projects that are anticipated to deliver late this year and early next year could cause rates to spike. Tenant downsizings weighed on demand growth for several years, with net absorption negative in 2015 and negligible from 2016–17, although rates have rebounded this year. Construction activity is ramping up, regardless, with nearly 1.3 million SF delivered as of early 18Q4 and another 1.2 million SF under construction.

D.C. tenants willing to pay higher rents, such as corporate law firms, prefer newer, more efficient space in the East End. Healthy preleasing of new deliveries highlights the flight to quality. Of the 10 properties delivered from 2014–17, eight are at least 90% occupied. The flight-to-quality trend explains why some of East End’s older, 3 Star inventory—which exceeds 8.5 million SF—is being renovated into 5 Star office space. Although buildings offering the newest, most amenitized space are landing big tenants, recent deals include generous tenant improvement packages and prolonged periods of free rent, suggesting that tenants have meaningful leverage. Sales have been relatively stable recently, hovering at just over $1 billion per year.

West End Submarket Overview

Like in the other core submarkets in the D.C. metro, a solid base of anchor tenants and a supply-constrained nature have helped keep vacancies here below the metro average, despite slow leasing velocity. However, several impending move-outs could cause vacancy to jump in the near future. This is a big-footprint submarket, and about 40% of tenants occupy 10,000 SF or more, but many users own the space they occupy. Although firms like Hunton & Williams (191,000 SF) and Vinson & Elkins (81,200 SF) are important tenants, this submarket is less dependent on law firms than the East End or the CBD. Given the relative dearth of such firms and their importance as anchors in new construction, it is no surprise that development has been depressed, despite tight vacancy. At over $51/SF, average asking rents in the West End are comparable to the CBD’s but slightly less than the East End’s. The West End has fewer prestigious tenants than the East End or the CBD, and it also has a smaller inventory and grapples with a higher proportion of owner-occupied inventory. This generally makes sales rarer and depresses volume to far lower levels than its primary competitors.


Downtown DC Multi-Family Submarket Q4 2018


Apartment fundamentals in Downtown D.C. continue to strengthen after inventory increased by about 25% since 2010. Vacancies, which reached the double digits in 2013 and 2014, regained their footing through the first three quarters of 2018 and were again below the historical average. Recently delivered projects have been leasing well. In fact, almost all of the absorption came from 4 & 5 Star buildings over the past three years. As developers provide new living alternatives in Shaw, Mount Vernon Triangle, and Chinatown, it appears many residents are trading up for these apartments.

Rents suffered from a slowdown in demand from 2016-17, but made considerable gains through the first three quarters of 2018. Concessions are still relevant in apartments built in 2018, but are difficult to find in older properties. It appears Downtown D.C.’s supply-side concerns are in the rear-view mirror as only a handful of small apartments were under construction at the start of 18Q4. This could further improve occupancies and rent growth, with the potential to lead to further sales.

After the record level of volume from 2010-15, sales activity has been muted. Only one property has traded this year, and after the flurry of activity earlier this cycle, the disparity between what’s available and at what price point has left many companies targeting other submarkets. Downtown D.C.’s reputation as one of the most sought-after residential submarkets in the metro should keep developers and investors coming back over the long term, but fundamentals gained a boost so far in 2018 because of the lack of activity.

Commercial Real Estate 101 – Chapter 4: Additional Rent (1 of 2)

A lease abstract is a document that summarizes specific, key information from a lease agreement. Leases can be lengthy documents with confusing legalese. Lease abstracts allow users to easily reference and review fundamental lease terms to ensure that both the tenant and landlord are in compliance with applicable obligations, timeframes, etc.

This series will go through a typical lease abstract and explain the various terms and what is important for a tenant to understand.  

CAM/Operating Expenses

  • CAM stands for common area maintenance and is synonymous with operating expenses. These are the costs associated with operating and maintaining the subject property. Leases will generally provide a list of costs included and excluded from operating expenses.
  • What’s important – Rental structure, what is included/excluded from operating expenses, historical records/variations, tenant’s proportionate share, audit provisions, etc. In full service leases, operating expenses are included in the basic annual rent. Tenant is only responsible for its pro rata share of any increases in operating expenses in subsequent years over the lease term. A review of the past few years operating expenses is advised. Caps on controllable operating expenses are a point of negotiation. In triple net leases, operating expenses are not included in the basic annual rent and must be paid separately. Tenant’s right to audit landlord’s books is a point of negotiation. Fixed annual increases in lieu of “passthroughs” is a point of negotiation.

Real Estate Taxes

  • Any and all general and special taxes levied against the subject property.
  • What’s important – Tenant’s proportionate share, special assessments, etc. Real estate taxes are levied by the governing body in which the subject property is located and is generally outside landlord or tenant’s control. Landlord may contest amount of real estate taxes.

Base Year/Expense

  • Applicable in full service or modified gross leases, is the amount of actual or “grossed up” operating expenses and real estate taxes in the first calendar year of the lease term. Tenant is responsible for its pro rate share of any increases in operating expenses and real estate taxes over the Base Year. Uncontrollable expenses, i.e. snow removal are generally excluded from the Base Year.
  • What’s important – Tenant’s proportionate share, amount of Base Year expenses, historical records/increases. Tenants are charged for increases but generally do not receive credits for any decreases in operating expenses or real estate taxes.

Gross Up

  • Process by which landlord calculates tenant’s proportionate share of operating expenses for a property that is less than fully occupied. Landlord increases its calculation of those expenses that vary with occupancy to reflect the amount of the expenses if the building were fully occupied or percentage thereof.
  • What’s important – Amount of the increase/”gross up.” Provisions can range from 90% occupancy to fully leased.