Washington, DC West End Submarket Q1 2019

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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 below the metro average, despite slow leasing velocity. However, several impending move-outs could cause the vacancy rate 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 $50/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 more rare and depresses volume to far lower levels than its primary competitors. But 2018 proved there is still interest in a submarket like West End.

Leasing – The flight-to-quality trend is alive and strong in D.C. but that may work against the fortunes of the West End since its aging office inventory is more skewed toward 3 Star space than that of its primary competitors. But declining vacancy, which has otherwise failed to spark significant rent gains, is so tight in 3 Star properties that the submarket is potentially on the cusp of a recovery. The West End is coveted by tenants because it’s the gateway to some of the District’s premier office corridors, like K Street and Pennsylvania Avenue, which bodes well for long-term stability.

As a result, the West End boasts a diverse tenant base, including prominent companies such as law firm Squire Patton Boggs and GSA tenants like the Department of State. Additionally, former President Barack Obama’s lease in the World Wildlife Fund building at 1250 24th St. NW helped bolster the submarket’s profile.

Absorption in 2017 was the strongest since 2011. That year, the 459,000-SF Square 54 completed, and several high-profile tenants including Hunton & Williams, Vinson & Elkins, Danaher Corporation, and Boston Properties moved in. Absorption in 2017 was primarily driven by a single lease, the 92,000-SF move-in by the Aspen Institute into 2300 N St. NW. Demand slowed again last year, though, with net absorption totaling about 30,000 SF.

Vacancies jumped dramatically in 2014 due to two moveouts that highlight the potential impact of the flight-to-quality trend in the West End Submarket. Both involved tenants that opted for newly constructed space. The first was the Association of American Medical Colleges, which vacated nearly 200,000 SF at 2501 M St. NW and 2450 N St. NW when it consolidated its headquarters at a new building in the East End. In the second move-out, law firm Pillsbury Winthrop Shaw Pittman vacated nearly 250,000 SF at 2300 N St. NW for space in Akridge’s 1200 17th St. NW in the CBD.

More move-outs are on the horizon, as well. Law firm Buckley Sandler, currently in the World Wildlife Fund Building, recently announced it will be moving its office to Brookfield’s 2001 M St. NW in the CBD when its lease expires this year. Buckley Sandler occupies more than 31,000 SF in the West End but will expand to 65,000 SF when it moves to the CBD.

The largest move-out looming is that of research and technology consulting firm Advisory Board, which is slated to move to Washington’s East End Submarket in 2019. Advisory Board is currently the West End’s third largest tenant, occupying about 318,000 SF at 2445 M St. NW, which will become vacant in Q2 2019 and has not yet been backfilled.

Rent – At over $50/SF, average office rents in the West End Submarket are among the highest in the metro. They remain comparable to those in the CBD, a primary competitor, but are lower than those in the East End. Of the core D.C. submarkets (East End, West End, and the CBD), the West End has the tightest headline vacancy rate, suggesting that the submarket might be primed for rent growth. It also has the highest availability rate, due to large blocks of available, but currently occupied space, like the 189,000 SF in the American Pharmacists Association headquarters, which makes the environment more competitive than the headline vacancy rate suggests. Still, conditions are so tight in the 3 Star slice that it’s hard to imagine rents going anywhere but up, especially since the free rent that was common in the early and middle stages of the cycle is starting to burn off. In fact, average annual rent growth in this segment from 2014–18 was roughly 2%, but growth slowed in each of the past three years.

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