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 later this year. These leases have absorption on the mend, and vacancy is beginning to recover, even if it remains elevated. Hines made news early this year with their sale of Half Street, which they originally purchased in 2013 for $142 million, and then just resold for $135.5 million.
Leasing – A number of D.C.-area submarkets, such as Crystal City and Merrifield, had their office fundamentals shaken up by GSA tenants and government contractors downsizing because of sequestration and Base Realignment and Closure (BRAC). The Capitol Riverfront Submarket was no exception. Vacancies have been elevated since 2013, despite minimal supply pressure. In fact, with over 40% of the Capitol Riverfront’s office space occupied by GSA and contractor tenants, the submarket ranks in the top five in the metro for federal office exposure. However, fundamentals are showing signs of improvement, with vacancies declining since peaking well above 25% in mid-2015.
The large amount of federally leased office space is due to the presence of the U.S. Department of Transportation and the Naval Sea Systems Command (NAVSEA). NAVSEA, in particular, has been a boon for office demand since this submarket began redeveloping. Government contractors working for the Navy, as well as those looking to win new contracts awarded by NAVSEA—such as Lockheed Martin and shipbuilder Huntington Ingalls, have a vested interest, and in most cases, a mandate, to be close to the Navy Yard.
The Capitol Riverfront Submarket has several positive attributes that could serve as demand drivers for sources besides government contractors. Not only are rents here lower than those in the District’s core submarkets, but this submarket also offers a wide range of retail amenities and is near Capitol Hill. In 2001, the Capitol Riverfront Submarket was comprised of vacant parking lots and public-housing projects. Fast forward to 2018, and the submarket is home to Nationals Park, numerous high-end and fast-casual restaurants, the popular Bluejacket Brewery, and a number of high-end apartment and condo developments, highlighted by WC Smith’s Agora Apartments, which features a 35,000-SF Whole Foods on the ground level.
Tenants that have traditionally favored prime downtown locations are slowly moving to emerging areas such as Capitol Riverfront or NoMa, and the East End Submarket is feeling the effect. For example, Muriel Bowser chose to relocate the office of the Deputy Mayor for Planning and Economic Development here from the East End Submarket in 15Q4. Several other municipal tenants have followed, with the D.C. Office of Campaign Finance and D.C. Board of Elections signing leases here in 2017. The National Labor Relations Board also left the East End when it moved to 1015 Half St. SE, in 15Q3. More recently, the Credit Union National Association announced that it will be leaving 601 Pennsylvania Ave. NW, to move into Skanska’s 99 M St. SE in 2018. WeWork has noticed the Capitol Riverfront’s growing popularity as well—in 16Q4, the tech tenant magnet signed on for 69,000 SF at Columbia Property Trust’s Navy Yard Metro Center.
Rent – Rent growth in Capitol Riverfront has been inconsistent since the recession but has stayed positive each of the past four years, a reversal from the declines from 2012–14. Rents increased by about 3% last year and 3.7% in 2017, the highest rate since 2010.
Still, this is a much-needed reversal and is in large part due to recovering vacancies. At almost $45/SF, asking rents have long since matched their prerecession peak, despite vacancies that are more than one-and-a-half times the metro average. The Capitol Riverfront’s convenient location, Metro access, and burgeoning retail scene have helped the submarket emerge as a live/work/play environment and could boost demand in the long term. Still, consistent rent gains across the submarket are still elusive. However, prospects for rent growth are bolstered by the fact that office space in Capitol Riverfront is more affordable than in other submarkets in the District, with rents well below those in submarkets like the West End, CBD, East End, and Capitol Hill.