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.