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%.

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