Downtown DC Submarkets Q3 2019

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When you’re at the top, the only way to go is down. The East End, CBD, and West End are considered the DC metro area’s premier office submarkets; however, millions of square feet of new supply added to nearly 13,000,000 SF of vacant space along with competition from emerging submarkets like NoMa and Southwest have caused fundamentals to suffer, a trend that may continue for the foreseeable future.

East End

  • RBA: 53,024,189 SF
  • Vacancy Rate: 14.4%
  • 12 Month Net Absorption: (117,000 SF)
  • Average Asking Rent: $57.22
  • 12 Month Rent Growth: 0.1%

The East End is the largest and most expensive submarket in the DC metro area with over 53,000,000 SF of inventory and an average rental rate of $57.22/SF; however, competition from emerging submarkets with lower rents and increases in supply have resulted in negative absorption, rising vacancy rates, and anemic rent growth. Developers have been demolishing older office properties and building trophy assets in their place; delivering over 1,600,000 SF in the past 12 months. This led to a 2.9% increase in the vacancy rate in the past year. In addition to the new supply, more than 10,000,000 SF of older supply remains vacant. Interestingly, a large portion of this inventory consists of 4-Star properties built before 2000. The 14.4% vacancy rate is 1.5% higher than the metro average. This disparity is dwarfed by the difference between the East End’s availability rate compared to the metro average: 21.3% to 17.1%. The forecast for East End fundamentals is grim as traditional tenants (corporate law firms) continue to downsize while others look at other submarkets like NoMa and Southwest that provide the same quality product at more affordable rents.

Central Business District (CBD)

  • RBA: 45,135,622 SF
  • Vacancy Rate: 10.9%
  • 12 Month Net Absorption: (433,000 SF)
  • Average Asking Rent: $54.07
  • 12 Month Rent Growth: -0.3%

The CBD submarket is 2nd only to the East End in terms of total inventory, asset value, and average rents at over 45,000,000 SF, $22.2 billion, and $54.07/SF respectively. Unfortunately, the submarket is also experiencing similar trends and the associated pains. Like the East End, developers are repositioning older assets and flooding the submarket with new supply. Over 360,000 SF has delivered in the past 12 months with an additional 600,000 SF delivering by year’s end. This new glut of supply has resulted in over 433,000 SF of net absorption over the past 4 quarters; leading to a 0.9% increase in the submarkets vacancy rate and a 0.3% drop in rents. Fundamentals should continue to suffer as another 557,000 SF is scheduled to deliver in 2020.

West End

  • RBA: 4,822,739 SF
  • Vacancy Rate: 8.1%
  • 12 Month Net Absorption: (49,800 SF)
  • Average Asking Rent: $51.18
  • 12 Month Rent Growth: -0.8%

The West End submarket may be included in the Downtown DC submarket cluster along with the East End and CBD and is similar in that it has some of the highest rents in the metro area, but at only 4,822,739 SF of total inventory it only 9% and 10.7% the size respectively. The office inventory in the West End is old with average age of 59 years (median 41 years); however, due to limited developable sites and the associated construction costs there are no new projects under construction or proposed. While the lack of new supply has kept vacancy rates below the metro average, the submarket’s aging inventory and high rents have led to a flight-to-quality and more affordable submarkets; resulting in a 1% increase in the submarket’s vacancy rate in the past year and an associated 0.8% decrease in rents. The West End is also a “big footprint” submarket with approximately 40% of tenants occupying more than 10,000 SF; making it especially vulnerable to move-outs. The outlook for the West End is grim as traditional tenants (government, law firms, and consulting companies) continue to downsize and others relocate to emerging submarkets.

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