Washington, DC 2nd Quarter 2008

Strong Demand, Stronger Supply

Whenever supply outpaces demand, the two most common results are higher inventories and lower prices. In the automobile industry, it is common for some automobile companies to offer buyer incentives, such as rebates and financing, to help sales when inventories are too large. However, such discounts are rarely found for the most popular models. In the case of the Washington, DC office market, we’re seeing a similar effect. Overall, there’s an oversupply of space and deals are there to be found. However, the General Motors discount only applies to the suburban markets. Leasing space downtown is still like buying a Porsche….the dealer will make you feel great about your purchase, but you’ll be paying full price.

After an anemic start for 2008, demand in the 2nd quarter was a robust 1.5 Million square feet of office space. (We measure office space demand in terms of absorption, or the net amount of additional space leased.) However, because almost 2.8 Million square feet of new space was delivered during the quarter, the overall vacancy rose to over 11%. At the same time, asking rental rates rose again by 0.1% to a market-wide average of $34.51 per square foot.

Real estate is all about location and the Washington Metropolitan Area is about submarkets. As has been the trend for the past year, we’ve seen continued vibrancy downtown, while the suburban markets have wilted. Last quarter the District accounted for almost 1 Million square feet (or two thirds) of the market’s absorption with the remainder being absorbed in the suburbs. However, virtually all of the space absorbed in the suburbs can be credited to one lease in Rosslyn, VA. Accordingly, the vacancy rate in the District dropped to 8.8%, while the vacancy rate for the suburban markets rose to 12.4%. Thus the market’s strength remains within the Beltway.

As illustrated to the right, deliveries continue to outpace demand. We continue to predict that the overall Metro Area vacancy rate could rise to 12% by the later this year. Provided that overall absorption remains positive, rents should hold firm, but concessions will rise.

But What Does It Mean?

As a company that only represents tenants, these changes in the market represent good news for our clients. More space equals greater competition among landlords for tenants, which equates to greater leverage when negotiating leases.

McBride’s Rule for Softening Markets

Lagging Demand + Higher Construction Costs =

Greater Concession Packages.