More Companies Signing D.C.-Area Office Leases, But Owners Still Feeling The Pain

Bisnow October 22, 2024

Signs of life are sprouting up in the D.C. metro office market. Leasing volume is on the rise, with more large tenants wading into the market for the first time in years and companies slowly getting comfortable making longer-term decisions.

But even with the glimmer of momentum, landlords are still feeling the pain of the office dynamic that was flipped upside down 4.5 years ago. In a market where tenants have their pick of the crop amid ever-increasing vacancy, landlords are feeling pressured to outlay more, often unable to say “no.”

Panelists at Bisnow’s DMV Office Market Update Tuesday said that while they are encouraged by the activity, the landlords are having to fight tooth and nail for each lease, giving up more and more in a tenant-friendly market that is posing stiff competition.

“We’re really excited about leasing activity in general,” CBRE Executive Vice President Amy Bowser said onstage at The Westin Georgetown. “It’s actually been really strong year-over-year.”

In D.C., tenants leased nearly 6M SF in the first three quarters of the year, according to CBRE. It is the highest volume during that time frame since 2019, when tenants leased 7M SF. Meanwhile, that 6M SF leased so far this year is around the same as the full year’s worth of leasing volume in both 2022 and 2023.

Northern Virginia’s leasing volume during the third quarter was a 49% increase year-over-year, according to CBRE, putting the submarket on track to outpace 2023.

Stream Realty Partners co-Managing Director Jeff Roman, who works in Northern Virginia, said he has seen a “significant pickup” over the last six months.

The volume is helped by an increase in larger tenants starting to wade into the market.

In downtown D.C., Fannie Mae inked a 340K SF lease at Midtown Center, starting in 2029, when it will give up about half of its current footprint.

The federal government’s Court Services and Offender Supervision Agency signed for 198K SF at 501 Third St. NW, consolidating several locations into one.

In Virginia, Alarm.com expanded its Tysons headquarters with a 245K SF lease in the third quarter at The Meridian Group‘s The Boro mixed-use development. It was one of four leases over 100K SF signed in the quarter, three of which were by technology companies, according to CBRE.

“For the first time over the last eight, nine months, we’ve had six, seven 200K SF or 300K SF users, whether they actually transact or not, or consolidate or stay put,” Roman said. “But it’s very encouraging.”

Landlords are also encouraged by the larger users coming to market.

“Post-Labor Day, we’ve had one 100K SF user and four or five 30K SF to 40K SF users,” Chevy Chase Land Co. Executive Vice President of Asset Management Jason Winans said. “We certainly didn’t see any of those coming out of Covid and the years after Covid.”

But on the other side of the equation, landlords are still in the thick of a painful period, and it is going to take some work to get to the other side, panelists said.

“We’ve gotten very used to saying ‘yes,’” Winans said. “There should be a day where we can say ‘no’ again, but right now it’s, ‘Yes, we’ll give you that.’”

D.C.’s vacancy rate in Q3 was 22.7%, according to CBRE, up from 22.4% last quarter, with 332K SF of office space emptying out.

The brokerage pinned Northern Virginia’s vacancy at 23.7% with 257K SF of office space given back to the market.

“It’s definitely a lot of pain we’ve been experiencing over the last little while,” Akridge Senior Vice President David Toney said.

While there is tight competition for top-tier space in trophy buildings, the increasing imbalance between supply and demand is forcing landlords to acquiesce to tenants’ every need, whether that be turnkey space, concessions or flexibility options.

“Right now, the landlord is being looked at as the ATM on the transaction, and the tenants are trying to take advantage of this very soft market,” Bowser said.

“You have a segment of owners who cannot transact because of financial constraints, and then you have a segment of owners who will not transact because of what has happened over the past few years to the transaction costs,” she added.

In addition to being flexible on the terms of the deal, the pressure is on the landlord to provide tenants with amenities to help entice their employees to come into the office, whether it is retail, sports courts and leagues, dry cleaning or a golf simulator.

“It’s just not enough to deliver a few amenities on-site and hope that the tenants will be happy with that,” Roman said.

Tenants also increasingly prefer move-in-ready spaces where the landlords have already done the heavy lifting on design, furniture and technology.

Bowser said she is seeing “larger-than-historical turnkey build-outs” and some tenants that are solely looking at space that’s already built out.

“As an owner, it’s been a rough ride,” Eastbanc principal Philippe Lanier said.

But he also said the firm has closed five transactions in the last month.

“So we’re looking forward, not backwards, and I think that’s a good, encouraging sign for the market opening up,” he said. “I’m not excited. I’m encouraged.”

Read full article here.

`

Newsletter Signup

Login

Reset password

Log In