7 Things You Need to Know About DC’s Office Market

Vacancy is down, space absorption is up, and market-watchers expect leasing to pick up from the record-breaking inactivity of 2013. Here are the big takeaways from Bisnow’s DC State of Office.

Get Ready for Growth

Regional director for Cushman & Wakefield Sarah Dreyer told the crowd of 400 that she’s tired of hearing her colleagues in New York, San Francisco and Austin talk about the office markets in their cities, but “DC is finally starting to join the party.” So far in 2015, the market has absorbed 1M SF of empty office space, leased a total of 3M SF and sits at 12% vacant, all improvements over 2014. There are also 2.4M SF of offices under construction, more than double than at this time last year, and the majority of the new product “is already spoken for,” Sarah says. That’s no surprise, considering the top 20 properties in DC Cushman tracks as trophy offices are only 8.8% vacant—they’re fully recovered. It's Class-A office, which hit 15.2% vacancy region-wide two years ago? That's still rebounding.

Landlords Still Aren't Comfortable

Despite renewed confidence over growth, it is still a heavy tenant market. Tenants were getting an average of 12 months free rent in Q2 2015, proving concessions haven’t come down at all in the majority of properties. Maybe that’s why only 27% of leases signed so far this year have been renewals, down from 40% two years ago—tenants continue to follow the deals, especially in new space. “The tenant rep guys are beating us up on concessions,” Dave Bevirt, Brookfield’s DC director of leasing, admitted to the crowd. We spoke to Dave last week about what landlords have to do when they lose a GSA tenant (TSA is leaving Brookfield space in Pentagon City for Alexandria) and how to retain one (DHS re-upped with Dave in Ballston).

A Rooftop Deck and Fitness Center Aren't Enough

As tenants continue to seek the shiniest, newest space, developers have to continue to find ways of distinguishing themselves. There are no trophy buildings without rooftop decks, conference space and fitness centers anymore. Tishman Speyer managing director Paul DeMartini said a key is “spa-quality fitness centers,” and roof decks with a party room. But Paul is a West Coast transport to DC, and he says San Francisco is at the cutting edge of office amenities. That means, even in the stuffy Federal City, we could see doggy day care and pet spas in office buildings and even “urban hydroponic gardens.” Considering what's legal in DC, those gardens might hurt productivity rather than help. But they could do wonders for the snack shop on the ground floor.

The Gap Between the Haves and Have-Nots Is Widening

Commodity Class-A buildings have become the modern American middle class of office properties—they’re still the backbone of the market, but they’re losing ground rapidly to the richest buildings. “You can get $80 to $85 (per SF) on new space,” JBG principal Paul Adkins says, “and $50 to $60 on existing. It’s a giant gap.” The two Pauls sat next to each other on the panel, and saw commodity Class-A the same way. The rents for those buildings have stayed flat, and Paul DeMartini wondered “does that product come off line? Or is there some sort of updraft where the trophy buildings bring those rents up?”

Collaboration's More Important Than Ever

Our second panel, about new construction trends, rather than talking about new finishings, tenant build-outs or lobby designs, discussed working together. With an engineer, WFT’s Reardon “Sully” Sullivan; a contractor, DFS Construction’s Mac Forsyth; an architect, Gavin Hughes Daniels of Wingate Hughes; and a developer in MRP Realty’s Zach Wade (more on him tomorrow) the panel was able to talk about how early they now meet in the process to get a project right. “It’s relationship-driven design,” Gavin says, both among partners and tenants. “You have to have the experts meet up front.” Mac, who told us about putting a basketball court on the roof of 1776 Eye St NW earlier this month, says getting together early helps everyone collaborate to deliver for the tenant.

Get with the Internet of Things (or Get Left Behind)

Lee Odess of Brivo gave the attendees a primer on the Internet of Things—the interconnectivity of devices, buildings and the web—and warned them, “This is coming, and it’s coming fast.” The trend became en vogue with the Nest thermostat, which users can control with their smartphones. Soon, security could be done through smartphones, doors will open based on who is around and companies can track who is in their building, and turn all of it into actionable data. UMBC is working on connected clothing, he says (which made Bisnow’s reporter think of a Jackie Chan classic, The Tuxedo. If only the IoT included devices to make you a martial arts master.) Experts think smart buildings have the potential to be a $17.4B industry, and considering the office pipeline in DC, there figures to be a big future for it in our region, he says.

Hop on the Data Express

View the Space regional director Alec LeFort extolled the virtues of streamlined communication, systems and data. The biggest struggle brokers and landlords have, he says, is staying on the same page about information in real time. The future of commercial real estate will have more systems automated, more functions for everyone based around their smartphone and connectivity among systems and teams of workers. That will mean decisions will be increasingly data-driven, and therefore can be made faster and with more confidence. “The faster a deal gets done, the better it is for the broker and owner,” he says. Stay tuned tomorrow for more coverage from our annual office event.