D.C. Offices Have The Highest Concessions In The U.S., Driving Firms To Relocate

Tenants in D.C. moving to new offices receive larger concession packages from landlords than in any other U.S. city, and the District's fast-growing concessions are driving more relocations from groups like law firms and associations. 

The amount of concessions offered by D.C. landlords, a combination of tenant improvement allowances and free rent, averaged $201.88/SF for trophy and Class-A buildings in D.C. last year, according to Savills Studley, representing the highest concessions in the nation. D.C's 2017 concessions were 21.7% higher than the the prior year, making it the second-fastest growing concessions environment to Downtown Manhattan.

The average tenant in D.C. last year received a $113.50/SF tenant improvement allowance and 15 free months of rent, according to Savills Studley. The TI numbers are especially high for new trophy buildings, said JLL Senior Vice President Tucker Farman, who will speak June 6 at Bisnow's Real Estate Strategies for Associations & the Legal Sector event. 

"Right now, for the average trophy building on a 10-year deal, you'd be getting $130. Last year it was $125," Farman said. "There's no end in sight. It will continue going up." 

Farman also does deals in New York City, and he said concessions offered to tenants in the Big Apple don't compare to the nation's capital. 

"You could be paying $90/SF [in rent] in New York and getting significantly less concessions than you're getting in D.C.; a half or even a third as much," Farman said. 

Concessions are particularly high in D.C. because of its elevated vacancy rate and rapid pace of new construction, Savills Studley Director of Research Sarah Dreyer said. 

"If you look at vacancy and availability, not just in D.C., but in the region, it's as high as it's ever been," Dreyer said. "The need to up the concessions and packages to lure tenants into space is there because it's very competitive. Tenants have a ton of options."

While concessions have skyrocketed, base rents have remained largely stagnant. Savills Studley Vice Chairman Tom Fulcher said maintaining a higher rental rate helps landlords refinance and ultimately sell a building, so they would rather pay the upfront cost of concessions in exchange for keeping rents up. 

"People buy based on the cash flow of the building, so you pull off the Band-Aid, suck it up, give all these concessions, give free rent, then once rent starts going it's a healthy rent," Fulcher said. "That's what they're selling." 

Receiving such high concessions can allow tenants to relocate with little to no out-of-pocket costs, Cushman & Wakefield Executive Managing Director Sherry Cushman said. That has proven to be a "massive factor" for law firms and associations, two of D.C.'s largest tenant groups, when making relocation decisions, Cushman said. 

"That is one of the key reasons you're seeing such a massive amount of movement in the market is because when you don't have out-of-pocket costs that affects partners' pockets or having to raise capital through an organization," Cushman said. "In other markets where half is paid for by the landlord and the other half by the tenant, they are thinking twice." 

Other factors, such as building amenities, location, transit accessibility and nearby dining options, also play a role in tenants' decisions, but Cushman said it always comes down to the bottom line.

"Typically economics always have a higher weight than qualitative factors, but they're still significantly important," Cushman said.

Clear Real Estate Services Managing Principal Chip Ranno, who consults with a variety of law firm and association tenants on building out new offices, says some high-end law firms can have expensive build-outs that even all-time high concessions can't fully cover. But even for those firms, having a large portion of moving costs covered can be enough to tip the scales toward choosing a relocation over a lease renewal.

"It's easy to sign an extension," Ranno said. "So when you can present something that is a wash or it's not significantly [more] out of pocket to move to a better building, they're going to take it." 

Farman, Cushman and Ranno will discuss the factors affecting tenant relocations at Bisnow's Real Estate Strategies for Associations & the Legal Sector event June 6 at the Renaissance Washinton D.C. Downtown Hotel.