With Slow Leasing Activity, D.C.'s Office Market Struggles Continued In 2017

Leasing activity in D.C.'s office market has slowed considerably over the last two years, a new report shows, driven largely by a decrease in government leasing even as the District's tech sector grows. 

With the end of 2017 just three weeks away, D.C.'s office leasing activity is forecast to finish the year 43% below its 10-year average, according to Washington D.C. Economic Partnership's 2017/2018 Development Report, created in collaboration with CBRE and released Tuesday. This downward trend continues from 2016, when D.C.'s 7.1M SF of leasing activity finished 29% lower than the 10-year average. 

A slowdown in federal government leasing this year has been the driving factor behind the office market's poor performance, the report said. The General Services Administration leased 691K SF this year, according to the report, a 69% decrease from its five-year average.

The report pins this slowdown to the GSA's transition, during which it went more than seven months without permanent leadership before President Donald Trump nominated Emily Murphy as the new administrator in September. Murphy just received Senate confirmation last week and was sworn in Tuesday morning.

But Colliers Executive Vice President of Government Solutions Kurt Stout said the transition to the new administration has not significantly affected the leasing volume, instead blaming it on continued footprint reduction. 

"On the one hand, office-using demand — meaning employment — hasn't really changed much," Stout said. "What has changed is that the federal government is looking to reduce costs, primarily through downsizing. As a result the demand from government leasing has decreased substantially."

Stout said he is beginning to see a pickup of the GSA pursuing long-term leases rather than short-term deals, a change the new Public Buildings Commissioner Dan Mathews previewed at a Bisnow event in October. 

"What we've seen a lot over the past few years is short-term leases, kicking the can down the road as the government prepares for long-term leases," Stout said. "Now we're beginning to see some of those occur, but over the past few years including this year, there just hasn't been as much net demand nor leasing volume in terms of long-term leasing." 

The market's poor overall leasing performance this year has also been highlighted by a sharp drop in new co-working leases. During 2016, co-working drove D.C.'s office market with nearly 40% of the year's net absorption. But that pace slowed considerably this year with 198K SF of co-working leases signed, the WDCEP report said, compared with 380K SF last year. 

"It was a somewhat new phenomenon in 2015 and 2016, and the large national operators were focused on expanding locations outside of the traditional downtown core," said Cushman & Wakefield Senior Director Theo Slagle, who works with technology and co-working tenants. "I think it's slowed because new entrants are evaluating opportunities in the market." 

That trend could reverse next year, with 11 co-working providers currently in the market for 320K SF of total space, according to the report. Slagle said he is seeing newer concepts emerge like The Wing, a women's-only co-working space that recently raised $32M in Series B funding and is planning to open a D.C. location next year. 

"What you'll see moving forward is different specialized types of co-working spaces than your typical WeWork or MakeOffices," Slagle said. 

A lone bright spot in the District's office market this year has been the growth of tech companies. The tech sector signed 374K SF of total leases in D.C. for the 12 months ending Sept. 31, more than double its total from the prior year of 180K SF. A large part of this year's total consisted of new leases and expansions, with tech contributing 141K SF of net occupancy gains. 

Those gains were highlighted by two well-known California-based companies moving to Terrell Place. Facebook in Q3 signed on for 74K SF, more than triple the size of its previous D.C. office. Yelp in August decided to open a new D.C. office, signing on for 53K SF at the building at 575 Seventh St. NW, across the street from Capital One Arena. 

These deals signal a growing focus on the D.C. market from big national tech companies, a trend Slagle attributes to their increased need to lobby the federal government. 

"Based on technologies growing influence in public policy, I think you're seeing an emphasized focus on Washington being a mainstay for these growing and important tech companies that are large contributors to the national economy," Slagle said. 

In addition to national tech giants boosting their D.C. presence, multiple D.C.-based startups have expanded their footprints in the market. Following a major funding round, location data company Mapbox in November tripled its footprint with a new 21K SF lease at 740 15th St. NW. FiscalNote in June signed a 38K SF lease at 1201 Pennsylvania Ave. NW, nearly double the size of its previous office. 

Looking ahead, Slagle said he does not see a big wave of large tech leases coming, but he expects many startup companies will go from co-working or other small spaces to leases of about 5K SF, which could add up. 

"It's small relative to the other sectors, but it is net new absorption," Slagle said.