Tenants Still Have Upper Hand In Area Lease Negotiations, But Not For Long

For the first time in three years, the DC area saw a major rebound in the local economy in 2015, fueled by the creation of 62,000 new jobs—well above the 20-year annual average of 42,000—ushering in signs of stabilization in the office market.

Overall, tenants continue to have the upper hand in lease negotiations but the market is tightening and that leverage won’t last long, according to a new survey by real estate advisers West, Lane & Schlager. 

Investment sales volume reached the highest level in nearly a decade with $3.4B in 34 transactions in DC; $741B, 32 transactions in Suburban Maryland; and $2.1B, 69 transactions in Northern Virginia.  

Job growth is expected to continue this year, the study says, noting that leasing activity last year “remained relatively restrained and was dominated by smaller leases involving net reductions in space.” However, tenants are beginning to sign large leases in higher-end buildings, particularly in more desirable submarkets.     

As for available space, the survey finds an abundance of newly built, high-quality buildings in the District. In the NoMa and Capitol Riverfront districts, there's 500k SF of additional space under construction. The relatively high vacancy and low rental rates in both submarkets give tenants “significant negotiation leverage, making it an opportune time to sign for new space.”  

Tenants seeking Metro accessibility and an area rich in amenities who can live with smaller spaces might want to look in Downtown Bethesda. Strong landlord incentives should remain in place there until roughly late 2016. North Bethesda is also attractive as recent federal agency relocations have left the submarket with declining rents and the largest amount of vacant, Class-A space in suburban Maryland.  

In Rosslyn, where rental rates are higher than the Northern Virginia average, competition from the new Metro Silver Line corridor, nearby Alexandria, and the District are forcing landlords to offer higher tenant improvement allowances and more free rent. 

But these perks won’t last long, so tenants looking to upgrade should do so soon, the WLS survey warns. “We expect the office market to become more competitive in Northern Virginia in late 2016 or early 2017.”  

The survey also assesses tenants’ lease negotiation positions. When demand for space declines, tenant leverage increases. When demand increases, tenant leverage diminishes.  

• The DC market: Overall vacancy is likely to hold steady for now but begin to decline in the near future. In CBD, East End and Georgetown substantial office market growth is narrowing the window for quality space with generous rents and concessions. “Tenants should look for deals in high-quality space in emerging submarkets such as NoMa and Capitol Hill.”  
• Suburban Maryland: Vacancy leveled off in 2015, and should further shrink slightly in 2016 due to the pipeline for new construction remaining relatively empty. Rents will rise moderately except for close-in submarkets and in the biotech corridor, where material gains are likely this year. Overall, the transit-accessible submarkets inside the Beltway will continue to outperform the county as a whole.
• Northern Virginia: The survey finds vacancy rates stabilizing and compressing in certain submarkets inside or near the Beltway. Overall rents should increase moderately. Current conditions do not favor landlords, who are expected to offer more favorable lease terms, especially to larger tenants. The Metro Silver Line will drive submarkets along the route so Tysons and Reston should see substantial growth, tilting the rental market in owners’ direction. Rosslyn, hurt by federal relocations, still offers tenants negotiating leverage for quality, transit-accessible space.