Co-Working Increasing Share of the Market

  • The Carlyle group’s renewal and expansion was the most significant private sector lease of the quarter. The private equity firm took 200,000 square feet at 1001 Pennsylvania Avenue, an expansion of nearly 70,000 square feet.
  • Four leases over 20,000 square feet were signed this quarter by hared office space providers. These new leases will account for 192,000 square feet of net new demand to the market over the next few quarters.
  • Over 1.6 million square feet delivered in the second quarter, which is more than the last five quarters combined.

Market Overview

Despite few 100,000 square foot leases signed in the second quarter of 2018, there was a considerable amount 20,000 to 60,000 square foot deals. The continued expansion of private sector tenants offset the impact of the Federal Government, which continued shrinking its footprint in the District. This coupled with continued growth within the shared office space industry resulted in positive absorption in the second quarter of 2018. However, with just over 1.6 million square feet delivered to the market, it was nowhere near enough new demand to prevent the vacancy rate from rising 80 basis points during the quarter. At 12.9 percent, it was up from 12.1 percent last quarter and 11.8 percent at the start of the year.

Outlook

Shared office providers have identified and capitalized on a very specific niche within the office market. Traditionally, they acted as incubators to new tenants, only to have them graduate to conventional office in months or years down the road. New product offerings by some of the larger shared office providers are retaining more of these smaller tenants and attracting much larger companies. This will affect the market sooner rather than later. It is only a matter of time before shared office providers take an entire buildings in the District. Whether this is a good thing for the market and if it will completely flip how real estate is handled in DC remains to be determined.