Tenant Confidence Fueling Deal Velocity

  • Tenant's confidence in the overall economy has allowed them to sign longer deals recently, one of the reasons that tenant concession packages continued to increase.
  • Government tenants had the top three leases of the quarter, all of which were over 150,000 square feet.
  • The redevelopment of Alexander Court at 2001 K Street, NW was completed during the third quarter. The project included the integration of 2000 L Street, NW into the project creating two conjoined towers. In addition, 152,521 square feet of new floors and connecting space between the buildings was added bringing the project to just under 800,000 square feet of rentable space.

Market Overview

The downsizing of several tenants moving into the newly renovated space at 2001 K Street, NW was the largest cause of negative absorption in the third quarter of 2018. During the quarter, 264,961 square feet of space was returned to the market, bringing the year-to-date absorption to negative 214,971 square feet. Vacancy, however, ended at 12.7 percent, down from 13.1 percent the previous quarter. That was entirely due to the demolition and conversion of 1.12 million square feet in the District. By far the most significant was the conversion of the former Intelsat headquarters into the Whittle School. This took over 600,000 square feet of vacant space out of inventory.

Outlook

Tenants in the District of Columbia, like tenants across the United States, are benefiting from strong financials associated with a growing economy. As a result, tenant confidence is at an all-time high. However, they are also faced with essentially full employment, and a very tight labor market. As a result, tenants are choosing to invest money into their space and are willing to locate to higher priced locations in order to attract and retain talent. They have taken advantage of their growth and landlords' willingness to provide abundant concessions to move into new, high-end space. However, most economists predict a slow down by mid-2019. This coupled with what appears to be a developing trade war with China will likely erode much of the confidence tenants have in their future growth. It is expected that tenant demand will grow through the first half of 2019 prompting new demand for office space, only to see it fall off again as the economy slows heading into 2020.