Washington, D.C. commercial market mirrors Congress

The commercial real estate leasing market in metro Washington remained flat in the third quarter, as lawmakers battled over sequestration, implementation of the Affordable Care Act and other key policy issues, according to third-quarter market reports released Wednesday by Jones Lang LaSalle (JLL).

Yet despite political gridlock on the Hill, the durability of the Washington region economy was apparent, as job growth and low unemployment persisted. Year-over-year employment growth of 33,400 new jobs extended the region’s gains, but the concentration of new positions in non-office-occupying sectors tempered overall tenant demand for office space.

For the Washington region as a whole, vacancy was 16.4 percent, up 0.7 percent from the second quarter. 

“So far this year, most sectors of the Washington metropolitan economy have been resilient, with few signs of distress.  One area of increasing concern is the leasing market, which has been and will remain subdued as tenants wait for political clarity and the full impact of sequestration,” Mike Ellis, JLL’s mid-Atlantic market director, said in a statement. “We cannot really expect to see a rebound until lawmakers are able to compromise on the policy issues that remain unresolved.”

Scott Homa, vice president, research, for JLL, said that, going forward, a lack of new construction and private sector lease expirations would likely rebalance the office market in about 24 months. “That leaves tenants with a limited window to act before the highest quality buildings and most appealing lease terms begin to disappear from the market.”

JLL gave a snapshot for the region’s areas:

Northern Virginia: Total vacancy rose to 18.7 percent, the highest level in years, as 1.3 million square feet were delivered to the market.  With the implementation of sequester cuts, any growth in tenant demand will depend on private sector job growth and transit-oriented development along the Silver Line.

Washington, D.C.: Leasing activity was essentially flat, with a vacancy rate of 12 percent and year-over-year velocity slipping by 33.1 percent. Despite suppressed federal leasing activity, the market is expected to tighten from the top down, beginning with trophy buildings. Given limited new construction, quality options for large tenants continue to dry up, and many tenants are now considering proposed development sites to accommodate future space needs.

JLL is a professional services and investment management firm offering specialized real estate services. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations. The firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet.