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The D.C. Metropolitan Area Might be Running Out of Tenants

CoStar Market Insights: A Look at the Tenant Breakdown in the District
July 10, 2018

The 602,350-square-foot office building leased to Federal Communications Commission in Washington, D.C.

Over three-quarters of the District’s commercial real estate tenants come from just four industries: government, law firms, personal services and non-profits. Given the nature of Washington D.C., this should really be no surprise. However, a trend to keep an eye on is the flow of jobs out of these primary drivers and into other sectors.

According to the Bureau of Labor Statistics, total employment here is roughly 9 percent above its prerecession peak, and Moody's data indicates that the region added roughly 60,000 jobs per year from 2015 to 2017, compared with a historical average of fewer than 40,000 per year. However, for most of the cycle, the fastest-growing employment sectors have been leisure and hospitality and education/health services, which do not generate office absorption as reliably as the government, business services or financial activities sectors.

These numbers could reflect a saturated work force, and it is possible that there simply isn't any room for growth. But looking at the District’s available office space suggests that might not be the case. A little more than 4.5 million square feet of office space is currently under construction. Of this space, about 60 percent has been committed. Notable tenants taking large blocks of the space include The Department of Justice, The Advisory Board and the Federal Communications Commission. This is a good sign that demand remains robust, although a few of these (mostly government) tenants are downsizing into new space. The largest contributor to leasing, the General Services Administration, has started to downsize and consolidate after lawmakers enacted space-efficiency policy requirements.

Undelivered space is only half the story. Since the start of the cycle, almost 12 million square feet has been brought online. Of that space, about 80 percent is currently occupied. That equates to about 2.7 million square feet under construction and another 2.7 million square feet of recently delivered assets that sit vacant, all vying for the same tenant base.

That begs the question: Which companies will absorb this space? As noted by CoStar News in late June, Silicon Valley firms are finding a home in D.C., a testament to the highly educated workforce and perhaps the close proximity to Capitol Hill. But outside of these firms, which typically have the deep pockets to pay District rents, demand will continue to get siphoned.

The trend of late, especially in regards to law firms, has been moving from older space to brand new, trophy assets and usually reducing their overall footprint in the process. While good for the landlords of these assets, this leaves Class B properties exposed to expanding vacancies. In the past decade, vacancies have moved from the low 5 percent range into the 8 to 9 percent range. As such, more than 3.5 million square feet of space is currently vacant and another 3.5 million square feet is available.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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