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Office market flat but stable according to Jones Lang LaSalle Q2 market reports
WASHINGTON, July 1, 2013 – The commercial real estate leasing market in Metro Washington was flat in the second quarter, while the capital markets remained active with tremendous interest from foreign investors, according to second quarter market reports released today by Jones Lang LaSalle.
“The second quarter was statistically one of the flattest ever for the office leasing market, but it’s encouraging to see stability in the market given the ongoing challenges that remain within the federal government,” Scott Homa, Vice President Research, Jones Lang LaSalle said. “Interest among foreign investors in the Washington market remains extremely strong, and core DC properties continue to attract significant leasing demand.”
According to the research reports, Metro Washington, D.C. and in particular downtown Washington, remains an extremely attractive investment environment. To date, foreign investment in the District of Columbia has increased dramatically to $1.9 billion (including completed and pending sales). This marks a year-over-year increase of 83.3 percent.
By comparison, while foreign interest in Washington has always been strong, 30 percent of buildings were sold to foreign entities in 2012. Historically since 2000, 17 percent of buildings sold went to foreign entities or partnerships.
“Washington remains an extremely attractive investment environment from a global standpoint despite government spending cutbacks and overall budgetary uncertainty,” Bill Prutting, Managing Director, Jones Lang LaSalle said. “Foreign investors are expected to remain active in Washington and are likely to continue to pay top-dollar for stabilized, core assets.”
Leasing activity in downtown Washington is expected to remain steady in the months ahead as tenant interest remains strong for core properties. Recent leases and tentative letters of intent for deals in Washington’s CBD and East End submarkets have commanded near-record high rents. Flight-to-quality continues to drive leasing decisions as tenants look to upgrade to more efficient spaces. As a result, Trophy vacancy has fallen and large blocks within the top segment of the market have gradually vanished from the marketplace.
“Although tenant demand across much of the region has slowed due to sequestration and rightsizing, core properties remain resilient,” Homa said. “An approaching surge in lease expirations and concurrent slowdown in speculative construction will ensure balanced market conditions in 2014, and market fundamentals are expected to tighten in the years ahead as supply constraints create limited large-block space options for tenants.”
Tenant perspectiveAlthough it is expected to remain a tenant-favorable market in the short-term, restrained new construction and a large wave of leases expirations in the 2016-17 timeframe should rebalance the supply-demand paradigm. Several large tenants have entered the market years ahead of their lease expirations, hoping to seize upon the tenant-favorable conditions before the anticipated tightening of the market.
Landlord perspectiveFor owners of regional office buildings, today’s market remains more of a demand problem than a supply problem. Many landlords have taken actions to attract new tenants and retain existing ones by renovating assets to add new amenities such as rooftop terraces or fitness facilities. Owners also continue to offer generous concessions to appeal to tenants’ cost-conscious motivations, however those incentive packages have topped out in core markets given the gradual pullback in quality space options.
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