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DC’s Unemployment Rate at Five-Year Low at 4.5 Percent, Suggesting Regional Economy is Gaining Strength
WASHINGTON, DC, July 1, 2014 – Nationally, the U.S. office market had its strongest quarter since the financial downturn in 2009, registering occupancy gains of 13.3 million square feet in Q2 2014. The Washington region also saw gains of 411,700 square feet in the 2nd quarter according to JLL’s Office Insight report for Q2 2014.
“While the region did swing into positive net absorption this quarter, overall leasing activity remained slow,” said Scott Homa, Vice President Mid-Atlantic Research, JLL. “Government gridlock continues to exert a large influence over federal leasing and contractor demand, but segmented growth in other industries is helping to offset that decline and suggests a favorable outlook for tenants in the region that are not heavily reliant upon government spending.”
EmploymentTotal employment in the Washington region is at an all-time high of 3.1 million jobs, and growth within the healthcare, education and technology sectors helped drive hiring momentum. Although payrolls within the federal government – the region’s largest employer – continued to decline, the federal budget deficit narrowed to its lowest point since 2009. Tax receipts rose by 7.5 percent year-over-year in May 2014 and outlays declined by 2.3 percent.
“The federal budget outlook appears to be headed back toward a more sustainable path,” Homa said. “Although sequestration has been painful for many regional businesses, the combination of restrained spending and increased tax revenue is essential for establishing a balanced budget, and ensuring that the procurement programs on which many tenants in the Metro DC region rely are funded into the future.”
Office MarketThe construction pipeline is subdued with only 4.4 million square feet under construction, two-thirds below average. Typically the region has about 11.4 million square feet under construction and 7.8 million square feet delivering each year.
“The pullback in new construction will have a meaningful impact on the Metro DC office market over the next 24 months,” Homa said. “Competition for new, efficient buildings remains remarkably strong.”
Tenants in nontraditional industries, such as consumer tech and healthcare are offsetting the choppiness in more traditional sectors of the market – namely law firms and contractors, which remained relatively flat. The GSA continues to seek opportunities to reduce its footprints.
Vacancy across the region remained elevated in Q2 2014 at 16.8 percent, yet was concentrated in Commodity Class A and Class B buildings, which do not always meet the needs of today’s efficiency-minded tenants. The result of this trend is that large tenants with pending lease expirations must start their search process early to preserve the option of anchoring a new development or risk being confined to second-generation space. That confining supply-demand dynamic is likely to signal a peak in concession packages and a gradual shift in negotiating leverage from tenants’ favor to more balanced conditions by 2015.
Tenant PerspectiveTenants still hold an advantage in today’s leasing market, but the degree to which users hold leverage over landlords depends heavily on tenants’ size, location and building preferences. In core submarkets, large blocks of new and efficient space have become increasingly scarce. Large tenants with lease expirations in the 2017 to 2020 timeframe have begun scouring the marketplace to lay claim to some of the last remaining large development sites in the urban core or use time to their advantage to restructure and extend leases.
Landlord PerspectiveAlthough demand levels remain suppressed, the market appears to be coming into balance given the restrained construction pipeline and reduction in sublease inventory, which has fallen from recent peaks. Competition among owners remains intense in most submarkets across the region with many owners renovating assets to add new amenities, such as rooftop terraces and fitness facilities to attract tenants.
About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4 billion, JLL has more than 200 corporate offices and operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and completed $99 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $48 billion of real estate assets under management. For further information, visit www.jll.com.
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