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Office investors across Metro DC are taking on greater leasing risk despite a challenging leasing market

  • ​In 2001, office assets in Metro DC traded hands with an average occupancy rate of 89% - the same as the occupancy rate of the broader market. In the nearly two decades since, however, the region’s leasing market has endured headwinds such as a recession, sequestration and rightsizing that have pushed total occupancy down to 83%.

  • Despite the leasing market correction, investors continued to flock to the Metro DC office market in 2017, pushing volume to the third-highest level in a decade by year’s end; yet office assets sold in 2017 averaged just 71% occupancy at the time of sale.

  • Foreign capital, a component of Metro DC investment that has been on the rise in the past decade, has not followed suit with this trend; in 2017, foreign investors bought 20 assets totaling 5.3 m.s.f. at an average occupancy rate of 88%. Foreign buyers look to DC for stable, long-term-hold opportunities, and so it stands to reason their standards have not wavered. Furthermore, they tend to focus mostly downtown, where direct vacancy sits at just 11.1% compared to 15.9% regionally. 

  • Meanwhile, investment by local companies focused on the value-add and opportunistic segment of the market, acquiring assets with an average occupancy of 44%, 68% of which were Class B or Class C. These companies leverage their market expertise to generate value through lease-up and/or redevelopment. Of the 34 purchases made by local companies in 2017, 24 were concentrated in Northern Virginia. Considering the current administration’s position toward Defense and Homeland Security spending, Northern Virginia stands to make a major comeback if Congress manages to pass a budget and breathe life into the government contracting sector that forms this market’s backbone. The under-leased, value-add purchases of 2017 could very well reemerge on the market as stabilized offerings in the coming years.​​

Source: JLL Research




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