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Metro DC’s office tenant composition presents challenges to future growth

  • ​Metro DC’s traditional engines of office demand growth generated a majority of the 50 m.s.f. of occupancy gains from 2000-2010: federal government spending increased consistently post 9/11 and during the financial crisis, driving government expansion regionally; defense contractors witnessed contract award levels jumping 286% to $28.5 billion, driving significant tenant advancements in Northern Virginia and AmLaw revenues consistently jumped > 5% and into the double-digits annually pre-recession, leading to the significant absorption of Trophy and Class A space downtown.

  • Since 2010, the growth among these traditional segments of the office tenant base has been stymied by reduce-the-footprint mandates, budget cuts, fee compression and rightsizing fueled by the focus on margin growth and aided by this cycle’s technology revolution. As a result, the federal government has reduced its footprint by 3.0 ms.f., contractors by 2.5 m.s.f. and law firms by 1.6 m.s.f. since 2010. ​

  • One industry that has grown? The coworking and tech sectors. Since 2011, coworking and tech have grown by 4.4 m.s.f. with the former comprising 75% of that growth. While this generator is tightening some segments of the office market, gains have been minimized due to the utilization rates of these sectors. While the combined federal government, contractor and law firm sectors average 210 s.f. per employee, tech’s utilization rate is right around 155 s.f. per employee and coworking hovers around 55 s.f. per “employee”.

  • With the political and legislative environment murkiness expected to continue over the next three years, Metro DC’s traditional drivers are not likely to contribute significantly to occupancy growth over that timeframe. As a result, the overall office market will remain more or less flat with the exception of creative, intelligence / defense and out-of-market tenants contributing to occupancy gains. ​

Source: JLL Research

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