Flight to Quality Drives Interest Throughout the Region

CBRE Group, Inc. announced the second quarter office market overview for the greater Washington, D. C. region. The flight to quality narrative continues to gain traction this quarter,  as the region sees continued interest for Trophy buildings in amenity-rich locations.

The District recorded its seventh consecutive quarter of positive net demand with concession packages reaching an all-time high. Core markets continued to dominate leasing activity, accounting for 70% of the total space leased and 66% of net absorption (or 86,705 sq. ft. of positive absorption) as tenants seek downtown, amenity-rich areas and buildings. This brings the overall net absorption for the year to 227,418 sq. ft. and leasing velocity to 2.64 million sq. ft.

Washington, D.C.’s office tenant base continues to diversify. The legal and government sectors accounted for 50% of all activity, with business services and nonprofits seeing increased activity, together accounting for almost a quarter of activity.  After being a driver of demand in Q1, co-working recorded almost 5,000 sq. ft. of negative absorption in the last three months. The financial services industry was the primary contributor of occupancy gain in the quarter, accounting for 123, 352 sq. ft. of positive net absorption.

“Leasing volume in the second quarter picked up by 200,000 sq. ft. over Q1, although year-to-date leasing velocity has slowed in Washington, D.C. - currently 16% below the five-year average. This is attributed primarily to market volatility, rather than a change in fundamentals,” said Revathi Greenwood, Director of Research, CBRE Washington, D.C.-Baltimore.

The District’s office market continues to see strong interest from overseas capital, with cross-border funds representing 60% of buyers in the first half of the year. 

Q2 Market Highlights:

Northern Virginia

The quarter ended with almost 65,000 sq. ft. of positive net absorption, thanks to growth from small-to-medium sized tenants and a few net new transactions. Government agencies and contractors comprised 56% of leasing activity, up from 43% last quarter and 37% in the 2015 calendar year. However, this activity did not translate into net growth as it added more than 100,000 sq. ft. of vacancy back to the market.

On the investment side, activity has experienced major growth from 2015 through end of the second quarter, reaching $1.5 billion in the first half 2016 and surpassing D.C. for the first time in more than five years.

Suburban Maryland

Office investment sales bucked the national trend, with activity from January-May, rising. This is an 85% increase from the same time last year and almost double the five-year average volume. The office market grew for the third consecutive quarter, posting 139,858 sq. ft. of positive net absorption. While rents remained stable in Q2 across all product types, Class A office rents saw a $0.23 increase year-over-year and had 183,000 sq. ft. of positive absorption for the quarter.

Baltimore

While there is a nationwide slowdown in investment sales activity, the Baltimore office market has outperformed historical transaction volumes. Year-to-date sales transaction volume totaled $434.5 million, 76.8% more than the five-year average in the first half of the year. With 1.2 million sq. ft. of office space under construction, 78% of which is already preleased, availability in newer, more efficient buildings is limited despite strong demand. Aging office product that is well located, particularly in the downtown core, is facing tepid demand, leading to an increased rate of residential conversions.

In order to attract and retain a high caliber workforce, Baltimore tenants are seeking more efficient floor plates that focus on collaborative space in amenity rich submarkets. This trend can be seen in the bifurcation of the CBD submarket within Baltimore. High quality product with views of the water has a vacancy rate less than 5%, compared to the overall submarket’s vacancy rate of 19.3%. 

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.