Net absorption of office space in the Washington metro area plummeted during the third quarter of 2019. Total net absorption during the quarter was -913,000 SF, a sharp falloff from the 574,000 SF absorbed in the second quarter. The Washington region’s Class A segment also recorded its first quarter of negative office absorption since 2016 at -487,000 SF, far below the 794,000 SF absorbed during Q2 2019. The Washington area’s overall direct vacancy rate (which includes both multi-tenant and single-tenant properties) increased significantly during the third quarter to 13.2%, in line with the large amount of negative absorption. The Washington metro area’s construction pipeline decreased somewhat during the third quarter. The total office space under construction as of September 2019 is 10.6 million SF, including roughly four million SF in the District, and three million SF each in Northern Virginia and Suburban Maryland. There were five office deliveries in the Washington metro area during the third quarter. Office effective rent growth cooled somewhat in the third quarter of 2019, as already stratospheric concessions push upwards and erode into gains. The average effective office rent for the Washington metro area is $34.01 per SF as of September 2019, up 1.9% from September 2018. The District of Columbia had the greatest rent increase over the period at 2.4%, followed by Northern Virginia with 1.6% and Suburban Maryland with 0.3%.With job and GDP growth slowing, both nationally and locally, there is a fair chance that the office market in the current cycle has already past its peak. Most economists agree that there is a strong likelihood of a recession occurring within the next year or two, given our current economic trajectory. However, there is a lot that can change between now and then, including an unexpected end to the trade war and/or a change in presidential administrations. The next recession is also expected to be less severe than the recent Great Recession.
THIRD QUARTER 2019 HIGHLIGHTS
- Net absorption: -913,000 SF during Q3 2019, down from 574,000 SF during Q2 2019.
- Direct vacancy rate (single and multi-tenant): 13.2% as of Q3 2019, up from 12.9% at Q2 2019 and up 40 basis points from one year prior.
- Under Construction: 10.6 million SF.
- Effective rents: Up 1.9% since Q3 2018.
- Investment sales:$2.7 billion ($442/SF) in Q3 2019, compared to $736 million ($374/SF) SF in Q3 2018.
Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals which has been providing consulting and subscription data services to the commercial real estate industry for over 35 years.