Cushman & Wakefield’s Washington, D.C. area and Baltimore research teams have released the Office MarketBeat Reports for the second quarter 2012. A summary of these reports is below:
The office market remained soft during the second quarter, with little movement in most market indicators. The collapse of law firm Dewey & LeBoeuf has once again raised concerns over the health of the legal industry, one of the District’s economic engines. The D.C. government is taking steps to attract and retain technology firms, including a $32.5 million tax incentive package for Living Social to keep its headquarters downtown.
Renewals continue to dominate the Northern Virginia leasing market, comprising about 42% of activity year-to-date. The overall vacancy rate increased to 18.0%, as more BRAC space hit the market, mainly in Crystal City. Despite the glut of vacant space overall, there are few large blocks of top tier class A space in markets such as Rosslyn, where high watermark rental rates are still being achieved.
Suburban Maryland showed signs of weakness during the second quarter, but submarkets such as Bethesda/Chevy Chase, the Pike Corridor and downtown Silver Spring continued to shine. Consulting firms of all types – IT, research, and management consulting – have been driving steady demand in Montgomery County.
D.C. Metro Outlook
The D.C. Metro area faces a challenging 12- 18 months. While the nature of these challenges differ by jurisdiction, the fundamentals are the same: tenants who are decreasing their occupancy footprints, businesses who are holding off on hiring, global economic woes, and uncertainty surrounding both the Presidential election and impending federal budget cuts. Strong points for the region include a private sector which continues to add jobs, a recovering housing market, and healthy population growth.
The flight to quality continued in the Baltimore area in 2012, where over 84% of leases were signed in class A properties. Demand was driven by the education, business services and financial services sectors. KEYW Corporation, a government contractor specializing in cyber-security, leased over 120,000sf in the Fort Meade submarket.
While tenant demand has been steady, it has not been strong enough to fill up new construction in Howard and Harford Counties, where nearly 260,000 sf delivered, largely vacant.
Demand for office product in the District remained strong during the second quarter, with foreign buyers, institutional, and local/regional investors focused on core assets. Sales volume for the region is approaching $2.2 billion, compared to $7.5 billion for all of 2011.
While more deals closed in the suburbs during the second quarter than during the first three months of the year, the overall slowdown in demand and market weakness has resulted in extremely conservative underwriting.