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The Washington, D.C., office market has continued to slow down throughout last year, as construction starts slightly decreased compared to last year. However, developers completed significantly more projects than in 2022. In terms of transactions, 2023’s total investment volume more than halved compared to the prior year, as fewer assets traded for lower prices.
There were a number of significant leases, as the vacancy rate in the capital was below the national average, the metro also faring better than many gateway markets. Coworking remains an alternative in D.C. with the share of flexible office space being on par with the national figure.
D.C. under-construction pipeline decreases
As of December, more than 4 million square feet of office space was taking shape in the Washington, D.C., market across 21 properties and accounting for 1 percent of existing stock. The relative pipeline was below the national rate of 1.7 percent. The metro considerably lagged many of its peers including Manhattan (1.4 percent), Miami (4.6 percent) and Boston (5.4 percent), but surpassed Los Angeles (0.9 percent) and Chicago (0.5 percent).
The largest project underway in Washington, D.C.’s office market is Fuse at Mason Square, a 345,000-square-foot building in Arlington, Va. Developed by Edgemoor Infrastructure & Real Estate, a subsidiary of Mason Innovation Partners, the building will feature specialty labs for robotics, VR and security data visualization, along with conventional business offices. The developers topped out the $178 million project in November.
Throughout 2023, construction started on four properties totaling roughly 1.2 million square feet and representing 0.3 percent of stock. The pipeline slightly decreased from the previous year, when developers broke ground on some 1.4 million square feet across seven properties.
The largest project to commence construction in 2023 is the redevelopment of 600 Fifth, a 400,000-square-foot office building. A joint venture between Rockefeller Group and Stonebridge began the development process in June. Groundbreaking coincided with the partners obtaining a 99-year ground lease from the Washington Metropolitan Area Transit Authority, the building having previously served as the institution’s headquarters.
D.C. was among the top U.S. markets for office deliveries
A total 15 office properties came online in 2023, totaling 4.9 million square feet and representing 1.2 percent of stock, above the national completions rate of 0.8 percent. It represents a significant increase from the previous year, when 3.4 million square feet were brought online across 13 projects.
In terms of sheer delivered office space volume, the metro considerably surpassed many of its peers, including Miami (251,933 square feet), Los Angeles (1.9 million square feet) and Chicago (2.3 million square feet). Across all U.S. markets, Washington, D.C., ranked third in terms of delivered office space last year, surpassed only by Manhattan (6.3 million square feet) and Boston (6 million square feet).
One of the largest projects to come online in 2023 was the $200 million redevelopment of 20 Mass. Office Properties Income Trust brought online the 427,191-square-foot mixed-use property which includes 183,000 square feet of office space and 13,800 square feet of retail, along with a 274-key hotel.
Transactions fell sharply year-over-year
Throughout 2023, office deals in the Washington, D.C., office market amounted to nearly $1.9 billion, as a total of 9.9 million square feet changed hands across 87 properties. Transaction activity really picked up in the last quarter, as the volume reached $765 million, surpassing the previous two quarters combined. These figures however represent a huge drop from 2022, when almost double the amount of space traded at 18.7 million square feet for an investment volume of $4.7 billion.
The average price per square foot in the capital amounted to $213.92 at the end of 2023, above the national average of $194.78 and representing a 21.4 percent decrease from the previous year. Prices in the Washington, D.C., office market considerably lagged comparable metros such as Seattle ($260.83), Miami ($331.38), Boston ($336.89) and Manhattan ($833.93).
One of the largest transactions recorded in 2023 in the metro was Property Group Partners’ $198 million sale of Station Place III, a 507,237-square-foot property within a three-building complex. Kaiser Permanente, which has been occupying 200,000 square feet at the building since 2011, purchased the 10-story office asset in November.
The total amount of debt in the Washington, D.C., office market as of October 2023 amounted to nearly $52 billion, according to a recent CommercialEdge market bulletin. Of the total volume, 16.1 percent is slated to mature by the end of 2024, with the figure ballooning to 31.1 percent through 2026. One of the largest notes originated in the market recently is Harrison Street’s $126 million refinancing of an eight-building medical office portfolio. The three-year floating-rate loan was provided by Thorofare Capital.
Leasing deals within the Washington, D.C. office market
At the end of 2023, the vacancy rate in Washington, D.C., clocked in at 17.9 percent, below the national rate of 18.3 percent. The metro fared better than other gateway markets such as Chicago (18.2 percent) and Seattle (22.5 percent). One of the significant leasing agreements in the metro was Tishman Speyer‘s full-floor lease at International Square. Legal Services Corp. will occupy 37,000 square feet at the 1.1-million-square-foot office complex for 15.5 years.
A joint venture of MetLife Investment Management and Norges Bank Investment Management also secured a 35,000-square-foot lease from Environmental Defense Fund. The non-profit organization relocated its local offices to District Center, an 850,000-square-foot building two blocks from the White House.
Tramell Crow Co. has appointed CBRE as the exclusive leasing agent for The McMillan Center for Health & Research, a 1-million-square-foot research campus development. Upon completion, it will encompass three buildings within the 2.1-million-square-foot Reservoir District mixed-use project.
In a similar move, Howard University also tapped CBRE to procure tenants for its National Research Center for Health Disparities, the first phase of which will include 179,000 square feet of lab and office space. Subsequent phases are slated to expand the property by an additional 160,000 square feet.
Coworking registers gains
The amount of flexible office space in the Washington, D.C., market totaled nearly 3.8 million square feet, accounting for 1.6 percent of stock and on par with the national figure of 1.7 percent. The share of coworking space was close to Boston’s 1.7 percent and below other gateway markets such as Los Angeles (2.2 percent), Manhattan (2.5 percent) and Miami (3.5 percent).
The largest coworking operator in the metro was WeWork, with a total footprint of 878,811 square feet across 11 properties. Other key players in the market were Industrious with 15 properties totaling nearly 500,000 square feet as well as Regus with 479,246 square feet in 26 locations.
Recently JLL opened a 39,000-square foot coworking space in Arlington, Va., through its Flex by JLL flexible office platform. The firm signed a lease with landlord JBG Smith for space at a 398,329 square-foot building. Hines also deployed its coworking platform, The Square, to develop a flexible office location at the historic Bowen Building, owned by JP Morgan Chase.
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