Cautious activity in the first half of 2017
Employment services job growth increased 1.0% in the District of Columbia during the first half of 2017, which is below the 10-year annual average of 1.3%. Office demand was low at just 146,000 SF in the first half, which is on pace to end the year well below the 10-year annual average of 1.1 million SF. Comparatively, net absorption during 2016 totaled 1.5 million SF. Trends such as densification and consolidation, which challenged the market throughout 2016, are now coupled with uncertainty surrounding government spending. Most tenants continue to demand Class A space but as trophy asking rents drive rental rates higher, value tenants look to more affordable Class B space.
Asking prime rents rise just 0.7% in uncertain market
Two projects, totaling 340,000 SF, delivered in the District of Columbia in the first half of 2017. Class A office inventory reached 33.4 million SF at June 2017 and the pipeline totals 6.8 million SF at 48% pre-leased. The vacancy rate edged down 20 basis points since year-end 2016 to 8.6% at June 2017, and remains elevated compared to the 10-year average of 8.1%. Office prime rents increased 0.7% to $76.20 PSF from year-end 2016.
Office investment slow in 2017
Office investment volume in the District of Columbia totaled $1.44 billion during the first half of 2017, accounting for 74% of the total real estate investment dollars for all sectors during this period. This compares to 79% of total investment spent over the past five years. Office net prime yields have trended downward since reaching 7.0% in 2009 and now stand at 4.4% at mid-year 2017. Despite the challenging market conditions and limited investment, office received the bulk of the share of investment.