Greg Leisch presenting at Benchmarks

WASHINGTON, DC–Good news Washington DC! Area job growth has reached a 12-year high. The bad news is, the office market remains tepid. But more good news! Due to record absorption, it appears the DC area's apartment vacancy rate remains healthy despite the massive building of the last few years. But unfortunately … rent growth is anemic in many submarkets.

Good news! Investment sales continue to be robust in large part thanks to foreign investment. Bad news: Cap rate compression appears to be over for this cycle.

So opened Greg Leisch, Senior Managing Director of Market Research for Newmark Grubb Knight Frank in his presentation of NGKF's Benchmark report Wednesday evening. His larger point was that DC's commercial real estate market was on the right track — but there are still challenges ahead.

We'll be looking at the megatrends for the area outlined in the report over the next few days. Today is the office market's turn.

The headline news for the office sector is that — finally — a regular period of positive absorption is ahead.

“We have had five years or more of negative absorption for office space,” Sandy Paul, NGKF's Managing Director of National Market Research told GlobeSt.com. “We think we are coming to the end of that period and we will start to experience positive absorption.”

NGKF predicts that there will be about two million square feet of positive absorption a year going forward.

Not that growth will be robust, Paul warned. It is still anemic, he said. “So the successful operator will have to find niches. Buildings along the Silver Line or highly amenitized space.”

We have had five years or more of negative absorption for office space. We think we are coming to the end of that period and we will start to experience positive absorption.

NGKF predicts that there will be about two million square feet of positive absorption a year going forward.

Not that growth will be robust, Paul warned. It is still anemic, he said. “So the successful operator will have to find niches. Buildings along the Silver Line or highly amenitized space.

It is instructive, first, to look at why the area started on the path to lackluster and then negative absorption. It began around 2011 when GSA began to pull back from its space needs. What the GSA didn't do, slow job growth and the growing trend of less space per office worker finished off.

This latter trend is starting to plateau, according to the Benchmarks report, which is one reason why NGKF thinks the worst of the absorption drought is behind us.

Tenant densification, though, will still be having an effect on office occupancy.

In the last two expansion cycles Washington DC experienced two to three times the projected two million square feet of absorption.

Another point to note: deliveries over the next two years will likely outstrip demand for new space somewhat in Northern Virginia and will be closer to equilibrium in the District.

The bottom line for the area?

The metro-wide overall office vacancy rate will edge up from 16.4% today to 16.7% by the third quarter of 2018 while asking rents will continue to increase due to the outsized weighting of new product on the market. Effective rents, however, will be under downward pressure over the next two years and will likely edge down.

Greg Leisch presenting at Benchmarks

WASHINGTON, DC–Good news Washington DC! Area job growth has reached a 12-year high. The bad news is, the office market remains tepid. But more good news! Due to record absorption, it appears the DC area's apartment vacancy rate remains healthy despite the massive building of the last few years. But unfortunately … rent growth is anemic in many submarkets.

Good news! Investment sales continue to be robust in large part thanks to foreign investment. Bad news: Cap rate compression appears to be over for this cycle.

So opened Greg Leisch, Senior Managing Director of Market Research for Newmark Grubb Knight Frank in his presentation of NGKF's Benchmark report Wednesday evening. His larger point was that DC's commercial real estate market was on the right track — but there are still challenges ahead.

We'll be looking at the megatrends for the area outlined in the report over the next few days. Today is the office market's turn.

The headline news for the office sector is that — finally — a regular period of positive absorption is ahead.

“We have had five years or more of negative absorption for office space,” Sandy Paul, NGKF's Managing Director of National Market Research told GlobeSt.com. “We think we are coming to the end of that period and we will start to experience positive absorption.”

NGKF predicts that there will be about two million square feet of positive absorption a year going forward.

Not that growth will be robust, Paul warned. It is still anemic, he said. “So the successful operator will have to find niches. Buildings along the Silver Line or highly amenitized space.”

We have had five years or more of negative absorption for office space. We think we are coming to the end of that period and we will start to experience positive absorption.

NGKF predicts that there will be about two million square feet of positive absorption a year going forward.

Not that growth will be robust, Paul warned. It is still anemic, he said. “So the successful operator will have to find niches. Buildings along the Silver Line or highly amenitized space.

It is instructive, first, to look at why the area started on the path to lackluster and then negative absorption. It began around 2011 when GSA began to pull back from its space needs. What the GSA didn't do, slow job growth and the growing trend of less space per office worker finished off.

This latter trend is starting to plateau, according to the Benchmarks report, which is one reason why NGKF thinks the worst of the absorption drought is behind us.

Tenant densification, though, will still be having an effect on office occupancy.

In the last two expansion cycles Washington DC experienced two to three times the projected two million square feet of absorption.

Another point to note: deliveries over the next two years will likely outstrip demand for new space somewhat in Northern Virginia and will be closer to equilibrium in the District.

The bottom line for the area?

The metro-wide overall office vacancy rate will edge up from 16.4% today to 16.7% by the third quarter of 2018 while asking rents will continue to increase due to the outsized weighting of new product on the market. Effective rents, however, will be under downward pressure over the next two years and will likely edge down.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.