"As a general rule 50% or more of new product in DC is absorbed when it is delivered," says Trip Howell, regional managing director here for JLL. "We believe that pace will continue throughout 2007." For instance, he notes, three buildings expected to deliver in 2007--1152 15th St., 975 F St. and 505 9th St.--are already substantially preleased.
Besides the strong demand, high construction costs are also having an impact on the availability of supply, he says. "Some tenants in commodity-type products can't move as easily as they might have in the past because of the high costs to make improvements to the building."
For instance, class B tenants that seek to replicate the space they already occupy in an expansion might find it would cost $50 to $70 per sf, compared to $35 to $50 per sf a few years ago. Large associations--one of the backbone tenants in the DC market--usually find themselves confronted with this issue, Howell says. "These organizations have annual budgets and they are finding that a relocation is no longer going to fit in that budget." In many cases, he says, these firms opt to renew.
Much of the demand for office space is driven by private sector law and consulting firms. These firms were among the most active tenants for 2006, according to the report. For instance, 1601 K St., a 215,000-sf office building that delivered in Q1 2006, is 85% leased, with Kirkpatrick and Lockhart occupying 181,110 sf of that space, according to JLL. Wilmer Cutler Pickering Hale & Dorr is occupying the entire 286,000 sf of space available at 1875 Pennsylvania Ave., which delivered in Q2. 1101 New York Ave., a 393,568-sf building that delivered in Q4, is 69% occupied by Ernst & Young (138,656 sf) and LeBoeuf Lamb (113,056 sf). Since this report was authored, Howell says, another tenant inked a lease in the building at the end of the year, bringing occupancy even higher.
1101 New York is a good illustration of how quickly supply is absorbed when it enters the market, Howell says. "Ernst & Young moved from another building, 1225 Connecticut, which is being completely renovated so it is now off the market. And when LeBoeuf Lamb left 1825 Connecticut to move into its new space another association there backfilled the vacancy almost immediately."
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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.
