DC's K street

WASHINGTON, DC–Well, this is a stunner. Savills Studley's 2016 Q3 Office Market Report for Washington DC reports that leasing for the Washington DC area year-to-date has decreased 37.1% compared to the same period last year.

It is a surprising drop given other momentum in the local economy, Savills Studley Executive Vice President and Branch manager Tom Fulcher told GlobeSt.com. “When I saw that number, my first thought was 'wow'.”

The report noted that the last time leasing contracted by this amount during this time period was 2013, which is arguably not all that long ago. Back then, though, the local CRE community was in the throes of dealing with the fallout from sequestration and the federal government's overall retrenchment of space. The law firms, as well, were in active scale back mode.

Supposedly, we had worked through that.

Not quite as it turns out. Washington DC is ultimately a government town and the local real estate community will likely need several years to adjust to the new normal. And that is happening, Fulcher said, pointing to buildings that have lost major law firm tenants and then retooled to attract new types of occupants. Unfortunately, these new types of companies do not have the same space needs or are willing to pay premium rents as the law firms of yesteryear did.

But there are also some relatively new drivers driving this latest retraction. Companies that otherwise might have leased space are turning to the growing co-working options in the city. Also, new workforce configurations are helping companies reduce space. Finally, there haven't been that many huge deals this year. Fannie Mae's 700,000-square foot deal was completed in Q1 2015 — and nothing comparable has come down so far this year.

Another factor is the changing nature of the deals themselves. “Essentially, there are less deals being done at smaller sizes, which only makes the drop more drastic,” Research Manager Jared Emery tells GlobeSt.com. There were 747 deals completed in Washington, DC through Q3 2015 compared to 572 through Q3 2016, Savills Studley's research shows. The average deal size in 2016 has been 10,929 square feet. In 2015, the average deal size was 12,690 square feet.

Last year, there was 5.3-million square feet of deals completed in Q4 alone, Emery added but here too 2016 is probably going to be different.

“Historically a huge increase in leasing activity isn't common at year-end, so I wouldn't expect there to be a significant improvement by the end of this year.”

 DC's K street

WASHINGTON, DC–Well, this is a stunner. Savills Studley's 2016 Q3 Office Market Report for Washington DC reports that leasing for the Washington DC area year-to-date has decreased 37.1% compared to the same period last year.

It is a surprising drop given other momentum in the local economy, Savills Studley Executive Vice President and Branch manager Tom Fulcher told GlobeSt.com. “When I saw that number, my first thought was 'wow'.”

The report noted that the last time leasing contracted by this amount during this time period was 2013, which is arguably not all that long ago. Back then, though, the local CRE community was in the throes of dealing with the fallout from sequestration and the federal government's overall retrenchment of space. The law firms, as well, were in active scale back mode.

Supposedly, we had worked through that.

Not quite as it turns out. Washington DC is ultimately a government town and the local real estate community will likely need several years to adjust to the new normal. And that is happening, Fulcher said, pointing to buildings that have lost major law firm tenants and then retooled to attract new types of occupants. Unfortunately, these new types of companies do not have the same space needs or are willing to pay premium rents as the law firms of yesteryear did.

But there are also some relatively new drivers driving this latest retraction. Companies that otherwise might have leased space are turning to the growing co-working options in the city. Also, new workforce configurations are helping companies reduce space. Finally, there haven't been that many huge deals this year. Fannie Mae's 700,000-square foot deal was completed in Q1 2015 — and nothing comparable has come down so far this year.

Another factor is the changing nature of the deals themselves. “Essentially, there are less deals being done at smaller sizes, which only makes the drop more drastic,” Research Manager Jared Emery tells GlobeSt.com. There were 747 deals completed in Washington, DC through Q3 2015 compared to 572 through Q3 2016, Savills Studley's research shows. The average deal size in 2016 has been 10,929 square feet. In 2015, the average deal size was 12,690 square feet.

Last year, there was 5.3-million square feet of deals completed in Q4 alone, Emery added but here too 2016 is probably going to be different.

“Historically a huge increase in leasing activity isn't common at year-end, so I wouldn't expect there to be a significant improvement by the end of this year.”

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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.