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WASHINGTON, DC–The local trophy market can expect to see rising vacancy as new supply delivers, demand that is below historical norms and net effective rents that will remain flat for the time being and then drop down the road, according to JLL's latest Skyline report for the trophy market.

It found that trophy vacancy has increased from 8.4% to 10.3% over the first half of 2017 and that the market has recorded 122,000 square feet of occupancy gains over the past year, compared to the historical average of 420,000 square feet of gains annually, a 71% average annual decline

And while average trophy asking rents have grown by 4.4% over the past year to hit $84.75 square feet as new construction has broken ground, large deals signed have included record levels of concessions with 15 months free and $130 in tenant improvement allowances for a 12-year deal.

A Tenant's Market

The upshot is that the DC trophy market continues to shift in tenants' favor as supply increasingly appears at risk of outpacing demand. JLL writes:

The delivery of five trophy buildings actively under construction as well as a glut of similarly priced Class A+ projects will continue to grow the number of options for tenants seeking high-quality office space, which will place downward pressure on face rates as large-block vacancies linger on the market and upward pressure on concessions as the demand pipeline thins. This misaligned supply-demand paradigm will result in trophy vacancy rising into the 13-14% range and culminate with a drop in net effective rents by 7-10% through 2019.

Other Drivers

Upcoming deliveries of largely vacant, similarly priced Class A + product, ongoing rightsizing and even more developments possibly breaking ground are also poised to affect the trophy market here.

Over the next 6-9 months, buildings such as 2000 K St., 2112 Pennsylvania Ave., Alexander Court and Anthem Row will deliver 1.5 to 2 million square feet of vacant space to a segment of the market (Class A+) where direct vacancy is currently 15%; New Class A+ supply will continue to grow with future spec groundbreakings of Class A+ projects such as 1101 16th St., 888 16th St., 1050 17th St. and 1901 L St.

Also

With a handful of large law firms actively in the market, the ability to secure a prelease could kick off large-scale Trophy projects such as 900 New York Avenue or 1700 M Street, further upsetting supply-demand dynamics and prolonging the tenant-friendly market across the high-end spectrum of Washington office space.

Finally, the rightsizing trend is still alive and kicking as such firms as Winston & Strawn goes from 150,000 square feet to 65,000 square feet and WilmerHale drops from 550,000 square feet to 300,000 square feet.

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