C&W: More Speculative Office Construction Coming

WASHINGTON, DC–The District’s speculative office pipeline has been quite robust for some time. Yet more spec office development is likely in the offing despite the current 14% vacancy rate, according to Nate Edwards, senior director of Cushman & Wakefield’s Washington, DC region Research team. “While the market overall is still solidly in tenant-favorable conditions, a few large tech transactions into existing product are making suburban Class A contiguous blocks harder to come by, and this is expected to spark new speculative construction in the next 12-18 months,” he said as part of the firm’s quarterly report on the area.

“Among contiguous blocks of 200,000 square feet or greater in Northern Virginia, there are six Class A options and seven Class B options available through 2020,” he said.

This prediction comes as the first wave of construction deliveries hit the Washington, D.C. office market during the second quarter of 2018, adding just over 2 million square feet of Class A product at six sites across the city. This is the largest quarterly total of new deliveries in Washington, D.C. history, C&W said.

While each of these projects delivered with at least one large, high-profile anchor tenant, nearly half of the total space (roughly 1 million square feet) has yet to lease, C&W said. It noted that these vacancies, along with further consolidations in both the public and private sectors, caused the overall vacancy rate in the District to rise to 14% — an increase of 170 basis points year over year and the city’s highest vacancy rate since 2014. C&W wrote:

No submarket was immune to this phenomenon; in fact, Capitol Hill/NoMa was the only one in which the rate rose by less than 100 bps over the course of the second quarter of 2018.

By year’s end, deliveries of new construction and substantially renovated product are projected to add another 2.2 million square feet to the District’s inventory, 60% of which is yet to be leased, according to the report.