WASHINGTON, DC–Rising rents for Class B space are alienating one of this category's core tenants: nonprofits, according to a new analysis by JLL. Since 2007 to 2014, Class B rents in the city's core hovered around $47 per square foot. However, over the past 36 months, Class B supply levels have declined by 10% and pushed rents beyond $50 per square feet to $51.93 today.
Many nonprofits appear unwilling to pay rents in excess of $50 per square foot, JLL writes. “Over the past 36 months, only 22% of nonprofit leases were signed with base year rents over $50 per square foot and the average base year rent was $49 per square foot, greatly illustrating that $50 per square foot might be a benchmark nonprofits use to monitor real estate costs.”
As a result nonprofits have begun to explore alternatives outside of the CBD and East End where they have traditionally located. Over the past year, more than 10 nonprofits have signed leases in Southwest, Ballpark and NoMa, surpassing the total number of leases signed by nonprofits in these submarkets from 2010-2017, JLL writes.
Just as significantly, nonprofit interest is spreading outside of the city limits to Crystal City and Silver Spring. In Crystal City, 15 leases totaling 360,596 square feet have been signed since 2013, four of which were relocations from the District. Silver Spring has also begun to compete based on some large new availabilities, particularly at One Discovery, according to the analysis.
This trend is likely to continue as investor interest in Class B buildings continue to grow. Class B sales comprised 44% of sales in the past five years compared to 35% in the five years prior. “Landlords of that product continue to explore repositioning B- and B assets to B+ buildings in the mid-to-high $50s per square foot to maximize value,” it writes.
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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.
