WASHINGTON, DC–Earlier this month Cushman & Wakefield released its fourth quarter 2017 Research Statistics, reporting that concession packages for the DC area have remained elevated for long-term Class A deals. That was perhaps an understatement: it noted that some tenant improvement allowance packages are reaching $130 per square foot, as landlords chase the few large near-term expirations in the market.
That's not all: there are rumor deals out there that have TIs reaching $150 per square feet and free rent as much as 24 months, Nathan Edwards, senior director of Cushman & Wakefield, tells GlobeSt.com.
“The ceiling keeps changing — we expected 2016 to be the top of concessions; back then the TIs were in the $120 per square foot range with free rent a month per year of the term. It rose in 2017 and we expect concession packages to rise again in 2018.”
Lease Terms Are Rising Too
Landlords, though, are extracting something for their trouble — lease terms are more frequently coming in at 15 years to counter the coosts. An 11-year deal with a year free rent has been historically the average package for the DC area, Edwards says. Now, “we're seeing two years free rent on a 15-year plus deal.”
As part of the give-and-take tenants have also been accepting higher face rates in exchange for these concessions, C&W said in its report, resulting in a 3.8% rise in overall rental rates across the city throughout 2017, closing the fourth quarter at an average of exactly $55.00 per square foot.
As new supply enters the market, the situation will only worsen — or improve if you are a tenant. “If you are a landlord in the west side where much of the new supply is coming online, the pool of tenants that can pay the high $50s per square foot triple net rent is quite a bit smaller than it would be in the East End,” Edwards says.
“I think that competition on the lower floors of those new buildings is going to be pretty significant.”
Those rumor deals of TIs coming in at $150 per square foot are, Edwards believes, “the tip of the iceberg.”
“I think that will be more common as these projects on the west side of town come to completion over the next 18 months.”
Another View of the Market
Newmark Knight Frank has a more moderate view of what is happening with concession packages in the DC area. Senior Managing Director of National Research Sandy Paul provided the following research on concessions, noting that the data are based on transactions for direct space in Class A properties where concessions were offered, and with a minimum lease term of five years.
“What we found when we look at TIs is that concessions have been holding steady on average but are quite elevated relative to the historical norm,” he tells GlobeSt.com. “In 2016 and 2017 we saw concessions of about $101 per square foot for Class A leases in the District.” On the other hand free rent has been edging higher, he says — in 2016 it was a little less than one month for each year of the lease and in 2017 it was just over one month of free rent.
These are average numbers, though, and there are clearly cases of TIs that are higher than $101 per square foot — Paul, too, has heard of deals in which TIs have risen to as high as $130 per square foot. “Of course such numbers are deal specific,” he says.
Rising supply, though, will do its part to make such TIs more common, he adds. “The bottom line is that new product is attracting a lot of tenant interest, particularly on the high floors. But in order to fill the lower floors of the building, substantial concessions are required.”
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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.
