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D.C.-Area Office Market Finishes 2017 With Best Quarter In 5 Years

After a tepid start to the year, the D.C.-area office market finished 2017 with a bang, recording its best quarter of office absorption in five years. 

A view of the National Mall from atop the Washington Monument.

The D.C. Metro area's Q4 net office absorption of 1.1M SF matched the total for the first three quarters of 2017 combined, and the last three months alone surpassed 2016's total, according to Newmark Knight Frank

"It does bode well for the future of the market in 2018 that we’ve seen increased activity," NKF Senior Managing Director Sandy Paul said.

Northern Virginia recorded its first full year of positive absorption since 2010, with its 2017 total of 909K SF beating out D.C. and suburban Maryland. Arlington started out the year with a major coup, landing Nestlé's U.S. HQ relocation, but Paul said the Silver Line corridor, including Reston and Tysons, was a key driver of absorption throughout 2017. 

"You have larger markets, and particularly markets along the Silver Line, that are attracting a lot of tenant interest," Paul said. 

The Washington Metro area's Q4 net absorption was the highest in the last five years.

The District's office market experienced a slow first three quarters, but then picked up the pace in the final three months of 2017. Its 464K SF of Q4 net absorption represented 58% of its 2017 total, according to NKF. 

The General Services Administration executed the largest lease of the quarter when it completed a deal to move the Pension Benefit Guaranty Corp. to 432K SF at Republic Properties' Portals complex in Southwest D.C. The government's real estate arm also signed a 173K SF lease to move the Peace Corps to NoMa's One Constitution Square.

Cushman & Wakefield Senior Director of Research Nate Edwards, whose report also showed Q4 as D.C.'s strongest of the year, attributed it largely to this increased GSA activity.

"Early in the year, the transition was happening and they were a little slower to appoint the head of the GSA and the Public Buildings Commissioner," Edwards said. "But now those appointees are in place, it's apparent they're able to start transacting these large-scale consolidations they've been trying to achieve."

A rendering of Boston Properties' development at 2100 Pennsylvania Ave. NW, where WilmerHale signed on for 288K SF

Edwards expects the GSA to continue to execute large deals at a faster pace in 2018. But with much of the fourth quarter's activity coming from the government and law firms — WilmerHale signed a 288K SF lease in Foggy Bottom — he said the elevated numbers are not that auspicious for the overall market. 

"The large deal activity that contributed to that uptick in new leasing toward the end of the year wasn't due to robust activity or expansions from outside of the market," Edwards said. "It was more your typical D.C. tenants like government agencies and law firms getting some large transactions in by year-end." 

Still, he sees some good signs from recent law firm deals. The top 100 law firms are 75% completed with their footprint consolidations, Cushman & Wakefield's research showed, and some are beginning to expand. 

"The worst is behind us, and we don't expect major givebacks in space like we did over the last six years," Edwards said. "In order to justify the move from older legacy buildings to these brand-new buildings, law firms had to get really aggressive in space requirements. But since that time, there are several firms that have exercised expansions." 

Paul said he sees this trend in other sectors, with companies realizing they may have gone too far in shrinking their footprint. He said this caused some of the positive net absorption in 2017. 

"It was partly due to a deceleration of the densification phenomenon," Paul said of the increased absorption. "Tenants on market to lease space are now realizing they can’t densify at the same level they did at their previous lease because employees aren’t standing for it."