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Here's How DC's Office Market Did in Q3

Q3 2015 ended in the middle of last week, bringing with it more good tidings if you’re in the commercial real estate business. The office sector saw positive absorption in every region for the second straight quarter, the first time that’s happened in more than five years, according to JLL. Most encouraging of all: sectors that have been the hardest hit by the office downturn all showed recovery. Crystal City (above) has gained 313k SF of occupancy so far this year, the highest growth of any market in the region (yes, including the CBD) and Arlington, long combating vacancy rates above 20%, has seen positive net absorption of 1.6% so far in 2015 (but the NSF and TSA have yet to officially leave). Thanks to the GSA’s increased activity—37% of all square footage signed in Q3 was from the federal government—the office sector has momentum going into the year’s final quarter.

The biggest lease of the quarter was TSA’s landmark, 625k SF deal in Alexandria back in August (at Prudential's Victory Center, above), but it was far from the only major tenant to move around. According to CBRE, relocations in Q3 outpaced lease renewals among tenants bigger than 20k SF for the first time since 2010, and an astonishing 74% of private sector leases signed were relocation deals. The big player in the market moving was The Advisory Board Co, agreeing to move into 500k SF of Douglas Development Co’s 655 New York Ave development in the East End, which again stood out as the priciest market in the region, at $59/SF rent asking prices. Rent prices are still flat around the region however: year-to-date in 2015, we’re only up about 11 cents, according to JLL. The most encouraging sign of the office market will be when rents and net absorption both see significant gains, rather than the modest ones so far in 2015, but beggars can’t be choosers.

What is clear: 2015 will be the best year for the office market since 2010. Net absorption for the region is at a positive 709k SF, the highest it's been in five years and 24.3M SF of leases have been signed already, higher than all of 2012 and 2014 and on pace to beat 2013 and 2011’s 25M SF of leases signed. There are currently 5.2M SF of offices under construction, 59% of which is pre-leased. The ABC certainly helps that number as did one of the highest-profile office signings of Q3, the American Psychiatric Association at The Wharf (above), which was announced by the mayor at the development’s bottoming-out ceremony this summer. And most prognosticators think that 2016 and 2017 is when the market will really heat up as leases expire and the government contractor sector recovers from sequestration. So stay tuned.

Related Topics: CBRE, JLL, The Wharf, TSA