Office Market:

• The Washington area office market experienced a huge turnaround in absorption in the fourth quarter. A net total of 894,000 SF of all classes of office space was absorbed during the quarter—more than the first three quarters of the year combined and the highest quarterly total since Q2 2014. Net absorption for all classes of space in 2018 totaled just 1.25 million SF, but Class A absorption totaled a strong 3.27 million SF.

• The headline deal of the quarter (and year) was JBG Smith winning Northern Virginia’s share of Amazon’s HQ2 requirement. Amazon’s 4 million+ SF campus in National Landing (Crystal and Pentagon cities) will include about half a million SF of existing space it will lease directly from JBG Smith, and up to 4 million SF in new construction. Over the long-term the National Landing Amazon campus could grow to as much as 8 million SF.

• The most promising metric from the fourth quarter was a (small) decline in the region’s office vacancy driven by the surge in absorption. Although the overall direct vacancy rate of 12.7% was 50 basis points higher than a year ago, the rate is 10 basis points lower than Q3 2018—the first decline in over a year.
• The average effective office rent for the Washington metro area is $33.71 per SF as of December 2018, up a strong 2.2% from December 2017. The District of Columbia had the greatest rent increase over the period at 2.6%, followed by Northern Virginia with 1.9% and Suburban Maryland with 0.6%.
• Coworking operators have gobbled up a lot of the vacant office space in the inner submarkets of the metro area, providing a solid boost to the market in the recovery cycle. Combined, tenants in the coworking sector have leased approximately 500,000 SF of space in 2018, or about 40% of the region’s total absorption. While the vigorous leasing activity from the sector is certainly beneficial to the office market in the near term, the long-term risks of having much of the region’s office inventory occupied by these unique tenants are uncertain.

Economy:

• While job growth in the metro area decelerated somewhat in the fall, it remained robust with 60,700 new additions during the 12 months ending October 2018. Unfortunately, the previously dominant Education/Health sector saw net additions plummet during the fourth quarter, recording just 1,400 new positions during the year ending October 2018. The primary source of the job growth deceleration is most likely in the District, where Providence Hospital has nearly shut down entirely as of December 14
• The November 2018 elections brought a shake-up in party control of Congress that could have ramifications on the regional economy. Democrats gained solid control of the House of Representatives, while Republicans solidified control of the Senate. The outcomewill likely lead to increased gridlock between the two chambers of Congress and the White House, which almost is never beneficial to this region. Case-in-point: the current federal shutdown.

FOURTH QUARTER 2018 FIGURES

• Net absorption: 894,000 SF during Q4 2018; Including 1.67 million SF of positive Class A space absorption.
• Direct vacancy rate (single and multi-tenant): 12.7% at Q4 2018, down 10 basis points from 12.8% at Q3 2018, and up 50 basis points from one year prior.
• Under Construction:7.1 million SF.
• Effective rents: Up 2.2% since Q4 2017.
• Investment sales:$3.1 billion ($330/SF) in Q4 2018, compared to $3.1 billion ($351/SF) SFin Q4 2017.

Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals which has been providing consulting and subscription data services to the commercial real estate industry for over 35 years.

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