Office Research

Market Report Second Quarter 2018

Washington, D.C. Metro Area

District Investment Activity Rises as

Development Weighs on Vacancy Office 2018 Outlook

Office moves and stable employment gains support further 6.8 million sq. ft. Construction:
rent growth as supply additions push vacancy up. Ongoing Completions for 2018 are
will be completed
corporate expansions and relocations are fueling demand for the most since 2009. A small
office space in the metro. To date, this growth indicates employers amount those deliveries, about
will add almost as many roles in 2018 as they did last year, with 125,000 square feet, will be
job growth in traditionally office-using sectors outpacing that of medical office space.
the market overall. Consistent demand will prompt asking rents for
marketed space to rise for the second consecutive year, although 70 basis point Vacancy:
healthy leasing and hiring activity will not be enough to offset Absorption of office space will
increase in vacancy
the expanding construction pipeline. A handful of speculative improve year over year but
projects, plus reintroduced older space from employer relocations, still fall short of added supply,
are adding more vacant space to the market, moving the overall pushing the vacancy rate up to
vacancy rate up for the second year in a row. 19.2 percent.

Construction surge includes major new CBD arrivals. 1.4% increase Rents:
Developers are set to deliver the most new space within a single The average asking rent
in asking rents
year since before 2010. Unlike in years past, the majority of advances to $37.77 per square
completions are taking place inside the District. Major arrivals in foot. This is just above the 1.3
the area include the new 760,000-square-foot headquarters for percent increase from 2017.
The Advisory Board in the East End, as well as the East Tower
of Midtown Center, where Fannie Mae will relocate later this year.

Investment Trends
• In contrast to investment trends over the past eight years, more
Local Office Yield Trends Class A than Class B structures were traded in the 12-month
Office Cap Rate 10-Year Treasury Rate period ending in March. Many of these transactions were for
premium properties located along the Dulles Corridor that were
12%
built after 2000 with floorplates ranging from 60,000 to 400,000
9%
square feet. Their average sale price was $240 per square foot.
• The number of trades taking place within the District grew by 42
Rate

6%
percent year over year. Capitol Hill, Downtown and Georgetown
3%
are still the most active D.C. investment submarkets,
representing 97 percent of the area’s deal pool. At an average
0% sale price of $585 per square foot, these are also some of the
00 02 04 06 08 10 12 14 16 18* most expensive submarkets in the metro.
• Foreign investment is a major component of office transactions
in the market. Approximately 37 percent of 2017 sales crossed
international borders, including investments of over $600 million
from buyers in South Korea, Singapore, Japan and Canada.
* Cap rates trailing 12 months through 1Q18; 10-Year Treasury up to March 29
Sources: CoStar Group, Inc.; Real Capital Analytics
Washington, D.C.
1Q18 - 12-MONTH TREND

Employment Trends EMPLOYMENT:

Non-Farm Office-Using 1.2% increase in total employment Y-O-Y
4%
Year-over-Year Change

• During the past 12 months ending in March, employers

2% created more than 38,000 positions. About 13,300 of
those jobs use offices, representing a 1.4 percent segment
0%
expansion that is above that of total employment.
-2% • Even as the pace of hiring slows year over year, the
unemployment rate still fell 20 basis points to 3.6 percent,
-4% 50 basis points below the national level.
08 09 10 11 12 13 14 15 16 17 18*

Office Completions CONSTRUCTION:

Completions Absorption
3.9 million square feet completed Y-O-Y
12,000
Square Feet (thousands)

• Developers completed 3.9 million square feet of office

8,000 space in the past year, 1.5 million more square feet than
was delivered in the previous annual period.
4,000
• Construction projects were finalized across the metro,
0 with the largest openings occurring in Downtown D.C.,
Alexandria and along the Rosslyn-Ballston Corridor.
-4,000
08 09 10 11 12 13 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

Metro United States 70 basis point increase in vacancy Y-O-Y
20%
• Over the past four quarters, a net amount of 21,000
18% square feet of existing office space was vacated, joining
Vacancy Rate

speculative construction to push the market’s vacancy

16% rate up to 18.8 percent.
• Select submarkets bucked the metrowide trend. Major
14%
new leases dropped vacancy by over 500 basis points in
12%
both East Prince George’s County and East Falls Church.
08 09 10 11 12 13 14 15 16 17 18*

Asking Rent Trends RENTS:

Metro United States 1.3% increase in the average asking rent Y-O-Y
8%
• The average asking rent rose to $37.34 per square foot
Year-over-Year Change

4% during the past 12-month period. In the prior year, rents

increased by 2.0 percent.
0%
• Among the three major regions of the market, northern
-4%
Virginia had the highest rate of rent growth at 2.0
percent, thanks to above-market returns in Manasses
-8% and Alexandria as well as in Fauquier County.
08 09 10 11 12 13 14 15 16 17 18*

* Forecast
 Office Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2018 FORECAST JOB GROWTH *POPULATION AGE 20-34 **SQ. FT. PER OFFICE WORKER

Metro 1.2% Metro 22% Metro 379

U.S. Average 1.2% U.S. Average 21% U.S. Average 213

**OFFICE SQUARE FOOTAGE

38% Urban
2018 OFFICE-USING JOB GROWTH POPULATION OF AGE 25+ U.S. Average 32%
*PERCENT WITH BACHELOR DEGREE+
Metro 1.3% 62% Suburban
U.S. Average 2.2% Metro 48% U.S. Average 68%

U.S. Average 29% * 2017

**1Q18

Lowest Vacancy Rates 1Q18 Sales Velocity and Asset Values Advance as
Investors Appreciate Long-Term Stability
Y-O-Y
Vacancy Asking Y-O-Y %
Submarket
Rate
Basis Point
Rent Change • Transaction velocity improved 10 percent year over
Change
year after declining 20 percent the year before.
• Strong demand prompted sales prices to appreciate
at their fastest rate in half a decade. Properties recently
SUBMARKET TRENDS

Charles County 7.9% 20 $23.13 1.9%

changed hands at an average price of $285 per square
foot, with initial returns averaging in the low-6 percent
Manassas/Route 29/I-66 9.0% -150 $21.81 4.8%
SALES TRENDS

band, where they have stayed for five years.

Leesburg/Route 7 Corridor 11.3% 80 $26.27 1.2% Outlook: The metro’s relative stability through different
East Prince George’s economic cycles adds appeal to investors, both domestic
11.4% -690 $20.97 6.6%
County and international, and will drive continued investment
Woodbridge/I-95 Corridor 12.2% 110 $23.52 -3.2%
activity despite some softening performance metrics.

Northeast/Southeast 12.9% 440 $35.63 19.0%

Price Per Square Foot Trends
Capitol Hill Area 14.1% -260 $50.22 1.4%
Year-over-Year Appreciation

Southeast Montgomery 18%

16.1% 140 $27.44 1.3%
County
South Prince George’s 9%
16.2% -190 $24.12 -1.4%
County
0%
Bethesda/Chevy Chase 16.8% 120 $39.46 0.1%

-9%
Overall Metro 18.8% 70 $37.34 1.3%

-18%
08 09 10 11 12 13 14 15 16 17 18*

* Trailing 12 months through 1Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Office Research | Market Report

1Q18 Office Acquisitions By WILLIAM E. HUGHES, Senior Vice President,

By Buyer Type Marcus & Millichap Capital Corporation
Other, 1%
Cross-Border, 8% • Fed raises benchmark interest rate, plots path for additional
increases. The Federal Reserve increased the federal funds rate
by 25 basis points, lifting the overnight lending rate to 1.75 percent.
Private, 62% The Fed noted that inflation has broadly reached its objective, while
Equity Fund the domestic economy is performing tremendously well as tax cuts
& Institutions, 24% power household spending and corporate investment. As a result,
the Fed has guided toward two additional rate hikes this year, likely
Listed/REITs, 5% in September and December, while setting the stage for as many
as four increases in 2019.
Office Mortgage Originations • Lending costs rise alongside Fed rate increase. As the Fed
By Lender continues to lift interest rates, lenders are increasingly tightening
100% margins in order to compete for loan demand. Despite these
Percent of Dollar Volume

efforts, borrowing costs remain on an upward trajectory, which may

75% Nat'l Bank/Int'l Bank CAPITAL MARKETS prompt investors to seek higher cap rates or pursue greater returns
CMBS
Financial/Insurance
in secondary markets. However, robust economic growth and
50%
Reg'l/Local Bank rising net operating incomes are keeping selling prices elevated,
Pvt/Other which may widen an expectation gap as property performance and
25%
demand trends remain positive.
0% • Lending continues to be highly competitive. While the Fed
12 13 14 15 16 17
has committed to tightening policy, global markets and foreign
central banks are keeping pressure down on long-term interest
Include sales $2.5 million and greater
rates, restraining the 10-year Treasury to the 3 percent range.
Sources: CoStar Group, Inc.; Real Capital Analytics Banks, commercial mortgage-backed securities (CMBS) and life
insurance companies are providing debt for office assets, with
leverage at banks typically capped at 65 percent. Meanwhile, life
insurance companies will typically provide capital with leverage
between 60 and 65 percent, with CMBS offering up to 70 percent.
Lender spreads have narrowed in recent months, while 10-year
National Office and Industrial Properties Group loan structures will typically range between 4.25 and 5.25 percent,
depending on tenancy, location, sponsorship and loan-to-value
ratio. Minimum debt service coverage required is 1.3 times expected
Alan L. Pontius
Senior Vice President, National Director | Specialty Divisions asset revenues, supporting debt yields of 8.5 percent. The national
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com economy should grow strong and office demand should support a
10-basis-point decline in vacancy to 13.7 percent nationally.
Prepared and edited by
Cody Young
Research Associate | Research Services
Washington, D.C., Office:
For information on national office trends, contact:
John Chang Mathew Drane Regional Manager
Senior Vice President, National Director | Research Services 7200 Wisconsin Avenue, Suite 1101
Tel: (602) 707-9700 Bethesda, MD 20814
john.chang@marcusmillichap.com (202) 536-3700 | mathew.drane@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment
growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline;
U.S. Census Bureau