Industries Commercial Real Estate

Leasing market in Washington region remains slow

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Leasing activity across the Washington region remains slow as government contractors, law firms and federal agencies are reluctant to commit to long-term space decisions, according to Jones Lang LaSalle’s Q2 Office Insights and Office Highlights report.

In the second quarter, the report says price conscious tenants renewed existing leases or consolidated space, to eliminate out-of-pocket moving and build-out expenses. Relocations were rare.
Across the entire Washington region there was negative net absorption of 359,199 square feet, including 172,327 negative square feet in downtown Washington.

Jones Lang LaSalle says this trend raised the total occupancy loss so far in 2012 to more than1.3 million square feet. This was driven in part by the dissolution of the law firm of Dewey & LeBoeuf, stagnancy within the U.S. General Services Administration and the move for efficiency. Overall, the direct vacancy rates stands at 13.1 percent.

In addition, rents were down just more than seven percent for the first five months of this year. “The relative stability of asking rents across the market obscures the fact that concessions have been increasing dramatically, and when accounting for record levels of free rent and tenant improvement allowances, net effective rents have fallen very precipitously,” said Scott Homa, vice president, research for Jones Lang LaSalle. Currently, the asking rent for Class A office properties is $38.80 per square foot.

Other highlights from the report:
There is a growing disconnect between market performance and macroeconomic conditions. Washington D.C.‘s unemployment (5.1%) is among the lowest of any major metropolitan region and job creation (+ 47,000) is trending above long-term averages. Yet this has not translated into gains in the office market.
Tenants are reducing their footprints taking an average of 10 to 35 percent less space.

The reports notes that recovery in the Washington market depends heavily on the passage of a new federal budget, which is highly unlikely before year-end given such pending issues as the extension of the payroll tax holiday and the Bush tax cuts. “Don’t expect to see any improvement before the November elections as most tenants are going to delay decision making and wait to see what happens,” added Homa.

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