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The five – six percent vacancy levels of the DC market are close to disappearing as cranes continue to dot the City’s skies in record paces. In total, 8.3 million s.f. of office space are under construction within the City limits, of which only 14 percent of the space was pre-leased at the end of December. While development activity has reached feverish paces, demand has slowed from the record paces set in 2005 and 2006. The City continues to be divided into two markets: the core and outlying markets, where the outlying markets such as NoMa, Southeast and Southwest, continue to see minimal demand, if any, depending on the submarket, yet developers continue to break ground to the tune of 4.5 million s.f. under construction. The core submarkets of the East End and the CBD, continue to see strong, yet slower demand from years past, yet also have seen a spike in development activity among non-Trophy Class A assets. Looking ahead to 2008, we expect demand to remain stable with second half 2007 levels, meaning absorption will dip below historical norms and vacancy will trend upward across the City due to the quantity of new product coming online. Rents will continue to grow, albeit at slower paces in the core areas especially in the Trophy and Class B segments, while commodity Class A pricing will flatten. Rent growth in the outlying markets will certainly come to a halt due to the out-of-whack supply-demand dynamics.
Leasing Activity
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1999 K Street, NW signed its first and only needed tenant this month in law firm giant Mayer Brown. Mayer Brown, who for months was expected to sign at the proposed 1000 Connecticut Avenue, NW, took the entire 249,000 s.f., Trophy building at 1999 K Street, NW with a rent rumored to be $49.50 NNN. The property, designed by the world famous architect Helmet Jahn, is scheduled to deliver in the second quarter of 2009.
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Law firm, Bryan Cave, leased 88,261 s.f. for 15 years at 1155 F Street, NW. Bryan Cave will relocate from 700 13th Street, NW in July 2009. 1155 F Street, NW (250,112 s.f., Trophy) will deliver in the fourth quarter of 2008. Bryan Cave is the only tenant to date to commit to space at the development; however another law firm is also in negotiations at the property.
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Law firm, Katten Muchin signed a 15-year, 72,258 s.f. lease at Harbourside North, 2900 K Street, NW. Katten will be relocating from 1025 Thomas Jefferson Street, NW in the summer of 2008. In the third quarter, law firm, Wallace King, committed to 20,145 square feet at the building.
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After touring the market for alternative options, Edelman Public Relations decided to remain at International Square (1875 Eye Street, NW). The PR firm signed a 10-year, 50,157 s.f. renewal, as well as a three-year, 10,702 s.f. expansion.
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Kaye Scholer will be relocating from its current space, but will stay in the same building at McPherson Square, 901 15th Street, NW. The law firm will move to the sixth, seventh and eighth floors and take occupancy on the 15-year, 55,000 s.f. lease in July 2008.
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The United States Holocaust Museum signed a 10-year, 36,500 s.f. lease at 1201 Maryland Avenue, SW (Portals III). The building is largely vacant besides the Biotechnology Industry Organization, which occupies the eighth and ninth floors.
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Reusch International signed a 10-year, 30,000 s.f. lease at the Columbia Center, 1152 15th Street, NW. Reusch will relocate from 700 11th Street, NW. The Columbia Center delivered in the second quarter of 2007, 35 percent pre-leased to law firm, Orrick. Since delivering, the building has also secured a lease commitment from Merrill Lynch, while Newmark Knight Frank subleased some of Orrick’s space.
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The American College of Cardiology Foundation expanded by 21,818 s.f. at 2400 N Street, NW. The increased space shifts the College’s total occupancy to more than 100,000 s.f. at the building.
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Knoll Furniture leased 12,500 s.f. at 1050 K Street, NW. 1050 K Street, NW (136,574 s.f., Class A) is currently under construction. The building will deliver in the third quarter of 2008 with Knoll as the only tenant commitment to date.
Building Sales
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The SunTrust building at 1445 New York Avenue, NW was recently purchased by Ponte Gadea Group for approximately $87 million ($618/s.f.). As part of the sale, SunTrust leased back a portion of the building they had occupied.
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Prudential RE Investors sold a two-building portfolio to a joint venture of the Carlyle Group and DCD Capital. 2300 M Street, NW and 1200 New Hampshire Avenue, NW sold for a combined $231.1 million ($548/s.f.). The buildings were 100 percent leased at the time of the sale.
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JPMorgan sold Union Square in Capitol Hill North for approximately $262 million ($430/s.f.) to a joint venture of the CIM Group and Akridge. The two buildings, 825 and 941 North Capitol Street, NE, were 100 percent leased to the DC Government at the time of the sale through 2009. The sale included a development parcel as well.
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The Flour Mill located at 1000 Potomac Street, NW in Georgetown was sold to Spear Street Capital for $50.3 million ($400/s.f.). The 125,781 s.f. building was 94 percent leased upon sale.
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2000 M Street, NW was sold by Juster Development to Washington RE Investment Trust for approximately $73.5 million ($324/s.f.). The Class B building was 98 percent leased at the time of the sale and the transaction was the buyer’s exchange in a 1031 exchange.
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