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Commercial Market Now and Then Petch Gibbons January 26, 2011.

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Presentation on theme: "Commercial Market Now and Then Petch Gibbons January 26, 2011."— Presentation transcript:

1 Commercial Market Now and Then Petch Gibbons January 26, 2011

2 Washington, DC Positive Absorption Hit Record Levels - Occupancy Levels Increasing by 4.3 Million SF - Federal Government Activity and Spending Sales Activity and Values Soared - The World Bank at 1225 Connecticut Ave NW for $216 Million ($900 psf) Lots of tenants hunkering down Northern Virginia The Tale of Two Markets; One Inside the Beltway; One Outside Investors Lured by Financially Stable, Fully Leased, Quality Office Properties Slow and Steady Recovery is Projected for Northern Virginia in 2011 with Tighter Markets Inside the Beltway Suburban Maryland Bethesda Brings Suburban Maryland Office Market into Solid Recovery Mode Government/Contractors Responsible for The Largest Transactions. Southern Montgomery County Leads the Office Market Recovery in 2011 Tell ‘em what you’re going to tell ‘em!

3 A Record-Breaking Year for Absorption Downtown while the Suburbs turn Positive Government Activity was Responsible for Most of the Demand in 2010 in all Markets Private Sector Activity Led by: Law firms (Core DC markets) Consulting, Technology (Northern VA) Consulting, Accounting (Suburban MD) Absorption (msf) 3 Source: Cushman & Wakefield Research * Overall absorption is defined as the change in occupied built space for a given period of time, including sublease space within five years.

4 Downtown Absorption will return to more Normal Historical Levels in 2011 and 2012 The Leasing Momentum Will Continue Into 2011, but will Taper Off During the Second Half of the Year. Employment Growth Will Begin To Pick Up in 2011 and 2012: Averages: (Over 5 yrs) DC: 1.3 msf NoVA: 1.6 msf Sub MD:24,000 sf * Absorption (msf) 4 Source: Cushman & Wakefield Research * Overall absorption is defined as the change in occupied built space for a given period of time, including sublease space within five years.

5 Historical Available Sublease Space 5 The Amount of Sublease Space Declined Markedly across all Markets. Downtown -24.1% Northern VA -35.4% Suburban MD -44.7% Noteworthy Subleases Source: Cushman & Wakefield Research Deloitte1919 N Lynn StRosslyn320,000 SF Scitor Corporation12010 Sunset Hills RdReston/Herndon40,252 SF National Association of Child Care Resource & Referral Agencies (NACCRRA) 1515 North Courthouse Road Arlington Metro Corridor 36,068 SF The Sierra Club50 F Street NWCapitol Hill/NoMa30,000 SF

6 BuildingSubmarketTenantSF Shady Grove Life Sciences CenterNorth RockvilleNational Cancer Institute575, Hubble Dr.GreenbeltTRAX International (on behalf of NASA)120, W. Gude Dr.North RockvilleMontgomery County Board of Education113, Wisconsin Ave.Bethesda/Chevy ChaseThe Reznick Group105,000 Top Lease Transactions Downtown BuildingSubmarketTenantSF Melpar Office ComplexMerrifield/Route 50GSA – Medical Command HQ668,285 Patriots ParkReston/HerndonGSA – Defense Intelligence Agency523,482 John Marshall I & IIITysons Corner/McLeanBooz Allen Hamilton (renewal)463,225 WaterviewRosslynDeloitte320,000 BuildingSubmarketTenantSF th St. SWSouthwestSEC900, Pennsylvania Ave. NWEast EndCrowell & Moring (renewal, expansion)375, & 1776 K St. NWCBDWiley Rein LLP (renewal)335, Eye St. NWEast EndDepartment of Veterans Affairs285, nd St. NECapitol Hill / NoMaSEC200,100 Northern VA Suburban MD 6 Source: Cushman & Wakefield Research

7 Other Renewals BuildingSubmarketTenantSF John Marshall I & IIITysons Corner/McLean Booz Allen Hamilton (renewal) 463,225 Washington Technology ParkRoute 28 South/Chantilly Computer Sciences Corporation (renewal) 257,485 Hunters Branch Fairfax/Oakton/ Vienna ICF Consulting (renewal/expansion)201, L'Enfant Plaza SW SouthwestDepartment of Health & Human Services185, L'Enfant Plaza SW SouthwestNational Transportation Safety Board179,519 7 Source: Cushman & Wakefield Research

8 Vacancy Rates remained Elevated from their Pre-Recession Levels… Submarkets with low 2010 vacancy rates: East End10.4% Ballston4.2% Bethesda/Chevy Chase10.5% 8 Source: Cushman & Wakefield Research

9 …but will Continue to Inch Down in 2011 and 2012 Very Few Construction Completions Help Vacancy Rates Tighten. In Downtown and Suburban Maryland Vacancy Rates Will Remain Well Above10-year Averages: 10 Year Average Vacancy Rate Downtown7.9% Northern VA12.9% Suburban MD12.3% 9 Source: Cushman & Wakefield Research

10 While Construction Deliveries Plummeted in the Suburban Markets, over 2.5 msf was Delivered Downtown 10 SF DELIVERED % OF INVENTORY Downtown2,523,1712.4% Northern VA270,0000.2% Suburban MD313,1300.6% Source: Cushman & Wakefield Research Two Constitution Square Capitol Hill/NoMa590,000 SF 90 K Street NECapitol Hill/NoMa413,000 SF st Street NW CBD365,000 SF Noteworthy Completions (over 350,000 sf)

11 Very few Projects are in the Pipeline 11 Total SF Under Construction% Vacant Downtown1,366,00658% Northern VA744,61030% Suburban MD358,4400% Source: Cushman & Wakefield Research 2200 Pennsylvania Ave. NW CBD431,000 SF Founders Square Phase I Ballston400,000 SF 1015 Half St. SECapitol River Front392,000 SF 1000 Connecticut Ave. NW CBD 374,000 SF North Bethesda Center Bldg I North Bethesda358,000 SF Noteworthy Projects (completions through 2012)

12 Class A Asking Rents hit Bottom Downtown… Concessions begin to Contract (Only In Prime, Core Properties) Institutional Owners are Becoming Less Generous. 12 Average Free RentAverage TIs Downtown7.4 months$72/sf Northern VA7.9 months$50/sf Suburban MD10.3 months$52/sf 2010 Class A Concessions (10-yr +deals) Source: Cushman & Wakefield Research

13 …and will Increase by 4-5% by 2012 in all Areas. Concession Packages will Continue to Tighten in Quality Space, Causing a Jump in Net Effective Rents in 2011 in Some Submarkets. 13 Submarkets with Highest Class A Asking Rents in 2010: CBD$ Connecticut Ave. NW, 1875 K St. NW (over $70/sf) Rosslyn$ & 1100 Wilson Blvd (over $50/sf) Bethesda/Chevy Chase$ Bethesda Metro Center, 7200 Wisconsin Ave. (over $40/sf) Source: Cushman & Wakefield Research

14 Metro Area Historical Sales Sales Volume vs. % of Total Inventory Sold Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research 14

15 Historical Sales Activity Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research Historical Sales (Washington, DC Metro ) YearTotal Sales Volume$/psfTotal SF% of Inventory# of Bldgs 2000$3,862,477,644$ ,937,2419.3% $3,689,443,116$ ,101,6177.2% $4,301,725,504$ ,721,5928.0% $7,004,205,648$ ,187, % $7,165,640,289$ ,586, % $8,952,360,458$ ,908, % $7,983,818,446$ ,059,9009.3% $16,657,538,696$ ,894, % $3,094,278,879$ ,052,8582.5% $1,948,496,982$ ,122,9502.1% $4,789,200,959$ ,381,9625.3%89 Total / Avg$69,449,186,621$ ,954,

16 2010 Significant Office Building Sales Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research 16

17 Metro DC Sales Volume by Buyer Type Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research 17 Institutional Investment Managers: INVESCO, Edge Fund Advisors Institutional Pension Funds: TIAA-CREF REITS: First Potomac Realty Trust, PS Business Parks

18 Trends to Watch in 2011 Tenants will continue to hold occupancy costs down. 18 Investors widen their nets outside Downtown, but remain focused on well-located, class A product with good financials. Slow and steady recovery in Northern Virginia and Suburban Maryland. Downtown returns to normal. Source: Cushman & Wakefield Research


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