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Market Information: Washington DC

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Economy
Office
Industrial
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Economy:  Year-End 2009

Washington Metro Area Ends 2009 with the Fewest Jobs Lost and Lowest Unemployment Rate Among Nation's Large Metro Areas

Prepared with the invaluable assistance of Dr. Stephen Fuller

We believe the Washington metro area economy is currently in recovery, as the worst of the recession’s impact is behind us. Although conditions remain sluggish, a slow recovery is underway.

Payroll employment declined 23,900 in the Washington metro area over the 12 months ending October 2009. This represents a decline of 0.8%, compared to the national decline of 3.9% during this period.  The Washington area unemployment rate was 6.2% at October 2009, up from 4.1% one year ago. This compares to the national rate of 10.2% in October 2009. The national rate retracted to 10.0% in November 2009.

The Washington area’s gross regional product (GRP) was $401.3 billion in 2008, an increase of 4.7% from revised 2007 figures.  We expect GRP in the metro area to edge down 0.5% during 2009, once the numbers are finalized. This compares favorably to our projection of the national gross domestic product change of negative 2.5% in 2009.

We expect the Washington metro area economy to slowly recover during 2010.  We believe the local economy hit bottom during the 1st half of 2009 and recovery is now underway. However, we expect the speed of recovery to be slow, as consumers and companies remain cautious. We expect consumer confidence will edge up moderately during 2010. Consumer confidence is currently very low and will remain challenged until healthy job growth is reported.

 

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Office:  Year-End 2009

Short-Term Pain Continues with Rising Vacancies and Declining Rents, Yet the Year Finishes with Modest Absorption

The Washington metro area office market finished the year with modest positive absorption, as government, health care, and contractors boosted absorption with notable lease deals. Although overall vacancy increased 240 basis points during the past year, it remains lower than most large metro areas due to the stabilizing influence of the Federal government. Given rising vacancy, rents declined 6.9% this year. Construction levels have declined notably, but remain elevated at this point in the cycle – particularly in the District. Despite weak conditions, the metro area remains one of the top performing markets in the nation.

Year-End 2009 Market Highlights:

  • Net absorption: 630,000 SF, compared to 3.4 million in 2008.
  • Sublease space: Increased by 1.2 million SF. Sublease space represents 1.4% of the standing inventory compared to 3.4% at the peak of 2002.
  • Overall vacancy rate: 13.0%, up from 10.6% one year ago. Fourth lowest rate in the nation.
  • Direct vacancy rate: 11.6%, up from 9.3% one year ago.
  • Space under construction: 5.7 million SF, down from 15.4 million SF one year ago.
  • Pre-lease rate: 48%, compared to 26% a year ago.
  • Rents: Down 6.9%, compared to an increase of 0.1% in 2008.
  • Investment sales: $2.0 billion, compared to $3.7 billion in 2008.  Average sale price: $276/SF.

 

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

 

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Flex/Industrial:  Year-End 2009

Regional Flex/Industrial Market Contracted in 2009; Market Stabilization Expected During 2010

The Washington/Baltimore flex/industrial market contracted during 2009. Market conditions held up better in the Baltimore metro area than in the Washington metro, as a handful of large bulk warehouse lease deals kept absorption only modestly negative during the year.  The Washington metro experienced a larger share of tenants vacating space – with fewer large lease deals to offset the loss.  Rents declined over the past 12 months as property owners competed for tenants.  The amount of space in the construction pipeline is down, which will help stabilize the market during 2010.  However, a handful of spec construction projects started in the Baltimore metro area in 2009, as the area prepares for BRAC-related tenants.  Overall, flex/industrial conditions are weak in the Washington/Baltimore region, but should regain solid footing in 2010 due to the relative strength of the Baltimore market.

Year-End 2009 Market Highlights:

  • Net absorption: Negative 2.3 million SF, compared to positive 4.4 million SF in 2008.
  • Sublease space: Increased by 217,000 SF.  Available sublease space represents 0.9% of standing inventory.
  • Overall vacancy rate: 11.4%, up from 10.1% one year ago.
  • Direct vacancy rate: 10.5%, up from 9.3% a year ago.
  • Under construction: 1.1 million SF, down from 3.5 million SF one year ago.  41% pre-leased, up from 30% a year ago.
  • Space delivered: 1.8 million SF in 2009, compared to 7.3 million SF in 2008. 25% of space delivered in 2009 was leased upon delivery, compared to 24% in 2008.
  • Rents: Down 4.3%, compared to rising 0.3% in 2008.
  • Investment sales:$136.9 million, compared to $564 million in 2008.  Average sales price: $58/SF.
  • Land sales: $20.3 million in 2009, compared to $18.3 million in 2008. Average price per land SF was $5.09.

 

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Retail:  Year-End 2009

Washington Retail Market

The most recent data available suggests the recession in the Washington metro area ended during the 1st quarter of 2009 – coming out of this downturn ahead of nation. Although conditions remain sluggish, the worst conditions are behind us, as a slow recovery is underway.

The Washington metro area has over 118 million SF of retail space, inclusive of all types of retail, in over 1,000 shopping centers. Northern Virginia is home to over half of the total metro retail inventory.

The metro area has 25.0 SF of retail space per capita, compared to the national average of 23.4. Although Northern Virginia and Suburban Maryland are above the national average, the District remains underserved at just 8.5 SF of retail space per capita.

Our Market Maker survey respondents noted that cap rates for grocery-anchored shopping centers have risen to 8.5% at October 2009, from 7.5% one year ago. However, when surveyed at June 2009 respondents noted an 8.6% rate, indicating a modest decline over the past four months.

For specific data on vacancy rates and rental rates in the Washington metro area, please contact us to receive a complimentary subscription to the full report.

 

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

To receive a complementary copy of the full report and be added to future distributions, e-mail Donna.Dennis@DeltaAssociates.com.

 

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Class A Apartments:  Year-End 2009

Class A Absorption Continues Record Pace; Pipeline Continues to Shrink; Investment Sales Volume Off Despite Late Year Uptick.

Highlights of market performance as of Year-End 2009:

  • The region’s stabilized vacancy rate for investment grade apartments (Class A and B) is 4.3%, the same as a year ago. With the national rate at 7.6%, this is one of the lowest vacancy rates of any metro area in the nation.
  • Rents edged down over the past 12 months for all investment grade product – down 2.0% since December 2008. Class A rents declined by 1.7% during this period, compared to growth of 0.1% during the preceding year.  
  • Annual Net Absorption, at 6,061 Class A and B apartments, rebounded from the third quarter due to a deceleration in dis-absorption of Class B apartments. Class A absorption continued at a strong pace with 7,955 units absorbed, remaining a nation-leading pace. Average monthly absorption at new projects slipped to 14 units per project per month, as the cumulative effects of product delivered in 2009 impact lease-up pace.  However, several projects are stabilizing: over the last year projects in lease-up have declined from 51 to 37. 
  • Concessions at Class A projects continued to edge higher.  This quarter concessions were 7.2% of face rent, compared to 5.7% of face rent at year-end. This upward trend began in the first quarter of 2007 as the market became more competitive.
  • Pipeline: After rising from a historically low 18,000 units in 2005, the pipeline ballooned to 36,951 units in December 2007, largely driven by the reversion of condominium projects. In the first quarter of 2008, the pipeline began its cyclical decline, and has continued downward to a new historical low of 16,606 as of year-end 2009. We believe this downward trend will continue over the next year due to the difficulty of obtaining development credit.
  • Investment Sales:  2009 is significantly off the pace of prior record setting years. In 2007 Delta identified $1.95 billion in multifamily Class A building sales volume. That total declined to $885 million in sales volume in twelve transactions in the first eleven months of 2008. In the first eleven months of 2009 we note just $504.8 million of multifamily Class A building sales (four garden properties, and four mid/high-rise properties) with the majority of these transactions occurring in the fourth quarter. The sale of land to construct new apartments, at just $9.1 million, is off dramatically compared to a total of $640 million in 2007 and $156 million in 2008. This dearth of land sales is an indicator of a slow-down in the pipeline of oncoming supply in the next year.


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Condominium:  Year-End 2009

Sales Volume Up; Prices Edging Lower but Moderating; Pipeline Down.

Highlights of market performance as of Year-End 2009:

  • Volume: New unit sales volume (defined as net binding contracts written with security deposits up) in the Washington metro area during the 4th Quarter was 732 units, higher than the 3rd Quarter total, and 2,350 for the year.
  • Prices: Condo sales prices are down, but moderating in Northern Virginia. Effective new condo sales prices were down in the Washington metro area by 5.8% from 12 months ago, with Arlington/Alexandria up 0.9%.
  • Concessions: In the Washington metro area, concessions are down, averaging 3.6% of the purchase price at Year-End 2009 (down 60 basis points from one year ago).
  • Pipeline: There are currently 6,071 unsold new condominium units that are actively marketing in the Washington metro area, a decline of about 40% from a year ago. As a result, there is now 2.6 years worth of inventory of product on the market at current rates of sales velocity in the metro area. Arlington/Alexandria and the District are below the metro average and are approaching levels considered “product shortage”.
  • Sales pace: Projects that have sold out in the past two years have averaged about three sales per month in the Washington metro area.

 

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Class B Apartments:  Year-End 2009

Rent and Vacancy Performance Mixed Across Sub-State Areas

Class B apartment rents are down and vacancy rates are up year-over-year.

  • Average effective rent decreased to $1,382, down 2.4% from a year ago.
  • Vacancy increased by 100 basis points to 5.2%.

Value-Added Strategy: Renovation

Opportunities continue for renovating existing B and C grade properties. In our view, these opportunities can be the most profitable where the rent spread is widest between Class A and Class B (or Class C) rents. Because units can be renovated, rents can be raised correspondingly and still represent a discount to prospective tenants compared to Class A rents.

Sales of Apartment Buildings:  Activity Increases Substantially at Year-End 2009

During the first eleven months of 2009, there have been 19 Class B apartment sales noted, three high-rise and 16 garden property totaling 3,597 units. Since August, 14 of these 19 have occurred totaling $295 million. Last year at this time there had been 21 garden and mid-rise properties sold for an average of $106,254 per unit and six high-rise sales averaging $200,758 per unit. Class B sales through November in the metro area total approximately $352.5 million.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

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