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Market Information: Washington DC

 

Economy
Office
Industrial
Retail
Multifamily

 

Economy:  First Quarter 2008

Pace of Expansion Continues to Decelerate; Sturdy Job Growth; Low Unemployment

Prepared with the invaluable assistance of Dr. Stephen Fuller

The Washington area economy slowed during the first few months of 2008, although unemployment remains lowest in the nation at 3.0%. Despite cooling conditions, the metro area remains one of the top economic centers in the nation.

Payroll employment increased 27,600 in the Washington metro area over the 12 months ending January 2008, ranking 8th among metro areas in the nation. This pace of growth, compared to the 15-year average of 53,400 per annum, feels like a significant slow down, especially after growth levels of 55,000 to 60,000 in 2003-2006. But it is sturdy enough to support a healthy commercial real estate market if product production is held in check.

The Washington aera unemployment rate ticked up 10 basis points during the past year to 3.5% in January 2008. Today's unemployment rate is below the average unemployment rate of the 1900s, which was 3.9%.

The Washington area's gross regional product (GRP) was $368.1 billion in 2007, an increase of 3.3% from 2006. We expect the GRP to grow in 2008.

We expect the Washington metro area economy to make modest gains in 2008, as the aftermath of the Credit Crunch continues to unravel. Although we expect growth to slow this year, we anticipate improving conditions in 2009 and 2010 as the economy regains its footing.

 

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Office:  First Quarter 2008

The Washington metro area office market experienced moderating conditions during the 1st quarter of 2008:

  • Absorption was sluggish
  • Vacancy edged up
  • Leasing activity was light as tenant move-outs impacted absorption

Despite these conditions, some positive trends emerged:

  • Rents ticked up
  • The development pipeline declined, but the level remains high relative to demand

Despite softening conditions, the metro area remains one of the top performing markets in the nation.

First Quarter 2008 Market Highlights:

  • Net absorption: 1.1 million SF, compared to 5.4 million SF in 2007.
  • Sublease space: Increased by 69,000 SF. Sublease space represents 1.2% of the standing inventory.
  • Overall vacancy rate: 9.7%, up from 9.2% one year ago.
  • Direct vacancy rate: 8.5%, up from 8.0% one year ago.
  • Space under construction: 17.0 million SF, down from 19.5 million SF a year ago.
  • Pre-lease rate: 24%, compared to 35% a year ago.
  • Rents: Increased 1.6% during the quarter, on an annualized basis, compared to 2.2% in 2007.
  • Investment sales: $543 million, compared to $5.7 billion in the 1st quarter of 2007. Average sale price: $321/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 2007

Above-Average Absorption; Rents Up 2.8%; Construction Levels High, But Easing

The Washington/Baltimore flex/industrial market closed the year on sold footing. Net absorption was above-average for 2007. Although pre-leased deliveries contributed to the absorption total, healthy leasing activity played a notable role as well. Construction eased over the past 12 months, but remains high with sub-par pre-lease rates. Given favorable market conditions, rents increased 2.8%. Overall, flex/industrial conditions are healthy in the Washington/Baltimore region.

Year-End 2007 Market Highlights:

  • Net absorption: 6.6 million SF, compared to 4.3 million SF in 2006.
  • Sublease space: Increased by 481,000 SF. Available sublease space represents just 0.7% of standing inventory.
  • Overall vacancy rate: 9.5%, down from 9.8% one year ago.
  • Direct vacancy rate: 8.8%, down from 9.3% one year ago.
  • Under construction: 6.4 million SF, down from 10.1 million SF in 2006; 24% pre-leased, compared to 21% one year ago.
  • Space delivered: 6.4 million SF in 2007, compared to 6.5 million SF in 2006; 31% leased upon delivery, compared to 32% in 2006.
  • Rents: Up an average of 2.8%.
  • Investment sales: $1.5 billion, compared to $1.9 billion in 2006. Average sales price: $80/SF.
  • Land Sales:  $149.7 million, compared to $167.6 million in 2006. Average price per land SF: $8.16.

 

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

 

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Retail:  Year-End 2007

Washington Retail Market

As jobs continue to expand in the metro area, retail employment is expected to keep pace. In the 12 months ending October 2007, retail employment grew 2.1%.

The above-average income of Washington metro area residents supports a vibrant retail market.  By 2012, the Washington metro area's average household income is projected to be $110,300, compared to $73,700 nationally. Incomes in the Washington metro area grew by 21.5% from 2000 to 2007, compared to 17.8% nationally.

Although the cost of living here is somewhat higher compared to other metro areas, Washingtonians have more disposable income for all kinds of retail goods. Of note, the Washington metro area led the nation in average annual consumer expenditures for all types of goods in 2005, the most recent data available. The average annual expenditure in the metro area was 21% higher than the national average.

The Washington metro area has over 116.0 million SF of retail space, inclusive of all types of retail, in just over 1,000 shopping centers. Northern Virginia is home to 52% of the total metro retail inventory.

The metro area has 21.3 SF of retail space per capita, compared to the national average of 20.0. Although over 12.3 million SF of retail inventory has been added to the metro area since the year 2000, the area remains underserved as the growing population continues to demand retail services, particularly in the District of Columbia where there is just 7.8 SF of retail space per capita.

The Washington shopping center landscape is aging, as just over half of the shopping centers are over 25 years old, while only 16% are aged 10 years or less. New centers, along with renovations to the existing stock, are necessary to keep up with demand. However, renovations might be slow to progress, given the strength of the retail market.

According to NCREIF’s Washington area retail data, the average total investment return for the 12 months ending in September 2007 was 14.79%, exceeding the national average of 12.95%. Washington’s strong market fundamentals and high disposable income have positioned local returns ahead of the national average, and those of most other metro areas.

 

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

 

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Class A Apartments:  First Quarter 2008

Washington Metro Pipeline Begins Cyclical Decline; Absorption is Strong As Rents Continue to Increase; Vacancy Edges Up As Transaction Volume Slows 

Highlights of market performance as of First Quarter 2008:

  • The region’s stabilized vacancy rate for investment grade apartments (Class A and B) increased to 4.5% from 3.4% a year ago. But it is an elevated rate by local historic standards.
  • Rent increases for all investment grade product dipped below the long-term average of 4.3% per annum - to 2.2% since March, 2007. Class A rents grew by 1.4% during this period, compared to 2.9% at 1st quarter 2007.   
  • Net Absorption during the 1st quarter, at 3,534 Class A and B apartments, retained its 4th quarter 2007 strength, compared to earlier periods in the year. Class A absorption continued its 4th quarter 2007 rebound, at 5,330 units – 2nd in the U.S. and the highest we have seen since third quarter 2006.  Average monthly absorption at new projects declined slightly to 15 units per month.  However, this rate is still remarkable, as the number of projects marketing has nearly doubled since last year. 
  • Concessions at Class A projects continued to move higher, to 4.9% of face rent, compared to 3.4% of face rent at 1st quarter 2007.
  • Pipeline: After rising from a historically low 18,000 units in 2005, pipeline ballooned to 36,951 units in December 2007, largely driven by the reversion of condominium projects. In the 1st quarter of 2008, the pipeline appears to have begun its cyclical decline, to 35,659. While only a slight decline from year-end 2007, we believe this downward trend will continue throughout 2008. We will likely look back at 4th quarter 2007 as the peak of apartment pipeline during this business cycle.
  • Investment Sales:  2007 surpassed prior record setting years. In 2007, we identified 23 Class A building sales, consisting of over 6,700 apartment units, for $1.95 billion of multifamily Class A building sales volume. So far in 2008, we lack confirmation of any multifamily Class A building sales closed, although several are pending, and $7 millon of land to construct new apartments or condominiums. This lack of building sales compares to $135 million during the 1st quarter 2007. The land sale total is off dramatically from the $172 million recorded during the 1st quarter of 2007. This is a potential indicator of a slow-down in the pipeline of oncoming supply in future years.


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

 

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Condominium:  First Quarter 2008

Prices Holding Steady in Most Submarkets. Pipeline Continues To Shrink; Now at Lowest Level in Three Years. But Sales Velocity Remains Sluggish

The national economy appears headed into a recession according to some observers. Reverberations from the August Credit Crunch are still being felt, as the stock market is volatile and the housing market searches for traction. Job growth in the Washington metro area has slowed and is now running below the long-term average.

In the midst of this uncertainty, there are some bright spots in the Washington condo market:

  • 1st quarter sales volume of new units are up from the 4th quarter in most submarkets.
  • Prices in the District and inner suburbs have held up well given the circumstances in the market and anecdotal evidence to the contrary.
  • The pipeline of actively marketing units continues to decline to the lowest level in three years.

Highlights of market performance as of First Quarter 2008:

  • Volume: New unit sales volume (defined as net binding contracts written with security deposits up) during the 1st quarter was 516 units -- an improvement from the dismal sales performance of the previous quarter.
  • Prices: Surprisingly, concessions have decreased from a year ago. Instead, developers have opted to drop listing prices. One action nearly cancelled out the other and as a result same-store new condo prices were down just 1.2% metro-wide after concessions. Resale price declines during the past 12 months were negligible.
  • Concessions: Concessions averaged 3.5% of the purchase price in the 1st quarter, down from the 4th quarter and down 110 basis points from one year ago.
  • Pipeline: There are currently 16,195 unsold condominium units that are actively marketing in the metro area - about a third of that inventory is located in Loudoun County and Prince William County. There now is 5.5 years worth of inventory of product on the market at current rates of sales velocity in the metro area. 
  • Sales pace: Projects that have sold out in the past two years have averaged about five sales per month. New entrants to the market are few and far between these days. Upon delivery, projects are seeing buyers fail to settle -- back out of sales contracts -- from 15% to 50%.

 

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

 

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Class B Apartments:  First Quarter 2008

Rents Continue To Rise, Vacancy Edges Up. The District Continues To Be a Strong Performer

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

  • Average rent rates increased to $1,300, up 3.3% from a year ago.
  • Vacancy increased by 90 basis points to 4.4% during the same period.

Sales of Apartment Buildings:  Garden Values Still Strong

  • During the first two months of 2008, there have been two Class B apartment sales noted, one high-rise and one garden property totaling 840 units. The garden property traded at a price of $119,658 per unit and the high-rise sale averaged $239,274 per unit. Last year at this time there were three garden properties sold averaging $115,663 and no high-rise sales.  
  • During 2007 there were 46 Class B garden sales and 12 high-rise sales posted, comprising a total of 17,544 units at an average price of $125,025 per unit for garden properties and $154,336 for high-rise properties. 

 

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

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