DC Region Looks Ripe for Investments in 2019

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As 2019 gets underway, the Washington, D.C. region’s commercial real estate market is “well-positioned for a solid year,” according to a new report from Avison Young that touts the area’s “strong economic performance and expanding tenant base” as drivers of occupancy gains in the office and industrial sectors in 2018.

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The report, titled “2019 North America, Europe and Asia Commercial Real Estate Forecast,” covers commercial real estate sectors in 68 markets.

The D.C. region “remains at the top of investors’ shopping lists but for different reasons than it historically has,” John Kevill, a principal of Avison Young, said in a prepared statement. “Long sought after for its relative stability due to the presence of the federal government, Washington is increasingly drawing investors looking for value-add deals.” Kevill added that previously “sleepy submarkets” in the region have seen opportunities for high growth due to new residents and advancements in technology, among other factors.

The region’s office market “remained predominantly tenant-favorable” in 2018 as it gained 2.7 million square feet in occupancy, mostly in Class-A space, according to the report. At 14.6 percent, the overall vacancy rate remained unchanged year-over-year.

Much of the region’s office absorption in 2018 was due to pre-leasing in buildings that were completed during the year such as at 1100 15th Street in the Central Business District where Fannie Mae leased 90 percent of the building and 1000 Capital One Drive in Tysons, Va. where Capital One leased 100 percent of the property, Donkerbrook said.

In recent years, the region’s office market has benefited from the relocation of large companies such as Nestlé, according to the report. One of the most notable relocations of 2018 was the Whittle School, “a new-to-the-market specialty user [that] leased an entire 666,000-square-foot property in the District,” according to Donkerbrook. Whittle leased the space to establish a D.C. campus at 4000 Connecticut Avenue NW for a global private school to house up to 500 students in dormitories, CO previously reported.

The report forecasts that the region’s overall office vacancy rate is expected to move slightly higher to 15.1 percent by the end of 2019 “as a supply-demand imbalance persists.”

The region’s industrial market saw demand “coming from a wide spectrum of users” in 2018 including Amazon, which opened a new fulfillment center outside of Baltimore,  as CO previously reported. Avison’s report also references Sofive Soccer Centers, which signed a 55,000-square-foot lease for a warehouse in Rockville, Md. that it planned to convert into an eight-field soccer facility, per Bisnow.

The construction of data centers in Northern Virginia continued in 2018. Atlantic.Net opened a 22,000-square-foot data center hosting facility at 1807 Michael Faraday Court and CoreSite Realty made plans to open a data center at the at the 22-acre Sunrise Technology Park, both in Reston, Va., while Sentinel Data Centers acquired a 280-acre Washington Dulles Gateway site in Loudoun County, Va. for $82.5 million to build a data center, CO previously reported. “But this trend will be difficult to sustain because available land in the area is becoming even more scarce and expensive,” according to Avison’s report.

Another observation in the industrial sector, per the report, was a lack of affordable light-manufacturing space, which “pushed demand to tertiary submarkets like Frederick County where vacancy rates fell substantially.

With preleasing levels in the region’s industrial market accounting for 81 percent of incoming supply, vacancy rates will likely drop in 2019 “and allow rental-rate growth to accelerate,” according to Avison.

The report also made a brief note regarding the region’s retail sector that experiential concepts such as cashier-less checkout and Capital One Cafés “are being introduced to attract more business.” Lia Dean, the head of bank marketing and retail at Capital One, previously told CO that the idea for the cafés, which offer Peet’s Coffee drinks, pastries, free Wi-Fi and meeting spaces, is to provide “warm, welcoming, physical locations where you can get the support and advice you need… Experience is central to the model.”