Muffin Tops and Donuts: Understanding DC’s Vacancy Trends

Vacancy rates drop the higher you go in buildings and outside Washington's central areas


At the end of a decade, it’s always important to take a step back and reflect on the major trends we saw. In Washington, D.C., if you truly want to understand how the real estate market has changed since 2010, it would be helpful to sit down and enjoy some muffin tops and donuts.

Yes, as someone who has spent over a decade in real estate and the restaurant industry, I find food metaphors to be the best way to describe commercial real estate.

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Entering 2020, the overall vacancy rate in downtown D.C. is hovering around 16 percent. However, if you examine the vacancy rate on the top floors of buildings in this exact area, you might be surprised to learn that the vacancy rate drops by half — to around 8 percent for those spaces! There are just over 300 buildings in Central D.C. and the East End that are 10 to 14 stories high, and of those buildings, under 30 have vacancy on the top floor. We have seen a rush to quality and prestige in this market, and nothing is more prestigious in D.C. than a top-floor office space. Top-floor spaces in D.C. are always special, due to district-imposed building height restrictions; most offer great views of the monuments and skyline. While the lower floors of most buildings tend to take longer to lease, the top floors move quickly, creating a “muffin top” trend in the market.

I mean, who really likes the bottoms of muffins anyway?

This rush to top floors has contributed to a donut-shaped pattern in local development. Since you can’t go up in D.C., you must go out. And so despite the relatively high overall office vacancy rate, developers are still building across the D.C. region. Over 13 million square feet of office space has been delivered in the D.C. market since 2010 and there are no signs of construction slowing, with 3.7 million square feet currently under construction and delivering through 2022.

The height restrictions in D.C. are pushing most of this development outside of the traditional core and into new submarkets like NoMA, Union Market, Navy Yard and the Wharf, as well as into Maryland and Northern Virginia. Office inventory in downtown D.C. tends to be made up of larger buildings with deep floor plates. These buildings worked great over the last 50 years for law firms and government tenants, but how we work and use space has changed dramatically over the last decade.

With near-constant development outside of central D.C. and large transactions in these new submarkets — such as Williams & Connolly relocating to The Wharf — generous landlord concessions are holding down the effective rents in downtown D.C. This has created an opportunity for tenants who were traditionally priced out of downtown to capitalize on development elsewhere and this rush to new construction. Hence, we are seeing a donut effect in the office development market.

Overall, these two trends further enhance the already favorable tenant conditions that exist in the market. So long as tenants don’t need to be on a top floor in a specific submarket, they can approach the market from a position of strength. In addition, tenants in the D.C. area are benefiting from some of the largest concession packages in the country. On long-term leases in Class A buildings, tenants can expect concessions around $200-plus per square foot in free rent and tenant improvement dollars.

As we enter 2020, not only will tenants benefit from more options across the D.C. market, they’ll see even more amenities, newer products to choose from and more flexible terms. The outlook for the coming decade will also likely include increased flexibility for tenants. With more and more flexible office options in the market and more landlords developing spec suites, tenants are going to further benefit from an environment that provides more flexibility and efficiency. Don’t be surprised to see tenants seeking to take advantage of this increased flexibility and begin to view their office “space as a service.”

Between the muffin tops, donuts, and the fact that D.C. went from having zero to 18 Michelin-starred restaurants in the last decade, it’s a great time to be a tenant with an appetite in this market!

Ken Biberaj is a managing director at Savills in the Washington, D.C., region.