It’s no secret that office vacancy is at a near high point in the District of Columbia. With a vacancy rate of 11.5%, over 14 million square feet remains vacant and there are a multitude of options for tenants throughout the market. A result of this scenario is that concessions- such as free rent and tenant improvement packages- that owners use to lure tenants amid a multitude of options, are also at a high point. So, how are rents holding up? While average face rents have declined slightly over the past twelve months, average effective rents have fallen 10.6% in the same time period. An analysis of third quarter transactions indicates that while still elevated, concessions appear to be topping out. Net effective rents in the third quarter of 2014 for non-renewal transactions with over 7 years of term averaged 90 percent of the base rate, down only slightly from 93 percent for the third quarter of 2013 and 93 percent for the third quarter of 2012.
For the third quarter of 2014, the average total value of free rent and tenant improvement allowances equated to nearly two years of the total average annual rental income for the term of the lease. While this seems like a staggering amount, owners are being rewarded with additional term to justify the expenses. The two years of rental income was up from a year and a half in 2012, but is flat over 2013 levels. It is likely concessions will trend down as vacancy levels out. With only two options for users larger than 150,000 sf in the CBD, concessions have likely reached their peak in that submarket.
By: Nathan Edwards
Director of Research, Cassidy Turley - Washington, D.C.
Email Nathan: Nathan.Edwards@cassidyturley.com
Follow Cassidy Turley on Twitter: @CassidyTurleyRE
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