Preleasing for buildings under construction in downtown D.C. is at all-time high.

Published January 8, 2014 by Paula C. Squires

The 1.5 million square feet of office space under construction in downtown Washington, D.C., is 79.2 percent preleased, an all-time high for the market, according to a fourth-quarter office market report for the Washington region from Jones Lang LaSalle.

The overall construction pipeline in the metropolitan Washington region (including the Virginia and Maryland suburbs) of 4.4 million square feet is 58.5 percent preleased, significantly above the long-term average of 47.3 percent, mostly because not many new buildings are going up.

“The Washington market always tightens from the top down, and there are limited large blocks of new, efficient space,” Mike Ellis, mid-Atlantic market director, Jones Lang LaSalle, said in a statement.

Large tenants with pending lease expirations must start their search process early to preserve the option of anchoring a new development or risk being confined to second-generation space, added Ellis.

The pullback in new construction will have an impact on the metro D.C. office market during the next 24 months. Although a few submarkets in the region, particularly North of Massachusetts, have ample new space options available, most vacancy across the region is becoming concentrated in Class A and Class B assets — buildings not well suited for efficiency-minded tenants.

“New construction and groundbreakings have slowed significantly, and, as a result, buildings already in the pipeline are exceptionally well preleased,” Scott Homa, vice president research, Jones Lang LaSalle, said in a statement. “The fact that new supply is well aligned with tenant demand reinforces the fact that market dynamics across the Washington region have stabilized and that the tenant-favorable environment will not last much longer.”

According to JLL, the passage of a federal budget, scaled back spending cuts and continued improvement in the economy suggest that a resurgence in tenant demand could be around the corner. Many tenants already are operating in a lean and efficient manner. With corporate profits rising, tax and regulatory outlooks gaining clarity and companies sitting on stockpiles of cash, capital investment in people and facilities could spark a rapid turnaround in the regional office market.

JLL’s report says the region’s total office vacancy rate stood at 16.2 percent at the end of the fourth quarter.  The asking rent for Class A properties was $40.04 per square foot.