By: Jon C. Olmstead, Executive Managing Director, Tenant Advisory Group
Over the past decade, there have been dramatic changes in overall business models and real estate decision making for the Non-Profit and Association sectors in Washington, DC. The fundamental drivers have evolved from “bricks & mortar” considerations of the past, to real estate decisions that focus on supporting an organization’s mission, brand, and improving overall operations – while also reducing overall real estate occupancy costs. Finding the balance between the cost of real estate and the impact it has on an organization’s mission, and the many benefits it can provide, is key to a successful real estate solution. Such a solution that supports the business, financial, and operational drivers and provides long term flexibility to place the organization in the best position for long term success, is the ultimate goal.
The nonprofit and association community is unique compared to other industries, particularly in real estate needs. In Washington, DC responding to those needs must also factor in recent movements in the local real estate market. The DC real estate market is complex and always evolving. Over the past two decades we have witnessed a shift from being a primarily locally-based group of real estate owners and investors to a ‘global ownership’ city, with a majority of property owners being REITs (Real Estate Investment Trusts), pension funds, or internationally-based institutional investors who answer to shareholders. These owners have very different motivations and priorities than local, often family-oriented, owners. Understanding building ownership structures and the debt, equity, and pro-forma of each building is key to negotiating the most financially aggressive transaction. Without such information, any tenant would be missing key components that may directly hinder the ability to achieve the best financial solution with the most flexibility.
Possessing an accurate view of the market’s overall direction and trends is key. More importantly, being aware of changes in availability, pricing, leasing velocity and absorption, and what is causing it in order to understand what will impact future trends, is vital. Arming oneself with a thorough analysis of what motivates each landlord, gives tenants the advantage of evaluating the market and negotiating with a greater level of transparency.
Federal spending has direct and indirect effects on nonprofits. By cutting funding to the areas in which nonprofits operate, the budget shapes demand for their services. Yet the federal government is also a vital source of direct revenue for many nonprofits through grants, contracts, or fees for goods and services. Budget cuts can increase demand for nonprofit services while cutting the resources to supply that demand.
Our research team’s recent analysis has found that continued economic uncertainty has kept many business leaders from executing plans for growth. The downtown Washington leasing market continues to experience a softening of demand, coupled with an increase in existing re-let supply like never before. What’s really happening is that the Class B market is dwindling for nonprofits. Trophy and Class A inventory is increasing while the B market is going down due to the shortage of land and the renovations of older buildings. Some associations are being priced out of Downtown DC altogether. Despite the lack of affordable Class B options, overall vacancy has increased steadily over the past two years, presenting tenants of all size requirements with an unprecedented number of space options, but for a price. It is required for more budget conscious organizations to consider opportunities either in emerging DC markets like, NoMa, the Capitol Riverfront or the suburban Maryland, Arlington, Rosslyn-Ballston corridor and Downtown Silver Spring markets.
Another prominent change is the increased advantage tenants have in the real estate market. Those tenants that are ready to strike when the ideal opportunity presents itself will achieve the most beneficial financial business terms, achieving concession packages at all-time highs with flexible terms. Tenants willing to commit to longer terms (10+ years) are increasingly offered improvement allowances in excess of $100 per square foot and rental abatement in the nine to 12+ month range. Rental rates have generally remained stable in the core markets (East End, CBD, and Georgetown/West End); while non-core markets (NoMa, Uptown, Capitol Riverfront and Southwest) are seeing fairly extensive rental rate compressions.
Despite all of the changes being made in the real estate market, inventory growth in Washington, D.C. has remained stagnant as the new construction supply has remained constrained and the inventory of available entitled land continues to shrink. This dynamic has become a particular catalyst as development alternatives have been required to span horizontally across the city versus vertically. As a result, the downtown leasing marketplace represents a pure bifurcation with tenants seeking re-let alternatives, receiving aggressive terms, and those seeking new construction facing all-time high rent levels.