The CBD submarkets are a highly sought-after market for local and international businesses. The concentration of commercial activity, people, and accessibility in the submarket incentivizes businesses to relocate and take advantage of clustering and agglomeration economies. CBDs are often considered the financial and business district of a city, driving high office, retail and residential rents in comparison to other submarkets. [i]

Recent reports suggest that secondary submarkets are experiencing significant growth of office inventory and sales volume. This trend is likely to exceed that of CBD-submarkets. A secondary submarket is an area within a larger market or city that is defined. They are typically more suburban, and have a lower density than a CBD. The demand for office space in secondary markets was on the rise, causing office rents to match that of traditional metropolitan offices. This shift in demand nationwide was noticed as early as 2011, and was further accelerated by the COVID-19 pandemic. It was speculated that this was due to tenant preference change, hybrid work schedules and office space expansions. This article reviews historical office real estate leasing and transaction trends in prevalent CBDs and secondary submarkets, and analyzes potential drivers of this shift.

Figure 1: Downtown Seattle Figure 2, Belltown/Denny Regrade [ii]

Seattle, Washington

Key Indicators of the Seattle Office Market CBD [iii] [iv] [v] Regrade Belltown/Denny [vi] [vii] The Current Market Rent (Class B) $47.70

$45.07 Year-over-Year (YOY) Rent Growth 0.2%

0.1% Historical Rent Increase 1.3%

1.0% Average Rent Growth 2.6%

=

2.6% Historical vacant (YOY).

8.7% Forecasted Average Vacancy (YOY) 16.7%

10.1% Total Asset Value $23.6 B

Market Cap Rate 5.1% $7.8 B

5.3% Sale Volume (12 Month) $2.2B

$302M Delivered Per Square Feet (Past8Q) 1,059 6,657

2,925,753

Table 1 - Seattle CBD Belltown/Denny Regrade Office Marketing Key Indicators

In 2019, Seattle CBD saw a peak in office sales volume, with other area submarkets following suit in Q1 2020. [viii] Seattle saw a decrease in the overall cap rate and increased development in all of its submarkets due to this capital flow. Belltown/Denny Regrade is the submarket that has performed the best in the city, other than the CBD. Belltown/Denny Regrade are a culturally rich and vibrant district that is located just north the CBD district. The submarket is known as bustling with activities. It houses affluent residents, upscale restaurants and art galleries, as well nightclubs. [ix] The submarket has notably been making historically high sales volume in the past couple of years. Amazon's active presence within the submarket, as evidenced by their extensive office space presence and their development activity to expand or relocate their offices. With 5 million square feet of office space, Amazon is now the dominant firm in the submarket, encouraging other companies to move into the area.

However, the COVID-19 Pandemic left a lasting and lingering impression on the city's entire office market. This halted rapid growth. The previously healthy real estate market was left in a distressed condition for the rest of 2020, with a large oversupply of office space and much more under construction. Although there are signs of a rebound in 2021 and 2022, the recovery lags due to the abundance of office space inventory, especially for the Seattle CBD submarket. Belltown/Denny Regrade was also negatively affected by the pandemic. Their YOY rent growth fell to 0.1%, compared with the 10-year average 4.3%. This submarket is expected to see YOY growth of 2.6% by 2022, similar Seattle CBD. The average vacancy rate for this secondary office market is expected to rise to 10.1%. However, it will still be 6.6% lower than that of the CBD.

Companies' preference to live near Amazon and rising demand for high-end urban areas are two factors that have contributed to the submarket's steady recovery. As younger workers seek to live-work/play environments in hybrid work cultures, they are driving the rise in demand. In order to attract high-skilled workers to their companies, companies are now incentivised to move closer to these populations. Moving has the additional benefit of lower rents at newer, better-amenitized offices.

Figure 3: Downtown Washington D.C. HTML4_ NoMa

Washington D.C.

Washington D.C. Office Market - Key Indicators CBD[xiii] [xiv] NoMa[xv] [xvi] Current Market Rent, Class A: $54.81

$49.87 YOY Rent Increase -0.2%

-1.4% Historical Rent Growth 2.2%

=

2.2% Expected Average Rent Growth 2.7%

2.8% Historical Vacancy (YOY) 9.1%

14.3% Forecasted Average Vacancy (YOY) 16.0%

6.6% Total Asset value $26.6 B

Market Cap Rate 5.8%

6.1% Sale Volume (12 Month) $484.2M

$509.1M

Table 2: Washington D.C. CBD NoMa Office Market Key Indicators

Washington D.C. CBD, with approximately 50 MSF of office space, has always been a desirable trophy office space. This area boasts a total value of $26.6B and an asset value of $26.6 B. This submarket has been known for its high-quality office rents and affordable office options. It is also a prime location that has made it a popular market for many companies. The pandemic has hit this submarket hard. There was historically negative net absorption in this area and very few transactions during the first half of 2021. This market's recovery outlook is expected to be slow and hard as reports indicate slowdowns in leasing and poor net absorption.

The slow recovery can be attributed in part to the submarket's ageing office stock. More than half of existing office spaces were built before 1980. The amenities and specifications of these older assets are not suitable for potential tenants or investors. The modern leasing landscape demands newer office layouts which can be flexible and allow for hybrid workspaces. Because of the CBD's aging office buildings and high rents (the highest rates on the market), it is difficult for other areas to take over the CBD office market. With its large inventory of office assets and inflowing inventory from other markets, the CBD is continually experiencing office oversupply and stagnant demand. The CBD is now in a quandary as they try to decide whether to create new offices in the middle of oversupply.

Tenant prospects in offices are now exploring other markets for expansion and relocation. Many articles report capital flowing into Bethesda East End Tysons Corner and Reston. NoMa has been the most prominent in this expansion. [xviii] CoStar recognizes NoMa in Washington D.C. as the top institution market, with the fastest population growths. NoMa has shown resiliency throughout the pandemic and has a positive prospect for a strong recovery. According to current reports, the submarket's vacancy rate is 7.1%. It is expected to fall to 6.6% in the future. This rate will be 10% lower than CBD. The CBD has had a greater sales volume than NoMa. However, rents have been rising at the rate of CBD. Overall, NoMa will be Washington D.C.'s next major submarket, boosted by its growth, resilience and tenant preferences over a few years.

Conclusion

Many markets saw signs of decreased investor interest in CBD offices market prior to the pandemic. This was due to the shifting demographic workforce or tenants' need for more modern office spaces. The COVID-19 epidemic had profound effects on the office asset category. This led to historically low performance and absorption and also accelerated existing workplace trends. The CBDs are a sought-after neighborhood but have a short lifespan due to inflexible office layouts and unpopular working environments. This motivates firms to move to other submarkets. Some submarkets boast vibrant mixed-use areas that are attractive to both firms and talent. It will be interesting to see the future of offices in the CBD as stakeholders and city planners evaluate this transition and strategize ways to increase the flow of capital back into these submarkets.

Refers

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[ii] Martin Selig Real Estate, 2018. Neighborhood Spotlight: Belltown. [online] Martin Selig Real Estate. Available at: https://martinselig.com/neighborhood-spotlight-belltown/ [Accessed 2 May 2022].

[iii] CoStar, 2022. Seattle CBD 22Q1 Office Submarket Report. 22Q1 Office Submarket Submarket Report. [online] Available at: https://www.costar.com/ [Accessed 14 March 2022].

[iv] CoStar, 2022. Seattle CBD 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: https://www.costar.com/ [Accessed 14 March 2022].

[v] Cushman-Wakefield, 2022. Seattle CBD 21Q3 Office Market Report. 21Q3 Office Market Report. [online] Available at: https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/seattle-bellevue-marketbeats [Accessed 15 March 2022].

[vi] CoStar, 2022. Belltown/Denny Regrade 22Q1 Office Submarket Report. 22Q1 Office Submarket Submarket Report. [online] Available at: https://www.costar.com/ [Accessed 14 March 2022].

[vii] CoStar, 2022. Belltown/Denny Regrade the 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: https://www.costar.com/ [Accessed 14 March 2022].

[viii] CoStar, 2022. Seattle CBD 22Q1 Office Submarket Report. 22Q1 Office Submarket Submarket Report. [online] Available at: https://www.costar.com/ [Accessed 14 March 2022].

[ix] Crowley, W., 1999. Seattle Neighborhoods: Belltown-Denny Regrade. [online] Historylink.org. Available at: https://www.historylink.org/File/1123 [Accessed 17 March 2022].

[x] Pryne, E., 2012. Amazon stamps its mark on downtown Seattle. [online] The Seattle Times. Available at: https://www.seattletimes.com/business/amazon-puts-its-stamp-on-downtown-seattle/ [Accessed 17 March 2022].

[xi] Clabaugh, J., 2017. Met Square is set for a facelift in Downtown DC. [online] wtopnews. Available at: https://wtop.com/business-finance/2017/10/major-renovation-prominent-dc-building-met-square/ [Accessed 2 May 2022].

[xii] Long Foster Real Estate, N/A. NoMa Washington District of Columbia. [online] Long Foster Real Estate. Available at: https://www.longandfoster.com/DC/Washington/NoMa [Accessed 2 May 2022].

[xiii] CoStar, 2022. Washington - DC CBD 22Q1 Office Submarket Report. 22Q1 Office Submarket Survey Report. [online] Available at: https://www.costar.com/ [Accessed 28 March 2022].

[xiv] CoStar, 2022. Washington - DC CBD 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: https://www.costar.com/ [Accessed 28 March 2022].

[xv] CoStar, 2022. NoMa 22Q1 Office Submarket Report. 22Q1 Office Submarket Research. [online] Available at: https://www.costar.com/ [Accessed 28 March 2022].

[xvi] CoStar, 2022. NoMa 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: https://www.costar.com/ [Accessed 28 March 2022].

[xvii] 2016. Growing Trend – The Benefits of Locating an Office Product in Mixed Use Projects and Neighborhoods. [ebook] HRA. Available at: https://www.nomabid.org/wp-content/uploads/sites/4/2017/09/HRA-Study-2016.pdf [Accessed 20 March 2022].

[xviii] Banister, J., 2017. Tale Of Two Cities - D.C.'s Core Market for Offices Fails As Emerging Markets Gain. [online] Bisnow. Available at: https://www.bisnow.com/washington-dc/news/office/tale-of-two-cities-dcs-core-office-market-struggles-as-emerging-areas-grow-79970 [Accessed 19 March 2022].