Leasing activity was led by Microsoft who inked another deal in Northern Virginia, this time in the Rosslyn submarket for 180,000 square feet at 1300 Wilson Boulevard. This new requirement was the largest lease signed during the first quarter. The only other deal signed over 100,000 square feet was by the United States GSA at 4755 Meadow Drive for 104,000 square feet. Fundamentals in the market softened, with substantial negative absorption totaling 1.83 million square feet causing vacancy to rise. Overall asking rental rates dropped slightly as well.
Supply & Demand
Demand in Northern Virginia fell dramatically during the first quarter, totaling negative 1.83 million square feet. This is the largest drop in demand in the market since the COVID-19 pandemic began. Multiple contractions and consolidations contributed to this drop. The Environmental Protection Agency (EPA) relocated from 2777 Crystal Drive to the Wilson Jefferson Complex in DC which is federally owned and not considered part of Colliers inventory. PWC consolidated their footprint in the region resulting in a relocation out of 1800 Tysons Boulevard. All three classes of space had negative absorption, with Class A seeing the largest drop with negative 1.23 million square feet returned.
The first quarter had 241,050 square feet deliver and 4.55 million square feet of construction was underway, up from the same time last year when it stood at 4.20 million square feet.
The overall average direct asking rate decreased $0.14 during the first quarter. The increase of space coming to the market from the lack of demand had a large effect on this. Class B product had a significant drop in asking rate, dropping $0.30 to end the quarter at $31.13 per square foot. Class A space saw a slight increase, rising $0.06 cents across the market to end at $37.23 per square foot. Over the past few quarters, rental rates had remained flat, however, it was expected that the continued negative absorption and slower leasing activity would lead to dropping asking rates which were realized in the first quarter of 2021.
With the increase of space coming back to the market, the overall vacancy rate ended the quarter at 17.9 percent, a 100-basis point increase from the start of the year. This is up from 16.2 percent a year ago and is the highest it has been since the fourth quarter of 2017 when the rate was 18.1 percent. Class A product had the largest jump in vacancy, rising from 17.6 percent to 19.1 percent during the quarter. Much of this comes from over 1 million square feet of space being returned to the market. The combined Class B&C rate increased as well, however, not as substantially as the Class A rate. The combined B & C vacancy rate increased 60 basis points to end the quarter at 16.9 percent.