The second quarter of 2020 was largely affected by COVID-19. Stay-at-home orders shuttered offices and required remote work from employees across the region. Towards the end of the quarter, the stay-at-home orders were being slowly lifted. While some tenants began to cautiously allow employees to go back to work, a large portion were still allowing remote work due to health concerns.
While COVID-19 slowed leasing activity, large deals that were already close to completion were executed. Microsoft signed for just under 400,000 square feet in Reston, City of Alexandria leased office space for 215,806 square feet at 4850 Mark Center Drive and Walmart leased 162,357 square feet at 2245 Monroe Street in the Herndon submarket.
Demand & Supply
Absorption for the quarter based on commencement was 543,402 square feet. Class A product was the only type to register positive demand, ending the quarter with just under 750,000 square feet of net absorption. Reston and Herndon saw the majority of this demand due to major moves by Amazon Web Services, Leidos, and Neustar. Demand for Class B product remained stable, giving 57,202 square feet back to the market. Class C product did not fair as well, giving back nearly 150,000 square feet during the second quarter.
The most notable deliveries were both in the Reston submarket. 1906 Reston Metro Plaza delivered 212,957 square feet and is the site of Neustar’s new headquarters. They consolidated from two buildings in the Route 28 North submarket. 1750 Presidents Street also delivered in Reston, adding 276,000 square feet to the inventory. Leidos is the sole tenant in the building.
No new buildings broke ground during the second quarter, ending with 3.24 million square feet under construction. Most projects underway continued with only minor delays due to COVID-19 restrictions. While Amazon’s HQ2 has been prepping their site and clearing dirt, it is expected to be the next big project to officially break ground as foundation work begins.
Vacancy & Rental Rates
Overall direct vacancy remained flat during the quarter, ending at 16.2 percent. While the market had considerable absorption, new deliveries offset that demand. The effects of COVID-19 did not have a significant impact on sublet space during the second quarter. As restrictions are lifted and companies reopen, space plans will be closely reevaluated in the coming quarters, potentially causing more sublet space coming to the market.
Class A vacancy fell from 17.3 percent to 17.0 percent during the quarter. Class B space dropped 10 basis points to 17.3 percent due to a demolition taking inventory off the market, while class C product ended the quarter at 10.3 percent.
Direct average asking rents increased in the second quarter of 2020 to end at $32.88 per square foot. This was a $0.08 increase from last quarter and a $0.18 increase from a year ago.