The third quarter of 2020 was met with negative absorption. This was primarily due to numerous small to medium move-outs with little move-in activity due to the effects of COVID-19 slowing down leasing velocity. Many companies around the region were still utilizing work-from-home policies during the quarter and more space was being vacated in the market. Sublet availability started to see large increases as tenants who are not utilizing their space fully are looking to shed unneeded square footage.
Four of the top five leases were renewals. All were either Federal Government tenants or government contractors, which mimics the leasing since the pandemic began. Only one lease was over 100,000 square feet, which was a three-year renewal by USPS at 1735 N Lynn Street in Rosslyn. The largest government contractor lease was The Aerospace Corporation who renewed at 4851 Stonecroft Boulevard in the Route 28 Corridor South submarket for 88,094 square feet.
Demand & Supply
Absorption for the quarter, based on commencement, was negative 706,349 square feet. All classes of office product saw demand fall; the last time this happened was the first quarter of 2016. The negative absorption was caused by numerous small/medium blocks of space coming to the market and was a combination of both direct and sublet space. Year-to-date absorption was negative 257,088 square feet at the end of the quarter.
No new buildings delivered or broke ground during the third quarter, ending with 3.66 million square feet under construction. Amazon’s HQ2 continued site work and it is expected to be the next big project to officially break ground as steel begins to go up.
Vacancy & Rental Rates
Overall direct vacancy increased 34 basis points during the quarter, ending at 16.6 percent. This is the same rate from Q2 2019, which had dropped as low as 16.1 percent in Q4 2019, before increasing again. The sublet vacancy rate is 0.8 percent; however, the availability rate is higher as tenants started to test the market to see if their space has will garner any interest during the pandemic.
Class A vacancy increased from 16.9 percent to 17.5 percent during the quarter. Class B space increased 30 basis points to 17.7 percent and Class C product ended the quarter at 10.4 percent.
Direct average asking rents increased during the third quarter of 2020 to end at $33.32 per square foot. This was a $0.44 increase from last quarter and $0.32 higher than a year ago when the rate was $33.00 per square foot. This is likely due to the volume of space coming to the market this quarter, however, owners have been generous with concession packages to get deals done and to attract tenants, bringing the effective rent down.