With the continued rollout of the COVID-19 vaccine, the market started to see an increase in new deals closing in the first quarter of 2021. The two largest deals signed this quarter were both government renewals. The DC Department of Health leased 205,590 square feet and the United States Department of Veteran Affairs signed for 131,424 square feet. The private sector saw a resurgence in the first quarter with three new deals over 50,000 square feet signed. PCORI and American Bankers Association both signed for 85,000 square feet at 1333 New Hampshire Avenue NW in the CBD. BIO signed for 60,809 square feet in the East End.
Supply & Demand
Since the onset of the pandemic many construction projects had been delayed or put on hold as developers have waited to see when demand would pick up. Several projects that were expected to start on a speculative basis have since altered plans, and these delays resulted in the delivery of only 300,000 square feet during the first quarter. The largest project that delivered was the build-to-suit for the DC Department of Transportation at 250 M Street SE for 227,948 square feet in the Capital Riverfront submarket.
Demand in the market has fallen for the fourth consecutive quarter. The first quarter registered negative 1.60 million square feet of absorption, which was a larger drop than the previous three quarters combined. The largest portion of this has been in the works for several years. The Citizenship and Immigration Services’ (CIS) move out of the District into Maryland was announced in the summer of 2017. The new headquarters siphoned roughly 620,000 square feet out of the District from five different DC buildings. Multiple buildings are reevaluating adaptive reuse strategies as space vacates.
The overall average direct asking rate decreased significantly from the end of 2020, dropping from $57.07 to $56.65 per square foot on a full-service basis. A considerable amount of the space that came to the market was vacated from lessor quality product, resulting in dropping rates.
As a result of the substantial negative absorption that hit the market in the first quarter, vacancy increased 100 basis points. This is over 200 basis points above where the rental rate stood a year ago. While the move out of the District by CIS was expected, ramifications from COVID-19 have further exacerbated the vacancy increase. Tenants have in many cases let their leases expire or downsized, directly corelated to the pandemic. The only quality of building not as adversely affected by this is the class C product. Vacancy has remained largely unchanged in the past three years, increasing only by 30 basis points. Class A and B quality on the other hand have increased by 270 and 580 basis points, respectively.