After several delays for return to office dates by many companies, a spring return appears likely. As a result, leasing volume steadily increased in this quarter accounting for roughly 40 leases signed over 10,000 square feet, which is above the 2021 quarterly average of just over 30 deals. While leasing velocity increased, there were no deals signed over 100,000 square feet this quarter. The largest deal executed was for the law firm Foley & Lardner at 3000 K Street NW in the Georgetown submarket for 95,000 square feet. Other notable leases signed include C-SPAN, Buchanan Ingersoll & Rooney, and two deals for shared office space provider Industrious.
Supply & Demand
After a flurry of new inventory at the end of 2021 when three buildings delivered a total of 753,340 square feet, no buildings delivered in the first quarter of 2022. With no new groundbreakings, just over 2.5 million square feet was under construction in the District at the end the quarter. Of that, several large projects including two buildings in the Wharf and 2100 Pennsylvania Ave NW are expected to deliver later this year.
On the heels of positive absorption in the fourth quarter of 2021, the District registered 118,347 square feet of negative absorption. While negative, this compares favorably to the 2020 and 2021 quarterly averages of negative 310,315 and negative 652,609 square feet, respectively. The largest factor to the negative absorption in the first quarter was the Wiley Rein downsize into 2050 M Street NW for 166,000 square feet, coming out of a total of 335,240 square feet at 1750 and 1776 K Street NW. The increased deal velocity in the first quarter is a good indication of stronger demand expected in the upcoming year, as the start of the year has historically been slower for signed leases. However, headwinds from a shrinking Federal Government footprint should limit the amount of positive absorption registered in the near future.
For the first time in four quarters, direct asking rental rates decreased to end the first quarter at $56.08 on a full-service basis. This brought District rents to the lowest they have been since the third quarter of 2018. Concessions continue to remain high as labor and material costs have stayed elevated since the start of the pandemic.
Due to a lack of deliveries in the first quarter, the minimal negative absorption only caused a 10-basis point increase in vacancy to end at 17.3 percent. Before this quarter, vacancy had an average 40-basis point increase over the last two years. Office to residential conversion projects has increased as vacancy hits historic levels. The Office of the Deputy Mayor for Planning and Economic Development is looking to further motivate owners into conversions and recently issued an RFI to understand what would most incentivize them to do so. This would counter some of the predicted vacancies that will be coming from the Federal Government vacating space in the District.