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Washington DC Office Report Q2 2020

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Market News

  • The second quarter was the first full quarter where COVID-19 was a major factor in both the economy and the District commercial real estate market. Most new deals remained on hold, and the majority of those that were executed were renewals and extensions. The top deals included short term renewals by the Citizenship and Immigration Services at 111 Massachusetts Ave NW and the Institute for International Education at 1400 K St NW.
  • As expected, the deal velocity in the District continued to slow dramatically in the second quarter. Palantir Technologies was the only non-Federal lease during the quarter when they renewed at 1025 Thomas Jefferson for 104,777 square feet.
  • Touring space which was a simple and often overlooked part of the initial deal process was made more difficult by the social distancing rules and stay at home orders put into place. Virtual tours have been a popular safe option during the pandemic.

Demand & Supply

  • Demand in the second quarter was down, returning 275,000 square feet to the market. For the first time since the second quarter of 2017, all three classes of buildings registered negative absorption. Class A, up until this quarter, had continued to perform strongly due to the flight to quality trend. The largest contributor to negative demand was the 80,000 square foot downsize of Winston & Strawn LLP into their headquarters at the newly delivered 1901 L Street NW building.
  • 1901 L Street NW and 1050 17th Street were the only two properties to deliver in the quarter. 1901 L Street will be the new home of Winston & Strawn LLP and Axinn, Veltrop, & Harkrider LLP for 90,000 square feet and 39,000 square feet respectively. The development was a full-scale renovation that added two floors. The other project that delivered was another full renovation located 1050 17th street NW in the CBD submarket. The 155,901 square foot building delivered vacant.
  • With the delivery of the two redevelopments this quarter, the amount of product under construction decreased to 2.7 million square feet. Construction in the District of Columbia has been steadily falling over the last three years from its peak in 2017 where more than 7 million square feet was in development. As city offices continue to reopen, we expect to see even more an increase in anticipated deliveries and groundbreakings in the upcoming quarters.

Vacancy Rates

  • The negative absorption and the continued delivery of new inventory to the market caused vacancy to increase to over 15 percent. This is not likely to be the high-water mark as the impacts of COVID-19 have yet to be fully felt. For example, sublease space is expected to increase as tenants get a handle on their space needs post-COVID-19. Sublease space had a 10-basis point increase from the previous quarter. We expect to see even more blocks of sublease space entering the market starting as early as next quarter, but likely to hit hardest by the end of 2020 and early 2021.
  • Direct average asking rents increased in the second quarter of 2020 to end at $57.15 per square foot on a full-service basis. This was in large part due to the considerable amount of high-end space that was delivered vacant to the market this quarter.

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Washington DC Office Report Q2 2020

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