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Washington DC Office Report Q2 2021

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As COVID-19 cases continued to fall in the District, tenants began to return to the office or have plans to return in the coming months. Deal velocity, touring and tenants in the market looking for space have also increased as the end of the pandemic is finally in sight. The top deals for the second quarter had no deals over 100,000 square feet, with the largest being from Boston Consulting Group which leased 97,779 square feet at 655 15th Street NW. Private sector leasing continued to gain momentum as six deals over 50,000 square feet were signed this quarter compared to just three last quarter. New/relocation leases continued to outpace renewals making up seven of the top ten transactions done for the quarter.

Supply & Demand

During the second quarter, four small buildings delivered totaling 174,679 square feet. The amount of square footage under construction in the District increased to almost pre COVID-19 levels, eclipsing three million square feet for the first time in over a year.

Despite increased tenant activity in the market the second quarter of 2021 registered the fifth consecutive quarter of negative absorption. This quarter, 613,392 square feet was given back in the District bringing the year-to-date absorption to negative 2.3 million square feet. The Federal Government continued to shrink their footprint in the District in order to cut real estate costs. This will be further exacerbated as the work from home practices are solidified. Prior to the pandemic this strategy was already in place and was accelerated by the forced work from home mandates put in place during the lockdown. In contrast to last quarter where there was one substantial move out of the city, by the U.S. Customs and Immigrations Services into Suburban Maryland, the negative absorption in the second quarter came from many smaller moves and downsizes.

Rental Rate

For the third quarter in a row direct average asking rental rates decreased in the District. This quarter rents dropped by $0.43 to end at $56.22 per square foot on a full-service basis. Rental rates decreased among all classes of space with the most significant decrease occurring in class B space where rents fell by $1.14 to end the quarter at $50.57 per square foot.

Vacancy

The negative absorption in the second quarter continued to push vacancy higher for the eighth quarter in a row, ending at 16.6 percent. While vacancy was above the previous quarter’s rate, the removal of inventory for renovations tempered the increase. Vacancy is likely to continue to rise for several reasons. The Federal Government will continue to result in a net loss of space leased in the District for some time. Additionally, the after affects of COVID-19 have not yet fully been realized by the market. While some available sublet space has been pulled off the market, there is likely considerable space that will be shed when tenants are fully back in the office and begin to understand their space needs. If the tenants adopt a hybrid work environment such as Capital One had recently announced, square footage per employee may see a reduction. Lastly, the construction pipeline started to increase after being largely shut off for several quarters. Developers are once again engaging the market and construction starts will increase.

 


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Washington DC Office Report Q2 2021

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