With the increase of COVID-19 cases caused by ongoing variants, the District’s real estate market outlook has once again become murky. Most local companies had eyed Labor Day as an all hands back to work goal which subsequently came and went with many tenants pushing back their anticipated full scale physical office return to an undetermined date. Despite this bump in the road, deal velocity in the District was strong, building upon an active second quarter. Two deals over 100,000 square feet were signed in the third quarter with the US Department of Veterans Affairs renewal at 1800 G Street NW being the largest. The private sector maintained momentum capturing seven of the top ten leases done in the quarter, led by Dentons’ 126,876 square foot renewal at 1900 K Street NW.
Supply & Demand
After a light second quarter for delivered buildings, the third quarter continued the trend delivering no new product in the District. In comparison the five-year quarterly average for deliveries was just over 500,000 square feet per quarter. Year-to-date 2021 is averaging 152,300 square feet delivered per quarter while 2020 averaged 359,738 square feet per quarter. Under construction product remained at 3.2 million square feet. This included Signal House in the Capitol Hill submarket and the Historic National Bank of Washington office conversion in the East End, both of which are expected to deliver in the fourth quarter. Also of note was the SEC award of their new headquarters to Douglas Development which will construct Financial Plaza at 60 New York Avenue NE. The SEC expressed they will not move into the new HQ until 2025 at the earliest.
While deal velocity increased recently, demand continued to be negative for the sixth consecutive quarter. Demand in the third quarter was -442,217 square feet bringing the year- to-date net absorption to negative 2.7 million square feet. While still negative it is an improvement from the first half of the year which averaged negative 1.1 million square feet per quarter. While tenants have started to evaluate their space needs and tour velocity increased which was encouraging, COVID-19 variants continue to hamper the long-term decision making vital to a full recovery.
The trend of decreasing overall asking rates which was seen in the past three quarters ended this quarter as rates remained at $56.22 full service. Class A rents dropped slightly to end the quarter at $60.12 per square foot, over a dollar decrease from the markets high water mark in the third quarter of 2018 when the rate was $61.35.
Continued negative demand resulted in vacancy rates rising for the ninth straight quarter ending the third quarter at 16.9 percent. In just three years vacancy has increased by 450 basis points and over 250 basis points from the start of 2020. Despite the good news for the District about the Bureau of Land Management returning their headquarters to the region, it is unlikely to have a positive impact on commercial vacancy. Since they fall under the GSA umbrella, it is anticipated they will move into federally owned space, having little affect on commercial vacancy.