The DC leasing hangover continued in the fourth quarter with just four deals over the 100,000 square foot mark. Unlike the previous quarter, four out of the top five deals were not GSA leases and three out of the five were non-renewals. The largest private sector deal was PWC at 655 New York Avenue for 198,316 square feet while the largest Federal tenant was the Department of Parks and Recreation at 1275 1st Street for 103,495 square feet.
WeWork halted any new leases to the market and it remains to be seen if they will keep all of their existing obligations. That has not stopped some shared office providers from strategically taking space in the market. Industrious at 650 Massachusetts Ave NW was the most recent when they signed for 35,598 square feet in the Class A office building.
Demand & Supply
The delivery of 1900 N Street NW and Capitol Crossing at 250 Massachusetts Avenue NW accounted for all of new space delivered to the market. Capital Crossing delivered almost entirely vacant, while 1900 N Street delivered just over a quarter vacant.
With the delivery of just over 800,000 square feet of new product to the market, the amount under construction in the District dropped to 3.8 million square feet. There are several large projects slated to break ground in early 2020. The current construction pipeline is well below the end of 2018 and 2017 totals, which were 4.2 and 7.0 million square feet, respectively.
Demand in the fourth quarter was 62,204 square feet, however, this was not enough to push absorption positive for the year. Despite WeWork no longer being a driving factor for absorption in the market other shared office providers were the impetus for positive demand, the most impactful being the move-in by Convene.
The minimal positive net absorption was not enough to counteract the delivery of 800,000 square feet of new inventory to the market, resulting in increased vacancy for the third straight quarter. At 14.3 percent, it is well above the five-year average of 12.4 percent and the ten-year average of 11.5 percent. WeWork’s moratorium on expansion, coupled with continued new developments breaking ground is expected to continue to propel vacancy rates higher.
Despite rising vacancy and minimal demand, rental rates continue to increase in the District ending 2019 at $56.72. This $0.04 rise from the start of the year. The delivery of high-end space continues to be the cause of the increased asking rents. Net effective rents have remained status quo if not decreased from rising concession packages offered by landlords.