Historically the fourth quarter has strong leasing velocity, however, the fourth quarter of 2020 had only two deals over 100,000 square feet signed in the District. Skadden signed a lease for 199,902 square feet in the East End submarket and the United States Small Business Administration signed a 266,163 square foot extension at 409 3rd Street SW.
The Federal government continued to be one of the few tenants that moved forward and signed leases. They accounted for three of the top five deals during the quarter.
Demand & Supply
For the third straight quarter, the District has registered over 200,000 square feet of negative net absorption. The fourth quarter of 2020 had the most significant negative absorption of the year registering just over 600,000 square feet of negative demand. This brought the year-end absorption to negative 1.03 million square feet. This was the second largest drop in the past ten years, second to 2016 when 1.23 million square feet was returned. Most of the negative demand had come from smaller to mid-sized blocks of space but the fourth quarter also had some tenants give back considerably larger blocks of sublet space.
At the end of the year, there was 2.90 million square feet under construction. The uncertainty of tenant demand in the upcoming quarters may slow new construction into 2021.
Prior to 2020, the overall vacancy rate in the District was rising and the pandemic further exacerbated this trend as tenants continued to give back space throughout the year. The overall vacancy rate rose 40 basis points from the third quarter and over 100 basis points from the start of the year to end 2020 at 15.5 percent.
Direct average asking rental rates did not decline as severely as tenant demand would imply. The fourth quarter ended with an average direct rental rate of $57.07 per square foot on a full-service basis. This is up from the start of the year when rents were at $56.72. Owners have maintained face rents throughout the pandemic but the deals that have been signed showed a significant increase in concession packages lowering the net effective rents.