The continued influx of new COVID-19 variants has made full-scale back-to-work initiates difficult to implement. Despite that uncertainty, tenants are starting to make long-term decisions about their space needs which had led to an active fourth quarter in leasing volume. Five leases were signed over 100,000 square feet, albeit three out of the five were government renewals, the largest coming from the DC Government who signed for 543,798 square feet in the Southwest submarket. The lone private sector deal in the top five leases for the quarter came from law firm Gibson Dunn & Crutcher who signed for 163,750 square feet in the new construction project at 1700 M Street NW in the CBD. Along with having more active leasing among larger users, the market had numerous 20,000 to 50,000 square foot leases including Industrious, Deloitte, TikTok, Ballard Spahr, and Freedom Forum, showing the diversity of industries committing to space in the market.
Supply & Demand
After no deliveries in the third quarter, the fourth quarter delivered over half of 2021’s new construction, with 753,340 square feet completed. The largest was Chemonics’ new build-to-suit headquarters at 1275 New Jersey Avenue SE in the Capitol Riverfront submarket. Chemonics consolidated out of multiple locations in the region and kicked off the second phase of the Yards development. Another notable delivery occurred in the East End submarket where 699 14th Street NW delivered. The former National Bank Building of Washington was as the name implies a former bank that was converted into Class A office space at the end of this quarter. Lastly, Signal House located at 1255 Union Street NE delivered 235,397 square
feet to the Capitol Hill submarket. TikTok, who had long been rumored to be going to the building made it official when they signed for roughly 50,000 square feet this quarter.
For the first time since the start of the pandemic net absorption was positive in the District, totaling 135,106 sqaure feet. This brought the 2021 total demand to negative 2.6 million square feet. Increased leasing activity over the last several quarters indicated companies’ willingness to re-enter the commercial space. While a positive sign, recovery remains tenuous. To get to pre-pandemic occupancy levels, the market will need to offset over four million square feet of negative absorption since Q2 2020.
For the second quarter in row, the District’s overall asking rental rates increased. Direct rates ended the fourth quarter of 2021 at $56.33 on a full-service basis, up $0.11 from the previous quarter but still down $0.32 from the start of the year. Increases were registered in all three classes of buildings, the largest coming from Class C where rents increased by over $0.50.
Despite positive demand in the fourth quarter vacancy rates continued to climb due to a considerable amount of space delivered to the market. Overall vacancy rates ticked above 17 percent to end the quarter at 17.2 percent, up 30 basis points from last quarter and up 180 basis points from the start of the year. While direct vacancy increased in the fourth quarter sublet vacancy decreased 10 basis points to end the quarter at 1.2 percent. While new construction starts have remained subdued, without significant sustained positive demand or increased office to residential conversions, vacancy will not decrease measurably.