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Washington DC Office Report Q4 2022

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During the last quarter of 2022, leasing velocity remained subdued as it had been throughout the year. For the second quarter in a row, there were no leases signed over 100,000 square feet and only one over 50,000 square feet. The largest deal signed in the fourth quarter was by the National Fish & Wildlife Foundation, which consolidated offices from around the country into 1625 Eye Street NW, where they leased 62,032 square feet. Law firm Allen & Overy renewed and expanded slightly at 1101 New York Avenue NW for 41,914 square feet for the second largest lease. On the other hand, the third largest deal signed in the fourth quarter was the American Bar Association which gave back roughly 25,000 square feet at 1050 Connecticut Avenue NW, signing for 34,348 square feet in an early lease restructure.

Supply & Demand

For the second quarter in a row, just one building delivered in the District. Parcel 10 at 610 Water Street SW in the Wharf delivered just under 90,000 square feet to the market fully leased. Freedom Forum and The Atlantic pre-leased space for 51,250 and 30,000 square feet, respectively. While 2022 delivered 1.4 million square feet of space, just above the three-year annual average of 1.3 million square feet, the pipeline of properties under construction has not replenished as it had in years past. Just 913,357 square feet is currently under construction, with very little construction expected to start in 2023, with virtually none likely to go on a speculative basis.

Demand in the fourth quarter was -99,791 square feet, negative for the second straight quarter. This was the third quarter of decreased demand during the year. While there was negative absorption, there was a positive takeaway primarily because the bulk of the negative absorption came from WeWork closing three different locations rather than a market wide trend. Were it not for WeWork giving back the keys on over 200,000 square feet of space the District would have ended on a positive note. In 2022 the market registered a total of 399,050 square feet of negative absorption which compares favorably to 2021 and 2020, which had negative 2.6 million and negative 792,445 square feet of absorption, respectively.

Rental Rate

Asking rents in the District have remained stable throughout 2022, ending the fourth quarter down slightly from the start of the year but up over the last two quarters to end at $55.66 per square foot on a full-service basis. Rental rates increased in both Class A and C space from the previous quarter ending at $59.67 and $48.74 per square foot, respectively. On the other hand, Class B space dropped $0.23 to end at $49.71. Concession packages remained aggressive, keeping net effective rents stagnant despite the moderate face rent growth in the last few quarters.

Vacancy

For the first time in twelve quarters vacancy did not increase in the District. Overall vacancy remained at 17.8 percent despite mild negative absorption. This is the start the growing trend of office-to-multifamily conversions taking existing vacant office buildings out of the inventory. Certainly not an indication of a strong economy, it is however a shift in the highest and best use thinking for aging, functionally obsolete but well located office product. A conservative estimate shows over 4 million square feet that will likely get converted from office-to-residential.


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Washington DC Office Report Q4 2022

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