CBRE Report – Commercial Observer
The vacancy rate in Washington, DC, is at an all-time high of 18.2%, surpassing the 18% mark for the first time, according to a third-quarter office report from CBRE.
Overall, the district reported an occupancy loss of 321,000 square feet in the quarter, bringing the total net contraction year-to-date to 1.9 million square feet.
The delta variant is primarily responsible for the increase, as much of the positive leasing momentum dissipated in the second quarter, the report noted.
A transaction at the very end of the quarter was a significant factor in gross rental volume ending at 3.1 million square feet. Just this week, the Securities and Exchange Commission announced a 1,274,000 square feet at Douglas Development’s 60 New York Avenue NE project.
DC also saw sublet availability continue to decline, dropping for the eighth consecutive month with a 17% reduction. It now stands at 2.9 million square feet.
Tech companies are the only bright spot in the district, with 365,000 square feet of leases signed this quarter, representing 9% of all market activity.
The office market in Northern Virginia showed encouraging first signs of improvement in the third quarter, after four quarters of disrupted activity. Gross rental activity was stable from the prior quarter to end the quarter at 2.1 million square feet. Although this is still a 22% decrease from the 2018-2019 quarterly average, it showed a marked improvement compared to the second half of 2020 and the first quarter of 2021, with an average rental volume of 1.7 million square feet.
Yet even with these indicators of improvement in the NoVA market, the vacancy rate increased 10 basis points from the previous quarter to 20.6%, an increase of 160 basis points from the beginning of last year, approaching the maximum market vacancy level of 20.9% compared to the first quarter of 2018.
Commercial Observer spoke to Wei Xie, CBRE’s Research Director, about what’s going on in both markets.
Business Watcher: How would you illustrate what we’ve seen in DC in regards to vacancies? What does this registration number tell us?
Wei Xie: Much like other US gateway markets, the demand for office space in DC has declined due to the economic impact and the effects of remote working due to the pandemic – 3.3 million square feet of negative net absorption since the first quarter of 2020 have contributed to the continued increase in the number of vacant offices in DC. That said, the fourth quarter of 2020 saw the greatest amount of negative net absorption, with each of the following three quarters reporting fewer occupancy losses, which hopefully indicates that the worst is now behind us. In addition, nearly 1 million square feet of the 3.3 million square feet of total occupancy loss was attributable to pre-authorizations signed before the pandemic and not related to COVID.
Why do you think subletting is falling so drastically?
Similar to the story of net absorption, the availability of sublease peaked in December 2020 and has been on a steady path to stabilize and improve since then. Some tenants initially decided to sublet spaces as an instinctive reaction to the pandemic and remote working, but have since recognized their need for office space after all and reversed their decision.
Part of the decline is also attributable to expired leases and sublet spaces which have become prime spaces directly marketed by owners. A combination of fewer tenants adding their space to the sublet market and more spaces taken off the market should continue to moderate the availability of sublet. This is also the case nationally, but DC has dominated other US markets in this trendline.
Why are tech companies an important industry for DC?
Not only has technology contributed to more occupancy gains in DC – both before and during the pandemic – than any other industry sector, it has also contributed 9% of all rental activity since January 2019, three times its 3% share of the total occupied market. space out.
As the two largest tenant groups in the district, the federal government and law firms have both followed a consistent trajectory of shrinking and densifying their office footprint. The technology sector has provided much-needed growth and rental activity to help drive demand and market dynamics. The growth of technology in DC has been widespread, both from big tech, as companies expand their presence outside of the West Coast, and from local local businesses that continue to attract funding and grow their businesses. robust way.
In 2020, DC’s regional tech companies attracted more than $ 3.5 billion in venture capital funding – a record for the region, and 2021 is set to break the record again. Most of the funding has been directed to tech companies that serve a wide variety of industries, from education and financial services, to energy, healthcare, government and cybersecurity.
What can you project over the next few months of what we will see in the District in terms of vacancy?
Without significant expansions or new market entries, DC’s vacancy rate will likely continue to rise in the near term, as a few other projects are expected to provide additional vacant space in the market, and tenant contractions will likely persist over the years. next three to six months. However, Trophies and Class A + products will remain the smallest segments of the market, as large blocks of quality space in major submarkets remain measured and the construction pipeline is expected to shrink significantly from the five. last years.
What is contributing to the slight turnaround in Northern Virginia?
Northern Virginia has always been a “big tenant market,” where a handful of major tenant movements could dictate the headline statistics. During the third quarter, the most notable rental transactions were flat rate renewals or extensions not involving restitution of space. In addition, Amazon leased an additional 167,000 square feet from National Landing, which was net new demand.
That said, the push for the delta variant resulted in a decline in tenant touring activity during the quarter. However, the rate of decline was much less pronounced in Northern Virginia than in downtown DC. This matches the trends of the past 18 months, where suburban markets were less immediately affected by the pandemic than higher density downtown markets.
Are there concerns about the growing vacancy?
Thanks to the expansion of tenant activity primarily by tenant businesses, the office vacancy rate in Northern Virginia has actually been trending down in recent times before the effects of COVID kick in. From the peak of the first quarter of 2018 to the second quarter of 2020, the overall vacancy rate decreased by 200 basis points, from 20.9% to 18.9%. While we lost some of the occupancy gains during this time, there are still tenants in the pipeline looking to significantly expand their market presence, which helps position the market to rebound after the effects wore off. of COVID.
That said, the exact level of impact of remote working will remain to be seen. But we believe in the underlying market forces in terms of talent, infrastructure and pro-business policy, all of which should continue to attract employers to our region.
Which sectors can help NoVA? Who rents space?
Technology, business services and consulting, financial services and education are among the growing sectors.
Keith Loria can be contacted at [email protected]