Net office leasing in the D.C. area turned negative during the second quarter, and office vacancies rose, even as record office building construction is underway in the region.
A second quarter report from Delta Associates also reports a pullback in new leasing activity.
The Washington area’s direct vacancy rate, excluding owner-occupied buildings, rose to 17.2% during the second quarter.
During the quarter, there was a net total of negative 344,000 square feet of office space absorption. That’s a nearly 1 million square foot decline from the 602,000 square feet absorbed in the first quarter.
(Net office absorption is a term that describes the difference between total new square footage leased minus total square footage no longer tenant-occupied.)
The second quarter was the first time in nearly a decade that all three markets measured by Delta Associates — the District, Northern Virginia, and the Maryland suburbs — posted negative Class A absorption.
The Washington metro area’s office construction pipeline, as of the end of the second quarter, was the highest in history, with 12.5 million square feet of new office space under construction, most of it in Northern Virginia.
Delta Associates says it does not expect any new groundbreakings this year.
“The economy is now officially in recession,” Delta Associates said in its report. “The depth of the downturn and the duration of the current pandemic are still major unknowns, but it is safe to say that turbulent times are ahead for the Washington office market.”
It reports many lease negotiations have been placed on hold or are being re-evaluated by potential tenants, and over the longer term, the pandemic will cause tenants, as well as building owners and developers, to rethink how office space is used.
The Delta Associates report does note a few bright spots.
It says the federal government is unlikely to shrink its office leasing footprint. And, demand remains strong in Northern Virginia from the tech sector and in suburban Maryland from the life sciences sector.
“Even with the downturn, the Washington office market should outperform most other gateway office markets thanks primarily to the outsized presence of the federal government,” Delta Associates said.