The District’s office vacancy rate hit a record high in the second quarter, but that doesn’t necessarily portend trouble for D.C. office building landlords in the future.
Commercial real estate firm CBRE reports the office vacancy rate within the District itself reached 17.8% in the second quarter of this year.
“At 17.8%, it is the highest ever. In fact, it went up 400 basis points just during the duration of the pandemic. And previously, it took the market almost 10 years for the vacancy to go up by similar levels,” said Wei Xie, CBRE’s mid-Atlantic director of research.
Negative net demand for office space in the District continued in the second quarter, with nearly a half-million square feet more office space vacated than leased during the quarter — the seventh consecutive quarter of occupancy loss. A total of 3 million square feet of D.C. office space has been returned to the market during that period.
That is not to say companies are abandoning office space en masse in the District. Following record low leasing volume in the first quarter of 2021, office leasing activity rose 62% in the second quarter. And CBRE reports a significant increase in the second quarter of touring activity, or prospective office tenants looking at new office space — which is up 25% in April and May compared to the 2019 average.
Fewer companies are also opting to sublease space they committed to as a way to downsize their own operations. Total sublease availability in the District is now 12% less than its peak level in December 2020. Most of that is the result of expiring leases, although the drop in subleasing is also because companies have reversed their prior decisions to downsize and have decided to keep their current office space, CBRE said.
Another factor that will ease the District’s record high office vacancy rate: The yearslong office construction boom is coming to an end.
“All of the product that is currently under construction is expected to deliver by the end of next year, and currently there is nothing slated to deliver in 2023 or 2024. Nothing that is currently under construction is expected to deliver then. So, with the slowdown in construction activity, that will help bring some balance,” Xie said.
Average office rents in the District increased slightly in the second quarter following four consecutive quarters of decline, but landlord concessions remain elevated, such as tenant improvement allowances and lease abatement terms.