DC’s Office Market Eyes Brighter Future As Biden Takes Office, Vaccines Roll Out
‘The new administration should help restore a reversion to business as usual’
Joe Biden’s inauguration and his plans for speeding up vaccinations against the coronavirus will mean big things for a Washington, D.C., commercial real estate market buffeted by uncertainty.
Alexander Paul, senior managing director of national market research for Newmark (NMRK)’s D.C. office, noted the region’s office market endured a negative 3.6 million square feet of net absorption in 2020 compared to a positive 2.8 million square feet in 2019.
“Asking rents have remained fairly sturdy during the pandemic, as new product continues to deliver at the top of the market and as asset owners try to hold face rents stable,” Paul told Commercial Observer. “However, concessions are elevated, which is pushing effective rents lower.”
Sublease space availability has been rising in all three of the region’s submarkets (D.C. proper, NoVA and suburban Maryland) and effective rents are under downward pressure.
“The Washington area remains better insulated than many of its peer cities, due to its high share of professional and business services workers, as that sector has been better protected from layoffs than most other employment sectors,” Paul said. “Northern Virginia seems positioned for the quickest market rebound, due to its strong mix of industries, including technology and government contracting.”
Jon Glass, corporate managing director for Savills’ D.C. office, said the office market is still firmly in tenants’ favor, with the amount of available space in D.C. at an all-time high of approximately 19.4 percent, providing tenants with tremendous opportunities and leverage.
“Rents have steadily decreased and concessions (i.e., free rent and tenant improvement dollars) continue to climb,” he told CO. “Landlords are reaching far to secure tenancy, not only for tenants with near-term lease expirations, but also for tenants in long-term commitments looking to improve their leasing situation. Regardless of where you are in your lease term, this is the time to proactively evaluate your real estate and take advantage of the soft market.”
He added that the diversity of people and industries in the area, coupled with the stability of the federal government, shielded the region from the free fall experienced by other top-tier markets like San Francisco and New York.
“This also proved how resilient people are as well,” Glass said. “This has been a challenging and traumatic year for many people, but companies with strong leadership and values have supported their workers and proven that culture can transcend office space.”
Gary Stein, a vice chairman and co-regional manager of Savills in D.C., noted now that the vaccine is available, he anticipates activity in the marketplace will increase steadily through the first half of 2021.
“Many of my deals that were put on hold in 2020 are now beginning to pick up steam again, as we can finally see a light at the end of the tunnel,” he told CO. “There are opportunities in nearly every submarket in the region, whether it’s downtown D.C., Arlington, Tysons or Montgomery County. Tenants that are proactively evaluating their real estate will continue to get great deals.”
Miles Rodnan, senior research analyst at Colliers (CIGI) International, noted the region has an increasing amount of available sublease space on the market.
“Tenants in the market have a lot of options. Alternatively, landlords, who may be facing longer downtimes on current and upcoming vacancies, have increased overall concession packages to entice the few active requirements,” he told CO. “However, we foresee some pent-up demand for those groups, who delayed their space search or may have signed short-term extensions and will be back in the market during the second half of this year.”
Since it will take time before employees feel comfortable returning to the office, any office leasing will be a lagging indicator of the overall market’s health.
“With the anticipation of a significant portion of the population having been vaccinated by mid-summer, we anticipate spec suites will be the most active in 2021,” Rodnan said. “Companies that pushed out a decision or are currently on the sidelines will be on a compressed timeline. Built-out suites provide a move-in-ready solution. Furnished spec suites will become a trend.”
Wei Xie, associate director at CBRE (CBRE), said a lesson learned — or at least reinforced — during the pandemic was that the federal government has been and remains a stabilizer for not only the region’s economy, but also real estate demand.
“GSA activity was a meaningful buoy for overall demand during 2020,” she told CO, referring to the federal government’s real estate manager, the General Services Administration. “And many leases executed within the private sector were tied to or contingent on federal contracts.”
Lou Christopher, a vice chairman at CBRE, added that while the overall headline stats suggest a tenant’s market, that can vary dramatically depending on the type of office. With dwindling development activity and a pipeline that’s heavily pre-leased, tenants looking for larger chunks of top-shelf space — especially law firms — still face stiff competition.
“Landlords with premium product are best positioned in this tenant-favorable market as options for quality large blocks will continue to thin out,” he said.
Still, CBRE expects calendar year 2021 to remain a tenant-favorable market, with market conditions and the rate of demand to continue at the same pace for the next three to nine months.
“We do expect the recovery will start earlier in the District, similar to other recent downturns like 9/11 and the Global Financial Crisis than other gateway markets,” Christopher said. “Given speculative construction has ceased and few large blocks of true trophy space remain, we anticipate significant competition for the best large blocks from 2022-2025.”
Xie noted that as vaccine distribution ramps up, CBRE expects touring and leasing activity to rebound more meaningfully.
“Pent-up demand from tenants that have exercised short-term extensions may provide a boost,” she said. “We expect well-located suburban submarkets — which have seen less of an adverse impact in 2020, thanks to GSA and life sciences users in Maryland and large tech and corporate users in Virginia — to lead the recovery curve.”
Additionally, she noted office users may incorporate more flexible work solutions in their real estate planning, and the long-established flight to quality will likely intensify, leading to further bifurcation in performance between top-quality product and commodity space.
And, though Biden is planning quick action, any policy changes by the new administration will take time to materialize and be reflected in the real estate market. His initial impact, then, on the office market will likely first manifest as an improvement in overall business confidence and a sense of certainty.
“Like the end of the pandemic, fully transitioning to the new administration should help restore a sense of calm and a reversion to business as usual,” Christopher said.