Downtown DC’s Office Vacancy Hits Record-High 17.8%, CBRE Report Finds

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Continuing a pandemic-long trend, vacancy in Washington, D.C.’s downtown office market has reached 17.8 percent, a record high, according to a mid-year report from CBRE.

Additionally, the average gross rent in Q2 increased to $58.42 per square foot in D.C., while decreasing to $34.10 in Northern Virginia and $28.40 per square foot in Maryland.

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Describing leasing activity during Q2 2021 as “a tale of two cities,” Wei Xie, CBRE’s research director for the Washington area, noted how both Downtown D.C. and Northern Virginia experienced pronounced quarter-over-quarter increases due to the end of COVID restrictions.

Still, the leasing uptick was counterbalanced by continued space reductions, resulting in the somewhat alarming vacancy rates, mostly a result of law firm and government space givebacks.

D.C., Northern Virginia and suburban Maryland combined posted negative net absorption of 1.1 million square feet during the quarter, resulting in year-to-date occupancy loss of more than 2.5 million square feet.

Still, there are some green shoots this summer. CBRE’s D.C. listing portfolio has seen almost a 25 percent increase in office tours in April and May over the average for 2019, which could be a strong indicator of some good leasing volume over the next six to 18 months. Plus, the pace of new construction is slowing. 

Xie spoke to Commercial Observer about some of the notable findings of the report.

Commercial Observer: What do you see as the chief takeaway from the report?

Wei Xie: While activity is on a promising upward trajectory, the continued space reductions mostly driven by government and law firm tenants have continued to increase the already elevated vacancy rates. 

However, the decided pullback in construction activity should help restore balance in market fundamentals, especially in the top segment of the market, where demand has been significantly outpacing commodity space. 

What is your overall assessment of how the D.C. office market looks as of where we are today?

The D.C. office market hit an inflection point in Q2 2021, when activity experienced a meaningful uptick following four quarters of disruption, enabled by COVID restrictions being lifted and pent-up demand from the prior year. Touring activity has now exceeded pre-pandemic levels, and leasing volume has posted a 60 percent increase quarter over quarter in both Downtown D.C. and Northern Virginia — the region’s two largest office markets.    

What sort of changes are we seeing this summer to get the office market back on track?

We are seeing a higher level of resumed in-person activity, such as building events and office visits, that help create positive momentum among industry professionals, and showcase building and space improvements that may not have been seen for a while.

As a hybrid workforce has emerged as a new normal for many organizations, we are also observing a heightened sense of focus from tenants on flexibility within their workplace, both from a building and space aspect, as well as from the technology aspect.     

What is your outlook for the rest of 2021, and what indicators from the report support your opinion?

The meaningful increase from touring activity may likely translate into further improving leasing demand in the second half of the year. Office occupancy rates have also been on a steady uptick and point to a more robust return post-Labor Day.  

Keith Loria can be reached at kloria@commercialobserver.com.