D.C. Office Vacancy at 18% Despite Drop in Sublease Availability: JLL

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D.C.’s office market had a rough first half of the year, registering a net occupancy loss of 2.6 million square feet in the first six months of 2021, according to a second-quarter report from JLL (JLL)

But, with the reopening in full swing, there’s good reason to believe that the second half of the year will show a marked improvement, per the report.

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“As re-entry continues, decision makers are appearing more optimistic, with tour activity back to 80 percent of May 2020 levels,” the report said. “Although this increase has not yet correlated with an increase in transactions, the market could see the results of this pent-up demand in the latter half of 2021 and into early 2022.”

Much of the leasing activity in the market came from companies making moves within the region, with relocations making up more than 40 percent of all leasing transactions this quarter. 

The biggest deal in the second quarter was Boston Consulting Group set to relocate from Bethesda, Md., to a 97,000-square-foot space at 655 15th Street in Downtown D.C. in 2023. Plans are also in motion for tech firm Enovational to relocate from its current East End space to the top six floors of The Meridian Group’s 1400 L Street, a redevelopment that has been vacant since coming online in the third quarter of last year. 

The activity was also largely driven by concessions. Direct asking rents held steady, but net effective rents for trophy and Class A deals have decreased more than 12 percent in the 15 months since COVID began, compared with the 15-month pre-COVID period. In addition, the average term length dropped by 20 percent compared to year-over-year numbers. 

“Generous concessions continue to draw tenants from within the region to D.C.,” the report said.

Another notable finding from the report shows tenants removing 1.4 million square feet of available sublease space from the market since January, indicating that tenants are reevaluating their space needs as occupancy continues to grow.

Overall, D.C. saw more than 500,000 square feet of occupancy loss in the second quarter, gaining 315,000 square feet of trophy space, while losing nearly 560,000 square feet in Class B space. Year to date, Class B office space has seen almost 2.5 million square feet of occupancy loss, mostly due to government relocations. 

Looking ahead, the report noted that most new developments in D.C. are “on pause” and new space in the construction pipeline currently is less than 60 percent leased. 

The report suggested a mixed-use strategy could ease some of the vacancy challenges, especially in the downtown core submarkets (central business district, East End, Capitol Hill), where vacancy levels are greater than 20 percent.

For example, The RMR Group’s redevelopment of the 430,000-square-foot 20 Massachusetts Avenue, which will combine a 270-room hotel with approximately 200,000 square feet of Class A office space, is on target to open next year.