DC Office Tenants Downsized by 24% on Average in Q3

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The Washington, D.C., office market continued to see a slowdown in leasing in the third quarter of 2022, with a little more than 1 million square feet of leasing activity, down from 1.6 million square feet in Q2 and 1.8 million square feet a year earlier. 

Savills noted that while this could be attributed to a typical seasonal drop in deal volume, macroeconomic issues such as a potential recession, geopolitical concerns and the increased use of hybrid workplace strategies have all combined to create uncertainty. 

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Tammy Shoham, research director for JLL, noted that there’s a big distinction between older and newer buildings. Properties developed since 2015 saw a gain of 144,000 square feet during the third quarter, driven primarily by relocations into newly developed Class A space.

“Market performance of newer vs. older office buildings demonstrates a flight to quality,” Shoham stated in JLL’s Q3 office report. “For Class A and trophy market, office buildings delivered since 2015 command rents 23 percent higher than those delivered before 2015.” 

Plus, tenants who signed in Q3 reduced their leased footprint on average by 23.6 percent, according to JLL.

Colliers’ Q3 report noted there were no leases signed that totaled more than 100,000 square feet and just two that were more than 50,000 square feet.

The two biggest leases were both federal agencies. The largest was U.S. Customs and Border Protection renewing 99,515 square feet at 90 K Street Northeast in the NoMa submarket. The second largest was the Financial Industry Regulatory Authority signing for 68,030 square feet at 1700 K Street NW, with law firm Van Ness Feldman’s 45,000-square-foot lease at 2000 Pennsylvania Avenue NW coming in third.

Asking rental rates remained relatively stable during the third quarter, according to Colliers, dipping by 10 cents to end the quarter at $55.41 per square foot. Still, concession packages remained near record levels, the firm’s report said.

Vacancy, meanwhile, continued to rise in the third quarter, caused by negative absorption. Colliers noted vacancy increased by 40 basis points in the third quarter and 80 basis points from the start of year, ending this quarter at 17.8 percent. 

The lone office building delivered in Q3 was the 111,455-square-foot 3950 Wisconsin Avenue NW — part of Roadside Development’s City Ridge project, according to CBRE. International Baccalaureate has preleased the entire building and will relocate from suburban Maryland to occupy the space, though it is listing half of the space on the sublease market.

Five office buildings remain under construction in the District, with three scheduled to deliver by year’s end: 610 Water Street SW, 14 Ridge Square NW and 1401 Massachusetts Avenue NW.

Sublease leasing activity in Q3 displayed a greater decrease in demand with just 42,000 square feet leased, a drop from 99,000 square feet last quarter, Savills said in its report. 

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