The State of DC’s Office Market in 2022
Office leases declined considerably in 2022 throughout Washington, D.C., as macroeconomic issues such as a potential recession, geopolitical concerns and the increased use of hybrid workplace strategies all combined to create uncertainty for companies.
“Tenants are returning to the office on a more regular basis now and realizing the space they designed five to 10 years ago does not meet the organization’s needs,” Ben Plaisted, vice chairman and co-regional manager for Savills’ Washington, D.C., office, told Commercial Observer.
Many landlords are still banking on what has become a major theme in 2022: the flight to quality, according to Lou Christopher, vice chairman for CBRE (CBRE).
“The office market is now bifurcated into two categories — trophy and everything else,” Christopher said. “Vacancy is ticking upward with commodity space sitting on the market, but trophy space and the highest-quality Class A space is being absorbed.”
Still, the D.C. office leasing market is at a historically slow pace, as well as the most volatile it’s been in the 34 years Christopher has been a broker downtown, he said.
“The federal government, traditionally the market’s demand engine that [held] this market steady in previous recessions, is now driving the uncertainty,” he told CO. “Until we see more job growth and more of the federal workforce returning to the office on a consistent basis, the D.C. market will continue to struggle.”
The construction pipeline in the District is also at a 30-year low. While limited new office supply will help to contain a rising vacancy rate, most tenants are looking to reduce square feet while improving their office quality, and solid relocation options are becoming fewer by the day.
“The biggest challenge right now is the rise in both interest rates and construction costs,” Christopher said. “Besides limited demand, these two factors are combining to make it very difficult for both landlords and tenants. It’s shocking how expensive base building and interior improvements costs are today. Landlords won’t build more product unless they can finance the new development and make a profit, and tenants will not relocate if significant out-of-pocket capital is required. Rising costs of financing will have ripple effects throughout 2023 and beyond.”
While the overall leasing volume was steady in 2022 compared to the last two years, the spaces leased were smaller, said Michael Hartnett, mid-Atlantic research director for JLL (JLL).
“Only 15 deals above 50,000 square feet closed in 2022, which is the smallest number of large deals signed annually in over a decade,” Hartnett said. “Average term lengths have fallen to 102 months (8.5 years), which marks the shortest average term in over a decade.”
Of the top 20 office leases in 2022, eight were law firm transactions — a significant number, but one that was not all that surprising as law firms continue to be believers in the value of the office and are providing flexibility for attorneys while also giving most attorneys dedicated office space, Plaisted noted.
“Major law firms continue to have a strong presence in the D.C. office market, a tenant base that historically keeps the market steady and balanced,” Plaisted said. “With leases coming up for expiration, law firms have taken advantage of the soft market conditions, allowing for the opportunity to reduce square footage, receive record-setting concessions from the landlord, and lock in long-term low rental rates.”
In general, 2022 did provide further certainty for the office market, as more companies focused on returning to the office, albeit in altered forms. That’s expected to continue into 2023 as companies continue to iron out new workplace strategies.
“Many CEOs, partners and leaders maintain they would like more employees in the office on a more frequent basis,” Christopher said. “We are partnering with many companies to determine what the future of their workplace will look like, as they re-examine how much space they need and what is the best workplace strategy to support a hybrid workforce.”
Despite the unknown as it relates to footprint requirements in the future, Hartnett noted one thing is clear: providing quality workspaces will always be an essential component of the office.
“Quality is not limited to the quality of the workspace, but also the quality of the neighborhood amenities, access to public space and building amenities, as well as floor plate sizes, layouts, air-quality building systems, and ESG considerations,” he said.
Keith Loria can be reached at Kloria@commercialobserver.com.