'It's Not Getting Any Better': Contractions, Distress Dim D.C. Office Recovery Hopes

The vacancy crisis in the D.C. office market is accelerating.

More than 920K SF of office space was emptied out by tenants in the first half of 2024, nearly reaching the full-year totals from 2022 and 2023. 

By the end of June, the average vacancy rate in District offices was 22.4%, according to CBRE, a new record high that is up nearly a full percentage point from the prior quarter.

Even emptier offices come as the federal government is more aggressively giving up space, D.C.'s law firms are contracting, and some tenants, including nonprofit groups, are “totally walking away from office space,” Savills Vice Chairman Tom Fulcher told Bisnow. 

“People are like, ‘We’re not coming in. We don’t need it anymore,’” he said. 

At the top of the market, the 14M SF of trophy space in D.C. was 12.6% vacant at the end of the second quarter, with a very limited large-block supply, according to CBRE. 

But the 94M SF that the brokerage defines as Class-A and A-plus was roughly 23% vacant, not far ahead of Class-B and C offices, where vacancy was 25.7% and 25.8%, respectively.

“For all classes, being the A's and the B's and the A-minuses and the B-pluses and the C's, the rest of the stuff that’s out there, it’s not getting any better,” Savills Research Director Arty Maharajh told Bisnow. 

Some of the availability in the Class-A space is situated in distressed buildings whose landlords can’t afford to make deals. That comes with paying out tenant improvement allowances or doing renovations, said CBRE Senior Vice President Brooks Brown, a leasing broker who represents landlords.  

“There is an element of distress in the market where there’s some buildings where they may have a loan coming due, and with values declining in the market, they might be in a situation where they might not be able to transact,” Brown said.

Last quarter saw several large tenants contracting, with the federal government accounting for nearly half of the 537K SF given back to the market in Q2. 

The Commodity Futures Trading Commission shrunk by nearly 50% as it moved from Lafayette Center to Patriot Plaza III at 355 E St. SW. The agency is taking 147K SF at the federal tenant-heavy office building, backfilling space vacated by the Department of Agriculture when it moved to Kansas City, Missouri, in 2019.

The property the CFTC is leaving, Lafayette Center, has been transferred to special servicing, the Washington Business Journal reported last week. The West End property is owned by Beacon Capital Partners. 

The federal government has been looking to shrink its leased footprint for more than a decade. But in the last few years, it has pushed to accelerate that effort, Cushman & Wakefield Executive Chair Darian LeBlanc, a top government office leasing broker, told Bisnow this spring.

LeBlanc said that over the last two years, reductions have been larger and more widespread than in the decade before, and agencies are now reducing their footprints between 20% and 40% across the board.

“It seems like the government is one where the rightsizing is so significant,” said JLL Executive Managing Director Evan Behr, who heads the brokerage's D.C. agency leasing team.

The looming problem is that most of the buildings that the federal government leases are older. Those buildings are seeing little demand from tenants and would require expensive upgrades that few lenders would be willing to finance.

“It’ll be challenging if it’s an older building with dated infrastructure,” Brown said. “It may be a challenge particularly for tenants that are seeking something a little newer and something that has been renovated. For those buildings, it may be a challenge.” 

But for landlords that are in the financial position to make outlays to attract tenants, there is still business to be had. Lobbying firm BGR renewed and expanded its lease at The Homer Building this past quarter, growing its footprint from 30K SF to 40K SF. 

The deal hinged on a $25M renovation project, said Behr, who represented the landlord, Mistui Fudosan. 

“Without that renovation, we do not win the right to keep BGR at The Homer Building,” Behr said. “I can say that with certainty.” 

But more private tenants are shrinking their footprints, not expanding. Law firm Brown Rudnick signed a 28K SF deal to relocate from The Homer Building near the White House, cutting its footprint by 18% with the move to 1900 N St. NW.

Maharajh, the Savills researcher, said negative net absorption, which is calculated by subtracting vacant spaces brought to the market from new leases signed, could eclipse 2M SF this year.

“We’re looking at a very, very healthy negative net absorption and large amounts of move-outs,” Maharajh said.

“Which is indicative of the market — downsizing, rightsizing, people pulling back on the space that they actually need,” he said. 

And the trajectory isn't expected to stop anytime soon. Many of the leases expiring soon are seven- or 10-year deals signed before the pandemic, Fulcher said, and landlords will be fighting to fill their struggling buildings with a shrinking pool of tenants.

“It’s like a bowling ball rolling down. We’re just hearing the rumble, rumble, rumble, and it’s just continuing to rumble and make things more difficult for landlords in the city,” he said. “Instead of a bowling ball with pins at the end, it’s more like a bowling ball going through a forest and knocking down trees. More and more trees are getting knocked down.”