Office Leasing Picks Up In D.C., But Not Enough To Stop Rising Vacancy
Office leasing activity in the nation's capital was up significantly in the first quarter, with a series of big lease renewals showing that tenants are becoming increasingly comfortable committing to downtown D.C. for the long haul.
But that renewal activity hasn't stopped the bleeding in the market, as net demand remained negative last quarter and vacancy continued to rise.
“There’s no denying the state of the market is pretty weak, and office is obviously a rough spot to be in right now,” Savills Research Director Arty Maharajh told Bisnow. “But the reality of it is there’s deals being done.”
The quarter’s leasing volume was dominated by large, long-term lease extensions, with some tenants even extending prematurely. That contributed to 1.7M SF of deals being done during the first quarter, according to Savills, up from just under 1M SF the same time last year.
“We had a very strong leasing quarter,” said JLL Research Director Tammy Shoham, whose firm recorded 39 leases of more than 10K SF in its Q1 report.
Of the 10 largest deals of the quarter, eight were tenants recommitting to their footprints through restructuring deals or renewals, Savills reported. The three largest deals of the quarter totaled more than 785K SF of tenants recommitting to their space.
The quarter's largest deal came from The Washington Post signing an early extension of its headquarters footprint, committing to around 300K SF for another 13 years at Hines' One Franklin Square, as Bisnow first reported.
Law firm Finnegan, Henderson, Farabow, Garrett & Dunner renewed a 214K SF lease at Boston Properties' 901 New York Ave. NW through 2042 while downsizing by 38K SF.
The D.C. Department of General Services signed an extension of its Southwest Waterfront footprint, inking 274K SF.
There were also a few cases of growth — a rarity in today’s market.
World Bank Group’s International Bank for Reconstruction and Development grew by 19K SF at 1899 Pennsylvania Ave. NW, inking a renewal for 57K SF, according to CBRE.
“Tenants are getting more familiar with the remote, hybrid pattern, employees coming into the office, so they’re willing to do leases,” Maharajh said. “They’re willing to do longer leases. They’re willing to transact.”
JLL’s data shows 59% of Q1 leases were renewals, including a “rising number of blend-and-extend agreements.”
But even amid the strong activity, the office market is experiencing the pain of rightsizing.
“It’s not enough to offset the giveback of space and the reduction of space yet,” Colliers Research Manager Miles Rodnan said.
Vacancy again reached an all-time high during Q1, with Colliers measuring the percentage of empty office space at 19.4%, up from 19.1% the previous quarter and 18.5% in Q1 2023.
The brokerages also recorded negative net absorption. By JLL’s measurement, 424K SF of space was given back to the market.
“What it really tells us is that we still have companies that are downsizing and moving to smaller spaces, and we’re going to continue to see that,” JLL's Shoham said.
Savills found the market had a net occupancy loss of 550K SF this year, but that represented an improvement from negative net absorption of 900K SF in Q1 2023, Maharajh said.
“We're still hemorrhaging a lot of space,” he said.
“It’s possible we’re starting to claw out of this thing, in at least being knowledgeable about what to do,” he added. “People are a little bit more knowledgeable about how to move forward as opposed to moving backwards.”
CORRECTION, APRIL 11, 3:40 P.M. ET: A previous version of this story misstated the leased square footage for law firm Finnegan Henderson and the D.C. Department of General Services. It has been updated.
