D.C. Offices Increasingly Empty As Leasing Market Shows Few Signs Of Life
The vacancy rate among D.C. offices ticked up in the second quarter, a sign that one of the biggest office markets in the country is still a long way from returning to a healthy state.
Vacancy in the District was at 20.4% in the second quarter, up from Q1’s 20.3% and half a percentage point higher than this time last year, according to CBRE data. Tenants emptied out 239K SF of office space, more negative net absorption than in the first quarter, when 230K SF more space was emptied than leased up.
“Vacancy continues to steadily increase,” JLL Mid-Atlantic Research Director Michael Hartnett said. “We're looking at about 25.5M SF vacant space in D.C., with a bulk of that being in the East End and CBDs, really the core of D.C.”
Gross leasing volume did pick up, with 1.8M SF leased compared with 1.2M SF the quarter before. But despite no new construction opening yet this year, the increased activity — much of which was fueled by law firms as they look to upgrade their space in a tenant-friendly market — wasn't enough to offset the trend of space reductions.
"Tenants are continuing to, despite rightsizing, prefer that quality space, quality neighborhood and quality building," Hartnett said.
Law firms accounted for 36% of all leases this quarter, according to JLL. The top three law firm deals this quarter, which also represent the top three private sector deals overall, were for upgraded space.
Law firm Crowell & Moring’s deal was the largest of the quarter — and the largest private sector office deal since before the pandemic. The firm signed a pre-lease for 199K SF at Stonebridge and Rockefeller Group’s redevelopment of the former WMATA headquarters at 600 Fifth St. NW. With the move, the firm will cut more than 80K SF from its current footprint in Penn Quarter.
The pre-lease exemplifies a common trend since even before the pandemic: upgrading and downsizing. The $375M redevelopment will add three stories to the building, 15K SF of ground-floor retail and include a new facade, rooftop, outdoor terraces and building systems, according to general contractor Clark Construction.
The deal represents a shift from the historical trend of law firms preferring to stick with the status quo, CBRE Research Director Stephanie Jennings said.
"Historically, law firms tended to stay in place and renew for a variety of logistical and financial reasons," she said. "And then, over the last cycle, there was an uptick all over the place, including in D.C., in relocation activity among law firms."
Crowell & Moring Management Board Chair Philip Inglima told Bisnow at the groundbreaking last month that the firm believes the new construction will "be a magnet for our folks to be back in the workplace."
The development is expected to deliver in 2025, and the firm plans to occupy the space in 2026.
Law firm Fried Frank, which signed another of last quarter’s top deals, is also renovating. But unlike Crowell, it is keeping its square footage. The firm inked a 10-year renewal of its 101K SF at 801 17th St. NW, also known as Lafayette Tower. A press release announcing the deal said the firm is working with the landlord on a renovation, including a revamped and expanded fitness center, a renovated roof terrace, and a new indoor lounge and event space.
Last quarter, law firm Kellogg Hansen also told Bisnow it plans to undergo a renovation in conjunction with its renewal and expansion at Sumner Square.
“Landlords are investing a good bit of money to improve, to bring a big quantity of amenities to a building and make different improvements,” Jennings said. “There's huge demand in that sector.”
Meanwhile, law firm Davis Polk & Wardwell is upgrading and expanding, according to the Washington Business Journal. The firm is moving from a McPherson Square tower built in 1988 to Farragut North at 1050 17th St. NW, which was completed in 2020. At 82K SF, the lease will nearly double the law firm's footprint.
More than a third of the top deals this quarter were expansions, according to CBRE. International Development Finance Corp. expanded to 82K SF at 1100 New York Ave. NW, Legal Services Corp. signed a new 38K SF lease at 1825 I St. NW, and the Environmental Defense Fund relocated and expanded to 35K SF at 555 12th St. NW.
It’s a trend CBRE Executive Vice President Brad Wilner wasn't expecting.
“Overall, the market’s not seeing growth, but I think the number of tenants that have grown in the top transactions, that's the surprise,” he said.
Wilner says there could be a variety of reasons for the expansions, from organizations growing in their numbers to adding more amenities and shared spaces to companies trying to encourage their employees to come in more days a week.
“We're seeing a shift in the use of office space across all industries,” Wilner said.
