Trophy Office Vacancy Falls To Decade Low In D.C. Despite Overall Market Weakness

D.C. office vacancy hit yet another record high during the last quarter of 2023, a years-long trend that was exacerbated by the pandemic. 

The city's office vacancy hit a record 21.2% in the fourth quarter, rising from 20.9% the quarter before, according to CBRE’s year-end market report. But at the top rung of the market, a much different story is playing out — one that has tenants jockeying for high-end space that is becoming more limited every month.

“It’s a tale of two cities,” Savills Research Director Arty Maharajh told Bisnow. “If you’re in the best premium product in D.C., it’s going to be competition. It’s like looking for the best house in Potomac or in McLean or in Santa Monica. If it’s a nice house near the water, in a good neighborhood, it’s always going to be in demand. And that’s the same situation with the D.C. office leasing environment.” 

D.C.'s trophy office vacancy rate dipped from 11.8% to 11.5% in Q4, the lowest level in at least a decade, according to CBRE. The numbers represent a quickly tightening sector of the market. In 2019, trophy vacancy in D.C. was around 17%, and it has steadily decreased since, even as the general vacancy rate went the opposite direction. 

There is 1.6M SF of trophy space available in the city, per CBRE, compared with 16.6M SF of Class-A and 8.1M SF of Class-B and Class-C. And the city now has the least new office construction underway in three decades, leading to a tighter trophy market and leaving tenants with limited options. 

“For the tenants that want the nicest buildings, it doesn’t matter if the vacancy rate is 25% — if you want a trophy building, there’s not many options,” Savills Vice Chairman and D.C. co-Regional Manager Ben Plaisted said. 

Employers are seeking new, well-located and highly amenitized office spaces to attract employees back to the office, Savills and CBRE brokers told Bisnow, and they are willing to downsize and pay more per square foot to fit those needs. 

Outdoor amenities, in particular, are at the top of Plaisted’s clients’ wishlists.

“Before the pandemic, it was a nice-to-have,” he said. “I think now it’s a little bit of a ‘wow’ factor and people being able to get outside and have fresh air, which is something they’ve probably been doing at home for the last three years.”

Law firm Zuckerman Spaeder signed a lease in the fourth quarter for 41K SF at Akridge’s 2100 L St. NW, a building developed in 2020, moving from Columbia Property Trust’s 1970s-era 1800 M St. NW, according to CBRE's report. The firm's new building has floor-to-ceiling glass windows, a rooftop terrace, an art gallery with private outdoor terraces and an outdoor pocket park.

The tightening trophy environment is turning out to be an especially difficult situation for tenants that need large, contiguous blocks of space, such as D.C.'s many law firms.

“Full-floor available space is pretty limited, especially in the upper stack of trophy buildings. It’s a really tight story,” JLL Mid-Atlantic Research Lead Michael Hartnett said.

CBRE Executive Vice President Amy Bowser said that in the top 10% of the market, there were only nine buildings marketing 50K SF unencumbered blocks and only two advertising over 100K SF, which many big law firms require. 

“There’s a lot of law firms out there right now all essentially circling the same space,” said CBRE First Vice President Harry Stephens, who is in the brokerage’s law firm practice. 

Tenants are starting the hunt for space earlier and earlier, Stephens and Bowser said. D.C. has long been a market in which midsized tenants have had to plan at least three years in advance of expirations, they said, but now it is common for tenants to be in the market with four or five years left on their leases. 

“There’s simply not that much out there, and there’s such a shortage in pipeline of new product coming online that if they don’t go secure the space that’s available today, they’re either going to be pigeonholed into renewing or having to relocate to a different building that doesn’t necessarily meet the parameters that they’re trying to achieve,” Stephens said.

CBRE's Bowser said the firm knows of some “very notable tenants” in the 30K SF to 40K SF range with leases expiring in 2027 that moved to the letter of intent stage in 2023. 

“That used to be more common when a tenant was much larger, but even these 20K SF, 30K SF, 40K SF tenants are feeling compelled to get out there very early,” she said. 

This level of competition for the dwindling trophy supply means that even in a market that has for years been heavily tenant-favored overall, some landlords are starting to have the advantage, brokers and researchers told Bisnow.

“We’re starting to see some opportunities, particularly in the trophy market where you see a little bit of leverage leaning back, in certain cases, to the landlord, where there are so few large blocks,” Bowser said. 

She added that trophy rents in some instances have increased by 10% to 15% year-over-year, and trophy concessions are starting to get more compressed.

The dynamic of increasingly limited trophy space isn’t expected to go away anytime soon, the brokers and researchers said. With 14M SF of available trophy space drawing strong interest, there isn't much more set to come online. 

The construction pipeline in D.C. has reached a 30-year low, according to CBRE. Just two office buildings under construction in the District total 716K SF: Skanska’s 17xM and Stonebridge and Rockefeller Group's 600 Fifth St. NW.

Each project has tenants committed for over 50% of the space, according to CBRE, including two big law firm deals. 17xM landed a 164K SF pre-lease with Gibson, Dunn & Crutcher, and 600 Fifth signed a 199K SF lease with Crowell & Morning. 

“We have a huge disparity in our supply: a lot of demand for quality and a very anemic pipeline,” Bowser said. “I think trophy is going to continue to tighten.” 

The trophy market tightening may provide hope for the 16.6M SF of vacant Class-A space in D.C., Hartnett said.  

“One of the green shoots for D.C., or a positive note, is what you could see as a spillover effect in terms of tenant demand moving into more well-positioned A buildings if they can’t find their perfect floor in a trophy building,” he said.

CORRECTION, JAN. 5, 9:30 A.M. ET: A previous version of this story incorrectly stated the total vacant square footage across the trophy, Class-A and Class-B office segments. This story has been updated.