DC Office Market Cratered in Third Quarter

The office market in Washington DC is going from bad to worse, according to third quarter reports released this week, one of which characterized the DC market as “still reeling” from the pandemic and afflicted with “dismal market fundamentals.”

The litany of dismal results cited by CBRE in its Q3 report on the DC office market included 351K SF of occupancy loss, bring YTD negative net absorption to 976K SF. Vacancies have increased 40 bps—they’ve now surged 580 bps above pre-pandemic levels—surpassing the 20% threshold for the first time, at 20.3%.

Perhaps most symptomatic of the malaise afflicting the DC market are the 3Q results for Class A properties, which in most US cities are benefitting from a flight to quality. Class A office properties in Washington registered negative net absorption of more than 391K SF in Q3, with the YTD tally now totaling negative net absorption of more than 1.5M SF.

Occupancy losses in the third quarter were most pronounced in the East End and Georgetown submarkets, which recorded negative net absorption of 206K SF and 122K SF, respectively. The Central Business District, which has notched YTD occupancy losses of 754K SF, managed to avoid another negative quarterly absorption tally by a whisker, with 107 SF of positive absorption in Q3.

The lone bright spot in the Q3 office report was the subset of Trophy office buildings, 48 properties that encompass about 14M SF of DC’s estimated overall office inventory of 128M SF. Trophy buildings—several of which have traded for record prices in recent months—posted net absorption of 146K SF in Q3, with the YTD tally a healthy 848K SF.

CBRE’s Q3 report offered a glimmer of hope for DC’s office market that also was of a bit of thin gruel: “These dramatic increases in vacancy should slow as the development pipeline declines and office to residential conversions increase,” the brokerage said.

Gross leasing activity in DC totaled 1.2M SF in Q3, down 59% from pre-pandemic quarterly averages. Private-sector tenants leased 745K SF, a 32% decrease quarter-over-quarter, and a 64% drop from pre-pandemic gross leasing levels, CBRE reported.

Sublease availability remains elevated in DC. During Q3, 42 tenants added a total of 540K SF of sublease space to the market.

The three sectors that together account for nearly 70% of office leasing activity in the nation’s capital—the US government, legal firms and nonprofits—have each notched significant occupancy losses this year.

Year-to-date, government leasing has decline by more than 300K SF; legal services have reduced their footprint by nearly as much, with occupancies retreating by 280K SF; nonprofits have recorded 61K SF of negative absorption YTD.

Several recently signed office leases in DC represent downsizing and consolidation by the occupiers. The law firm Kilpatrick Townsend & Stockton relocated from 607 14^th St. NW to 701 Pennsylvania Avenue, downsizing by roughly 40K SF in the process.

The Department of Homeland Security inked a short-term extension at 1120 Vermont Ave. NW, but let its 60K SF lease expire at 650 Massachusetts Ave. in the East End submarket.