Office leases fell significantly in 2022 in Washington, D.C., as macroeconomic issues such as a potential recession, geopolitical concerns and the use of hybrid workplace strategies combined to create uncertainty for companies.
“Tenants are now coming back to the office more regularly and realizing that the space they designed five to 10 years ago doesn’t meet the needs of the organization.” Ben PlaistedVice President and Regional Manager Saviles“Commercial Observer” was told in the Washington office.
Many landlords are still working on what has become a major theme for 2022: the leap to quality, according to Lou Christophervice president CBRE.
“The office market is now divided into two categories: cup and everything else,” Christopher said. “Vacancies are increasing with commodity space on the market, but trophy space and the highest quality Class A space is being absorbed.”
Still, the D.C. office leasing market is historically slow and has also been the most volatile in the 34 years Christopher has been a broker at the center, he said.
“The federal government has traditionally been the driver of market demand that [held] This market, which has been stable in previous recessions, is now causing the uncertainty,” he told CO. “Until we see more job growth and more federal labor returning to the office on a consistent basis, the DC market will continue to struggle.”
The construction pipeline in the district is also at a 30-year low. While limited new office supply will help curb rising vacancy rates, most tenants are looking to reduce square footage while improving the quality of their office space, and sustainable relocation options are becoming fewer and fewer.
“The biggest challenge right now is both rising interest rates and rising construction costs,” Christopher said. “In addition to limited demand, these two factors combine to make it difficult for both landlords and tenants. It’s shocking how expensive base construction and interior design costs are today. Landlords won’t create more output unless they can finance new development and make a profit, and tenants won’t move if significant capital is required. Rising funding costs will have a major impact in 2023 and beyond.”
While overall leasing volume in 2022 was stable compared to the past two years, leased space was smaller, it said. Michael HartnettFor Director of Mid-Atlantic Research JLL:.
“Just 15 deals above 50,000 square feet closed in 2022, the fewest number of major deals closed annually in a decade,” Hartnett said. “The average term has fallen to 102 months (8.5 years), the shortest average term in a decade.”
Eight of the top 20 office leases in 2022 were law firm deals, which was a significant number, but one that wasn’t too surprising, as law firms continue to believe in the value of office space and provide flexibility for attorneys while giving their best. Attorneys have allocated office space, Plaisted noted.
“Large law firms continue to have a strong presence in the DC office market, a tenant base that has historically kept the market stable and balanced,” Plaisted said. “As leases expire, law firms have taken advantage of soft market conditions, allowing them to downsize square footage, receive record landlord concessions and long-term low rental rates.”
Overall, 2022 provided further certainty for the office market as more companies focused on returning to the office, albeit in modified ways. This is expected to continue through 2023 as companies continue to develop new workplace strategies.
“Many CEOs, partners and leaders say they wish they had more employees in the office more often,” Christopher said. “We are working with many companies to determine what the future of their workplace will look like as they review how much space they need and what the best strategy is to support a hybrid workforce in the workplace.”
Despite the unknowns surrounding future footprint requirements, Hartnett said one thing is clear. Providing quality workspaces will always be an important component of the office.
“Quality is not limited to the quality of workspace, but also the quality of neighborhood amenities, access to public space and building amenities, as well as floor plate sizes, layouts, air quality building systems and ESG considerations,” he said.
Keith Loria can be reached [email protected].