The District has an empty office problem — and it is getting worse.
District-wide, the commercial vacancy rate among office buildings reached 18.9% in the fourth quarter, the highest in at least 40 years.
Companies that are signing new leases are downsizing. Of the 100 office leases signed in D.C. last quarter, 19 were for large blocks of space — 50,000 square feet or more — according to commercial real estate services firm JLL. The average size of a lease signed in the fourth quarter fell to under 10,000 square feet.
“What we’re finding is that they are downsizing to a space that is an average of 42% smaller. When they do relocate, we found that 88% of tenants chose a new space in a building of the same class or better than their prior location. So that reflects a flight to quality in the city,” said Michael Hartnett, senior director of research for the Mid-Atlantic at JLL.
That flight to quality is not good for owners of Class B and Class C office buildings, where the vacancy rate is 37%.
“There really is becoming a gap between the top and the bottom of the market … We think the gap between the top and the bottom of the office market will continue due to that influx of buildings in the bottom of the market that are experiencing little to no leasing activity,” Hartnett said.
Some of those Class B and C office buildings, mostly older buildings, are prime for office to residential conversion. JLL said it is tracking at least 13 office-to-residential conversion projects planned for D.C. currently, representing roughly 2.9 million square feet.
Newly-constructed office projects are no longer adding to the oversupply problem. Last quarter, only two buildings totaling 195,000 square feet delivered, and there are currently only four other office buildings under construction in D.C.
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