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DCs Office Environment Experiences Bumpy Ride in 2021 – Commercial Observer

DCs Office Environment Experiences Bumpy Ride in 2021 – Commercial Observer

Since COVID-19 was first introduced, the Washington, D.C., office environment has been a rollercoaster ride.

The trajectory of public health recovery has been on a similar bumpy track, and office market recovery, especially return-to–office efforts, is closely tied.

This years market has seen anticipation and delayed momentum. Edwin ClarkExecutive managing director at Newmark. It has been clear that the recovery of the office market is closely tied to public health metrics over the past 12 months. There have been ebbs, and flows, in industry momentum.

For example, the spring vaccinations allowed for summer-to-fall return-to office plans. However, delta and the reinstatement of some indoor mask mandates at the end of July prevented reboarding, and almost eliminated the small deal activity which had been picking up in late spring/early summer.

Mandatory employee vaccinations were more accepted in the fall, which encouraged optimism that offices could bring back their employees despite viral spread. However, the omicron variant, absence of delta control and holiday schedules hampered reboarding.

Clark stated that the region saw modest improvement in the quarters ending in 2021. This was due to rising leasing activity driven by pent-up demand. The pace of recovery feels slow, however, as long as COVID-19 is not yet eliminated.

According to Newmark, despite the fact that occupancy has decreased in each quarter of 2021 and year-end net absorption being less negative in 2021 than 2020, it is still a more severe issue. Sublease availability has remained stable at 2.5 percent throughout 2021. This means that either existing spaces are not being listed for lease or the firms aren’t confident enough about removing their subtenants to reoccupy their offices.

For most of the last two decades, rents in certain regions have been stable or increasing. Clark said that although there was some contraction in submarkets in the latter part of 2021, overall landlord competition during the pandemic was greater than effective rents.

He said that average concessions rose in 2021, which put downward pressure on effective rents. The most notable aspect of the new deals is the average 19.4 percent increase in the number of months of free rent per annum. This is compared to the 2020 average. Regionally, the average 10-year lease has 12.6 months of free rent. However, examples of long-term leases that began in the close term fetch over one and a quarter and even two months free rent each year.

The same holds true for tenant improvements. Clark said that TI values have been rising, with many tenants earning over $150 per sq. foot, a sum not seen in previous years.

Making strides

Despite the challenges, there’s still activity.

Notably, the occupancy levels of District offices in 2021 remained low at 10 to 30%. This correlation is generally related with the number of COVID-positive patients in the area. Jordan Brainard, a senior vice-president at CBRE D.C. These levels are however increasing, as shown by the increased traffic and how crowded downtown restaurants have been in recent months, she said.

Brainard stated that 2021 saw an exacerbation or continuation of the same story as previous years, with supply outweighing demand in the D.C. office markets. The trophy category of buildings is a different story. In 2021, there was a continued flight towards quality in the market. Due to slowing construction deliveries, there is a shortage of high-quality space that companies are looking for in their offices.

CBRE reported positive absorption in the fourth quarter 2021, despite 3 million square feet of occupancy losses since March 2020. This is the first positive report in two years.

Brainard stated that renewals have been more popular than renewals because of uncertainty and tenants are taking a wait-and see approach. As a result, there is a growing trend of relocations. Spec suites are highly sought after by tenants who want immediate occupancy and move-in-ready options with fewer build-out-related risks.

At Hoffman & AssociatesThe company has been a major success with office leases in the second phase of The Wharf. Atlantic Media Freedom Forum Relocating to the neighborhood in 2022 or early 2023, depending on your preference.

The Wharf offices have seen a lower occupancy, but it started to rebound this fall. Shawn SeamanHoffman & Associates President. Our tenants are also more reliable than many other owners in other markets or sub-markets.

Seaman described 2021 as a year of growth and transition. Organizations continue to explore new opportunities and obstacles.

Seaman said that the success of office environments has never been more dependent on their location. The central business district is experiencing a decline in D.C. but mixed-use environments like The Wharf are thriving despite the downturn.

Reuniting people

The average office environment has seen major changes in the last 16 months. These shifts include the types and features that tenants seek to attract and retain talent.

Many companies have changed the environment in which employees work to bring them back to work.

Companies continue to evaluate their office space to make plans for the future. It is vital that properties meet tenants’ needs regarding employee health, wellness, access to quality amenities, conveniences, outdoor space, and accessibility to nature. Doug Firstenberg, a principal of Stonebridge.

See Also

JLLResearchIt is clear that the pandemic had an impact on tenants’ expectations of office space. Flexible floor plans and innovative technologies are now top amenities.

For instance, at Stonebridges Avocet Tower Bethesda had been planning features such floor-to-ceiling smart Windows and an outside air system (DOAS), for optimal safety and health in the office. These features have only become more important in recent months.

Hoffman & Associates has observed tenants prioritizing flexibility in their office meeting spaces for collaboration, ideation, and gathering.

From increased ventilation measures to more environmental additions like terraces and green space, health and safety are at the forefront for office buildings, Hoffman & Associates’ Seaman said. The Wharf’s open outdoor and green spaces are a major draw for many office tenants. This includes the piers as well as the planned 1.5-acre park, The Green. These spaces are more appreciated and needed by employees for their long-term success and for their mental and physical health.

Looking ahead

Even though omicron is spreading fast, experts believe that offices will continue being an important part communities and neighborhoods. They will also be the foundation for corporate work, idea sharing, and corporate work.

Remote work will be more relevant, Seaman said, but the energy, exchange of ideas, and creativity that occurs in the workplace cannot easily be replicated in remote locations.

Washington D.C.s next normal is a 15 to 20 percent vacancy rate, CBRE’s Brainard said.

This high level of vacancy will continue for theforeseeable future, which means great opportunities for tenants who are value-focused. However, the market for top-quality space will continue performing differently. Tenants will continue to place greater emphasis on space that is more efficient and in buildings with the best amenities. This will keep the market tightening in this most expensive and sought-after product segment. This category will be more competitive until speculative building resumes.

Keith Loria can reached at Kloria@commercialobserver.com.

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