The impact of COVID-19 in the Washington D.C. metro area

commercial real estate Jul 31, 2020

Due to the COVID-19 pandemic, social distancing is enforced, groups of no more than 10-20 people is allowable. This has been a tough break for businesses that work from commercial real estate. They cannot get the amount of employees to work at a level that would bring in income to stay where they are. Everything has closed and that means, companies of all sizes are choosing to work from home. The commercial real estate industry has taken a hit. Landlords are questioning when things will return to normal and who might stop renting office space. The impact of the pandemic on the industry is varies. Asking for renegotiation in rent prices for the commercial real estate in the Washington DC metro area, is viable.

The first quarter

Lockdown came into effect around March but this has negatively impacted first quarter earnings; albeit not drastically. The Washington DC metro area, saw a negative net absorption of 338,026 square feet (ca. 3 ha). For that reason, finding new offices and booking an office tour shouldn’t be a problem. For places like national landing and others in Northern Virginia, the negative absorption was 232,504 square feet (2.16 ha). This has been the first negative net absorption for the Metro area since 2018; the third quarter specifically. A further decline from the previous quarter, the decrease amounts to 20 basis points. This is level with the rate that was recorded prior at the same time last year. In summary, this brings the total vacancy rate of the region to 16.3%. Although this has amounted to a consistent and accelerated decline, it's still not danger zone territory. Considering its options in national landing and beyond, is JBG Smith. It had plans to build office space at the L'Enfant Plaza. JBG Smith is working with Amazon in national landing. The wholesaler plans to build it's HQ2. JBG Smith filed plans for 2.6 million square-feet of planning last year.

Further south

Some major companies have their headquarters in downtown Washington DC and Northern Virginia. One of them being Northrop Grumman, arguably in the top 5 most important defense contractors in the US. Along with General Dynamics, the company trimmed and combined its renting office space leading to the majority of Northern Virginia’s negative absorption. Gross leasing in downtown Washington DC was good, but this is pre-coronavirus feedback reporting. Leasing activity is in purgatory, as businesses are waiting for the virus to come under control before making a move. In this regard, one can expect to see an uptake in office space, from biotech companies finding new offices. Keep your eye on the Suburban Maryland area, around the I-270 especially. Now might be the right time to book an office tour as the vacancy percentage for the first quarter is now at 18.4%. This is an increase of 10 basis points from the previous quarter. Expect to see a lot of companies renegotiate rent as the asking renting office prices have increased by 2%. Fingers crossed that this will turn around due to the predicted leasing activity in the second quarter.

What’s to come?

In the Washington DC metro area, 54% of businesses admit they are struggling to pay their rent. Many customers are keeping the option of breaking their leases on the table. This makes the need to renegotiation rent prices a lot more likely. 59% of renters are skittish over whether they should ask their employees to return to the office. However, landlords are not effectively communicating whether it is safe to do so. If someone with the virus has been given an office tour, how would they know it's safe? Coming up with some kind of return-to-work plan must be resolved at ground level between landlords and leaseholders/renters. You should be finding new offices in downtown Washington DC, in case the 2-meter rule is still in effect when lockdown lifts.

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