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Office Leasing Slows To Historic Lows In D.C., With Law Firms Providing A Backstop

Leasing activity slowed dramatically in D.C. during the first quarter — new data from JLL, CBRE and Savills shows — as economic uncertainty led some tenants to delay decisions and remote work led others to shrink their footprints.

The office building at 1200 17th St. NW, where law firm Pillsbury renewed its lease.

By JLL’s calculation, it was the slowest leasing quarter in two years, with a volume of 724K SF totaling less than a third of the activity in the first quarter of 2022. 

“Volume overall has been down throughout the pandemic,” JLL Mid-Atlantic Research Director Michael Hartnett tells Bisnow. “We’re in a period now of continued economic uncertainty just adding to the decline.” 

By Savills’ calculation, it was the slowest quarter in the past five years, with leasing activity totaling less than half of the historic average during that period of time.

Savills Vice Chairman and Mid-Atlantic Market Lead Tom Fulcher said tenants often evaluate new leases over a period of at least two years before their expiration, so when there is market uncertainty they have the ability to put decisions off for multiple months.

“There are some people who basically said, ‘Let's give this a pause. We don't have to sign anything for a little while,’” Fulcher said, “So if you see enough of that, what you'll see is a quarter dip as people look at the potential downturn in the economy.”

A graph showing D.C. leasing activity over the last five years from Savills' Q1 Office Report.

Tenants that signed new leases reduced their footprints by an average of 27%, JLL estimates. Vacancy in the office market sits around 20%, per the three reports, a figure similar to Q4 2022 but still on an upward trend since the pandemic hit the U.S. three years ago.

Law firms led the way in D.C. office market activity in Q1. According to CBRE, law firm deals accounted for almost 43% of all leasing activity in the District last quarter — they comprised between 15% and 20% each year from 2018 to 2022 — signaling the industry’s long-term commitment to in-office culture. 

Nationally, law firms are at 60% of their pre-pandemic in-office levels, compared with 50% in workplaces as a whole, according to Kastle Systems. In D.C., law firms are at 50% of their pre-pandemic office usage compared with 47% in the city overall. 

Fulcher, whose tenant-focused firm represents many D.C. law firms, said these firms see office work as especially important because of their apprenticeship model, in which younger attorneys learn and advance their careers by collaborating with the firm’s more experienced partners.  

“Firm management is saying ‘hey, people, if you want to be part of this organization, you really need to be here, at least a significant part of the time,’” he said.

A chart showing D.C.'s gross leasing activity by sector from CBRE Q1 Office Report.

One of the largest deals this quarter was law firm Pillsbury’s 89K SF renewal of its space at 1200 17th St NW. The firm gave up its sixth floor, downsizing about 17K SF. Savills represented the firm in the deal. Fulcher declined to say the length of the lease but noted “it’s a longer-term extension.”

“Like many firms, they evaluated their needs, and they said, ‘you know, we don't need as much space as we've had before.’ So they did end up giving some space back,” he said.  

While Pillsbury chose to downsize, law firm Kellogg Hansen opted to significantly increase its office footprint with an expanded lease in its Sumner Square location through October 2036. The deal widened the firm’s footprint by 20K SF, from 63K to 83K on five floors, and it comes with a redesign set to be completed in summer 2024. 

“We’re going to make the spaces a little lighter, brighter, more spacious for social distancing,” Kellogg Hansen Head of Business Development & Marketing Elizabeth Jeffries told Bisnow. “We’re going to put in more spaces for rest, wellness, nursing rooms, all those things that our partners and associates are looking for.” 

New additions to the building include a Zoom deposition room, gym, wellness support space and conference center, while upgrades are coming to conference rooms, the library and common and reception areas. 

For companies like Kellogg Hansen that are investing in a physical space, improving the atmosphere for employees is a priority. 

“If it's not a really good environment [and] it’s not commute-worthy, then it's not really worth doing,” Fulcher said.

One of the major considerations when re-evaluating spaces to improve employee experience: window surface area. 

“A big thing is the access to light,” Fulcher said. “The buildings that were built in like 1990, the optimal building might have a 50K SF floor plate. The optimal building now, 17K SF floor plate.” 

In that vein, trophy buildings are an exception in the slow office market. 

“The bright spot for the city is that trophy vacancy is now declining,” JLL’s Hartnett said. His firm estimates a 12.8% vacancy rate among trophy office buildings, compared to 18.8% overall. 

While new buildings are leasing better, the office development pipeline has nearly frozen. Hartnett noted the only trophy office building under construction in the District is Skanska’s 1700 M St. NW — slated as the new D.C. office for law firm Gibson, Dunn & Crucher LLP.

Skanska's under-construction building at 1700 M St. NW, where it signed law firm Gibson Dunn, photographed in February.

The new location is just two blocks away from the firm’s current Washington Square 200K SF space, but it’s a building that’s vastly different architecturally, with a design that densifies space and prioritizes the larger window area offices are looking for. 

“There's a lot of little cutouts in that building, to provide more access to light there's different amenities in terms of signage and things,” Fulcher said. “And Washington Square, which was a building built back in the '70s, just doesn't really have that same ability to provide that.”

Beyond the active law firm sector, large deals from a nonprofit and a government agency also helped drive leasing activity in Q1. 

The Atlantic Council expanded by 36K SF, moving from its space at 1030 15th St. NW to a 79.7K SF space at 1400 L St. NW, a building where TMG launched a $20M renovation and rebranded it as The Aleck, CBRE announced Tuesday. 

The General Services Administration renewed the Customs & Border Protection Agency’s 194.7K SF East End space at 1331 Pennsylvania Ave. NW, but the federal government still remains largely out-of-office, according to a February CBRE study

Tenants relocating to trophy projects are creating some difficult situations for the older buildings they’re vacating, CBRE Mid-Atlantic Research Director Stephanie Jennings said.

“We have really strong activity in the top tier of buildings, our demand you know, kind of scales back or waves as you go down in the building classes,” she said. “And that's, I think, what's causing some maybe anxiety for Washington, D.C.”  

But with plenty of vacant office space downtown, office-to-residential conversions are accelerating.

Hartnett said JLL is tracking 17 near-future conversions and another 18 rumored conversions. “It's quite a substantial list that's growing each quarter when it comes to conversions.” 

The trend of conversions taking unoccupied office space off the market has helped keep the vacancy rate from rising further, CBRE’s report found. 

Office-to-residential conversions is a solution that the D.C. government has publicly supported, with Mayor Muriel Bowser exploring a change to the Height Act, as a way to incentivize residential developers downtown. 

Jennings says it makes sense given the post-pandemic shift in work culture and the “relative strength in the multifamily housing market.” 

“With kind of a backlash of commuting post-pandemic, people want to basically shorten their commutes as much as possible, and in a lot of ways that makes sense to put your housing stock commingled with your office stock, so I think there's a lot of potential,” she said. 

Looking ahead to the future of the market this year, experts say this quarter reflects a period of uncertainty, but that the market should right itself in time. 

“From a cyclical perspective, this is when you have all of your uncertainty and you don't have many of your questions answered yet. So it feels like a scary time but these things always get resolved,” Jennings said. 

“I tend to think that what's happening though, is people are looking at the future and just saying, let's give it a little bit of a pause here,” Fulcher said. “And then I think you'll see things pick up again.”