OFFICE MARKET TRENDS Absorption swung positive during Q4 for first time in 10 quarters, causing total vacancy to dip slightly to 19.9%. CBD absorption has reached positive territory for two consecutive years, with occupancy gain growing 30% YoY, but vacancy rates continue to gradually increase as the construction pipeline delivers remaining projects. Rents showed resilience, with the average asking rate at $59.54 p.s.f. Full Service (FS), reflecting the underlying strength at the top of the market. Trophy space continues to outperform, with asking rents rising to $91 p.s.f. FS. Trophy rents exceeded $90 p.s.f. FS for the first time this quarter and commanded premiums of 60% above the rest of the market. Trophy total vacancy is 12.3%, more than eight percentage points below the rest of the market. There is just one Trophy building under construction in DC, and no new office buildings broke ground in 2024. CBD leasing fell by 20% YoY, but this was largely driven by reduced expiration activity as new deals and expansions remained consistent. Leasing activity is still highly bifurcated by asset quality, but tenants are now targeting a broader share of buildings—the share of leasing in Trophy properties fell by 3% YoY, but the share of leasing in Class A properties increased by 24%. Federal government, law firms, and nonprofits and associations represented 55% of annual volume. 64% of tenants maintained or grew their footprint in 2024. Consulting and law firms drove growth in Q4 2024, with Alvarez & Marsal, Milbank, and Simpson Thatcher among WASHINGTON, D.C. (CBD) • The DC office market showed signs of improvement in Q4, with positive quarterly absorption for the first time in 10 quarters and a slight dip in total vacancy to 19.9%. • The CBD posted its second consecutive year of positive net absorption as downsizing has slowed and expansionary activity is returning. A flight to quality has driven gains predominantly in Trophy and Class A buildings. • Leasing activity in 2024 returned to pre-pandemic levels of 8.8 million s.f. Government, law firms, and nonprofits and associations drove leasing activity. • While total vacancy increased slightly from 2023 to 2024, office conversions will gain momentum in 2025, which will help reduce vacancy rates over time. Overall market statistics Forecast 2024 net absorption (s.f.) -876,320 Under construction (s.f.) 400,000 Total vacancy (%) 19.9% Sublease vacancy (s.f.) 1,444,125 Asking rent ($ p.s.f.) $59.54 Concessions Stable firms that grew their footprints the most. Additionally, tenants signing 10,000-20,000 s.f. leases in 2024 grew their footprint by an average of 3%. OUTLOOK There are signs for optimism for DC’s office market. The tight supply of Trophy space will continue, driving more tenants into the market sooner. This supply/demand imbalance in the Trophy market will reach a tipping point, and at least one new Trophy building will break ground next year. At the bottom of the market, conversions will gain momentum in 2025. Removing obsolete office buildings will reduce vacancy rates over time. Current and planned office conversions will remove 5.2 million s.f. from the office inventory. 82 million s.f. are set to expire market-wide over the next three years, and just 5 million s.f. remains available in supply built in the last decade or the pipeline, suggesting high renewal rates over the short term. MUST'S SUBMARKETS Net absorption and overall vacancy rates Gross leasing activity Rental rates and going-in yields Class A cap rate (%) Cap rate Asking rent 1.0 0.5 0.0 -0.5 -1.0 -1.5 8% 7% 6% 5% 4% 3% 25% 20% 15% 10% 5% 0% $75 $70 $65 $60 $55 $50 2010 2014 2018 2012 2016 2020 2022 2024 Washington, D.C. CBD Rest of Washington, D.C. 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 8.9M 5.3M 7.3M 6.8M 7.6M 4.8M 5.1M 4.8M 5.4M 6.7M 1.8M 1.8M 2.6M 2.7M 2.3M 2.2M 1.6M 1.9M 2.5M 2.1M Net absorption (m.s.f.) Total vacancy (%) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 ANNUAL REPORT 2024 | 49
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