During the quarter, demand for office space grew by 235,835 square feet, bringing the total for the year to 21,864 square feet. 2015 was the last time annual net absorption was positive.
Demand for high-end space continued to grow at the expense of lower-quality product. During the year, net absorption of Class A space measured 2.0 million square feet, while the combined net of absorption of Class B and C space was negative 2.0 million. Higher quality product has outperformed lower-end space since mid-year 2015.
Four buildings delivered in the fourth quarter, adding 1.4 million square feet of office product to the market. Of the space, 67 percent was leased upon delivery. These deliveries reduced the amount of space under construction to 4.3 million square feet, the lowest amount since the second quarter of 2016.
Since very few undeveloped parcels remain, developers have been demolishing or renovating older buildings to meet tenants’ demand for high-quality product.
Even with over 200,000 square feet of net absorption, the amount of new supply forced the vacancy rate up from 12.7 to 13.0 percent during the fourth quarter. The vacancy rate has risen every year since the beginning of 2013 when it measured 10.0 percent. The increase pushed the vacancy rate to the highest level recorded in the District of Columbia since 1993.
Class A product’s vacancy rate increased from 12.7 to 13.7 percent during the year, while the combined Class B and C rate increased from 10.9 to 11.7 percent.
The direct average asking rental rate increased $0.15 or 0.3 percent to $56.17 per square foot during the quarter and $0.30 or 0.5 percent from the start of 2018.
The Class A rental rate decreased by $0.15 or 0.2 percent during the quarter to end the year at $60.03 per square foot, the second decline in a row. The Class A direct asking rate peaked in the second quarter of 2018, and has subsequently fallen 2.2 percent since that time.
The Class B direct average asking rate rose $0.17 or 0.3 percent to $49.26 per square foot during the fourth quarter. It was a 4.8 percent increase from the start of 2018.