Shrinkage: Office and Retail Leasing in 2021
Enough has been written about the woes of the office and retail real estate markets to make it clear both are in trouble, both suffering shrinking demand and obviated purpose as a germaphobic workforce isolates at home and shops online. And yet the aftermath of the pandemic is neither as obvious nor as uniform as may seem. The retail apocalypse sinkhole, identified in 2018 as the scourge of malls and mom-and-pops, swallowed restaurants in 2020 as biblical-level pestilence, mayhem and inferno forced storefront closures nationwide (add insurrection to the list in 2021). Zoom replaced offices, 40,000 dry-cleaners were sidelined (shirts only, if that), and in some parts of the country steakhouses and bars have collected dust. Malls and co-working office space...well, let's not even discuss that. Not good.
NAIOP projects the office market will have negative net absorption (oxymoronic real estate speak for demand shrinkage) 18 million s.f. in Q4 2020 (the numbers are not yet in), and 10 million s.f. in Q1 of this year. Office leasing in DC went from more than 1.6m s.f. in March 2020 to around 700,000 s.f. in October, according to Costar - a bigger percentage drop than occurred in the great recession of 2009. The National Association of Restaurants says 400,000 restaurant jobs were lost. Just in December. The casualty list is long. Yet the same NAIOP report projects that office space will recover all lost territory by Q3 2022, a projection backed up by Cushman Wakefield.
Still, recovery looks to be a tale of two cities. Or rather, a tale of cities and suburbs. Of the office markets to fare the best, suburbs have easily outperformed the downtown core. In the DC area, Tysons Corner handily outpaced downtown DC, 90,000 vs. 28,000 s.f. of office leased, according to the same Costar report. Even Bethesda, heretofore a rounding error in the office market, notched higher numbers than downtown DC. DC's office vacancy reached 15.9% at the end of the year, or 16.9% according to NGKF. Retail leasing was nil in downtown DC in 2020, as downtown retailers sought residential neighborhoods over office-centric blocks, with restaurants abandoning the happy hour / expense account model for the safe harbor of shopping centers and ghost kitchens in residential areas.
If the aforesaid prognostications bear out, losses will be erased next year, at least in the aggregate. Office building owners in downtown Washington DC will continue to watch vacancies climb in the short term as office managers recalibrate, shedding office space in favor of remote work and moving out of the urban core. That trend is also likely to reverse over time, but the looking glass is not clear. Still less clear is the climate for retailers. Density, food, culture and opportunity beckon to the metropolitan centers, but until the office workers return en masse, retailers need not reopen. Still another metric will delay the return of retail downtown: the percentage of workers returning to the office each day. While analysts watch the easier-to-measure office leasing data, less susceptible to measurement, at least for now, is the amount of office workers showing up each day. Regardless of net absorption in office space, if office workers show up only in shifts, or staggered, that bodes ill for dinners downtown, happy hours and shopping. The Downtown DC BID says just 5% of offices are occupied at the moment. To put it succinctly, if only 50% of office workers show up on any given day, why have happy hour at all?
The remote work phenomenon has its naysayers, noting the distractions of home offices, Zoom burnout, the need for human interaction, and the lack of serendipity. Undoubtedly workers will shift back toward the office and away from the virtual office. DC still has much lower office vacancy than most suburbs (19.2% in northern Virginia) Still, if 90% of offices renew their leases, and 80% of workers come back to the office, the streets will see just 72% of foot traffic compared to before the pandemic. For office buildings, this might be a formula they can live with; for retailers, this may portend yet a new wave of the apocalypse.
Washington DC retail and commercial real estate news