Leasing Down 31% While Touring Dips 67%
April 7, 2020COVID-19 Impacts on Real Estate
These are unprecedented times, as the impacts of COVID-19 continue to evolve at a rapid pace. Our Metro DC Avison Young team is committed to you and remain available for discussions and advice as your partners. We hope you find these latest insights, our fourth note in this series, valuable.
Office Leasing: ↓ 31%
Businesses across the region are feeling the burden of the coronavirus pandemic, as all those deemed “non-essential” have been forced to work remotely, if not close down altogether. Uncertainty regarding the length and severity of the pandemic caused a 31% pullback in office leasing activity quarter-over-quarter.
The District, Suburban Maryland and Northern Virginia are driven by very different industries, and thus have reacted differently to the pandemic, though all saw decreased leasing activity in the first quarter. Suburban Maryland, the life sciences hub, saw a 3% decline in comparison to an average quarter in 2019. Washington, DC, experienced a 33% drop despite the significant increase in lobbying activity we have referenced in past updates. Northern Virginia was hit hardest, with leasing volume down 40% due to most of the tenancy there being globally focused and thus the crisis hitting earlier for global companies compared to regional or local ones. As Northern Virginia was the first market to feel the impacts of this crisis, it will also be the first market to experience growth from the government response. Contractor activity will drive Northern Virginia leasing with government contracts directly related to the response being prioritized.
Office Touring: ↓ 67%
Touring activity in March dropped by roughly 67% compared to a typical month in 2019, as many companies have paused any capital-intensive decisions and even those tenants who remain in the market are generally unable to physically tour space options.
A normal tour can be arranged in a day. A virtual tour – our temporary new norm – cannot be, requiring both additional marketing and technology efforts, all at an added cost ranging from hundreds to thousands of dollars, depending on the utility of the tools.
In the first two weeks of March, when the pandemic had reached a scalable level, but social distancing protocols had not been widely implemented, tour activity was down by 21%. In the third and fourth weeks of March, by which time nearly all non-essential businesses had become remote-only or had closed, touring was down by 71% on average.
These findings suggest that, although uncertainty is undoubtedly weighing on the regional office market, a substantial proportion of the slowdown can be attributed to the added friction of conducting business virtually. In a survey of Avison Young leasing brokers regionally, 75% reported that a majority of deals in the post-LOI stage (no longer dependent on touring) are continuing as normal, and only 9% reported less than 25% of deals in this stage proceeding. In contrast, 86% of Avison Young leasing brokers reported that less than half of their leases in the pre-LOI stage are moving forward at this time. Among those deals that have been put on pause, 73% are planning to hold off for 60-90 days, on average.
The Region’s Resilience
As the home of the world’s largest office consumer, the U.S. federal government, the Metro DC region experiences shallower downturns than peer markets and the overall U.S. In fact, in examining the last three downturns since 1990, Metro DC’s job market has seen an average decline of 2.3%, while its major MSA peers (NYC, SF, LA, Chicago) and the U.S. overall posted a decline of 5.4%.
Note only is the depth shallower, but the duration, shorter as well.
Government Leasing (2009-2011): ↑ 33%
While most office-occupying businesses are grappling with business continuity and a declining economy, the federal government is busy executing the long list of initiatives set forth to take the country out of decline, which in the current crisis comes from the CARES Act. Although this pandemic and the federal response to it are unprecedented in modern history, a look at what happened to our office market in the wake of the 2008 financial crisis provides some indication of what could be in store.
The regional office market experienced only one quarter-over-quarter decline in overall leasing activity during the financial crisis, down 11% between Q4 2008 and Q1 2009. Leasing activity accelerated throughout 2009 on a trajectory that continued into 2011, driven by federal government initiatives. The Federal Reserve expanded its footprint in the CBD by 350,000 sf, while other Treasury-related functions such as the Troubled Asset Relief Program (TARP) took down an additional 250,000 sf and The Securities and Exchange Commission saw its respective budget and regional footprint grow by 46% and 25%, between fiscal years 2008 and 2012.
As we outlined in our note last Tuesday, the CARES Act is twice the size of the American Recovery and Reinvestment Act of 2009. Because the current environment is rooted in both a health and financial crisis, the federal response goes far beyond financial regulatory bodies and includes most cabinet-level agencies. Expect a significant uptick in federal leasing demand in Montgomery County’s life sciences corridor, in downtown’s core’s government financial epicenter and increased demand from the Department of Defense and Intelligence sectors and their private sector contracting partners in Northern Virginia.
Defense Will Go Offensive
While most tenants have moved to the leasing sidelines, some remain focused on business as usual and are not only still transacting, but actually growing. Based on recent touring data collected from Avison Young brokers, 100% of the tenants that remain in growth mode are government contractors in Northern Virginia focused in the cyber and intelligence sectors. The Department of Defense budget is up 32% since its post-sequestration but pre-Trump low in fiscal 2015. The CARES Act will ignite growth further; the bill allotted an additional $10.5 billion to the Defense budget and set aside up to $17.0 billion for aid to industries that are critical to national security, including defense contractors.
Looking at leases signed in Q1 2020, the strength of the contracting sector is evident, and the geographic beneficiaries have been the Toll Road and Route 28 South markets. Activity in Q1 included a 125,556-sf extension by Booz Allen Hamilton in Herndon and large renewals by Accenture and Leidos in Reston and AECOM in Westfields, to name a few.
In our upcoming note on Thursday, we will take a deeper dive into how tenants are engaging with their landlords in these challenging times.
For more on the virus’ potential #CRE impacts, read the latest briefings on our
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