Availability remains abundant across Washington, D.C., as the city ended the fourth quarter at a market-high vacancy rate of 19.5%. Overall, availability has continued to grow into the new year. As new construction delivered throughout 2022, more space was added to the sublet market and coworking terminations began to put upward pressure on availability. Available sublease space in the D.C. market continues to trend upwards and remains robust with over 3.6 million square feet (msf) available - 4.1% of inventory. A sizable portion of the overall available sublet inventory (approximately 1.5 msf) remains high quality, long-term space, such as law firm or private sector space brought back to market due to mergers or quality Class A space vacated early in flight to new construction. However, more space is coming to the sublease market that has never been occupied by the sublessor as many companies reevaluate their space needs post pandemic. As more sublease options continue to come to market, increased competition and the relative value of sublet compared to the direct market, coupled with the lack of demand, will drive down the potential recovery from subleasing.
Class A space makes up nearly 75% of the sublease inventory and 70% of the Class A space is in the East End and CBD. Even though the bulk of sublease space is in the core of D.C., the outer and emerging submarkets are putting large quality blocks on the market. Notably, Chemonics makes up the bulk of sublease offerings in Capitol Riverfront with 123,000 sf available while the International Baccalaureate HQ at newly delivered City Ridge added 57,000 sf to the sublease market at the end of 2022.
Sublease leasing activity has accounted for nearly 281,000 sf of new leasing throughout 2022. The largest sublease in 2022 occurred in the West End/Georgetown submarket when the not-for-profit organization The Special Olympics took the top two floors at The Watergate (2600 Virginia Ave NW) after the National Trust for Historic Preservation put the space on the sublease market in December 2021. There were 30 subleases signed in 2022- a third of the leases were over 10,000 sf blocks and accounted for nearly 200,000 sf of new leases. Smaller sublets have been leasing faster than larger sublet spaces. Out of the 30 sublets leased in 2022, spaces under 5,000 sf were on the market for an average of 12.3 months, while 5,000-15,000 sf sublet spaces were on the market for an average of 21.2 months and sublet spaces over 15,000 sf were on the market for an average of 13.8 months.
The sublease market has followed the broader market’s trend of flight-to-quality and high-quality sublease space at a relative discount to market has generally leased well. Subleases offer an attractive option for tenants who are cost conscious but do not want to compromise the quality of the spaces. As evident in the flight-to-quality trend, sublet tenants also prefer buildings with higher-quality amenities. Out of the 30 leases signed in 2022, 97% of the buildings had fitness centers and 47% had both fitness centers and conference facilities. Spaces located in buildings with fitness centers and conference facilities were on the market for an average of 12 months which was six months less than spaces in buildings with fewer amenities. Currently, the average sublease price is $43.58 per square foot (psf) which is 22% lower than the average direct cost of $56.12 psf. Last year, 70% of all subleases signed were Class A spaces and, on average, Class A spaces were on the market shorter than those in Class B and C buildings. This leasing trend is expected to continue in 2023 as companies enforce return to work policies and provide attractive offices and amenities for their employees.