The Metropolitan Washington, DC office market started 2006 with a sizzling first quarter. Strong demand coupled with positive employment fundamentals characterized the first quarter's office market. The region's office and employment market remained the strongest in the country, fueled largely by the increase in Defense and Homeland Security budgets for Northern Virginia and strong private sector growth within the District and Suburban Maryland.

• Spanning the past three years, the Metropolitan region has created more jobs than any other metropolitan area. Since February 2003, approximately 215,500 jobs were added to the regional economy, with 38% of those jobs consisting of office sector employment growth.

• Limited new supply within the first quarter and strong demand from the private sector, especially among smaller users, helped shift the Metropolitan DC vacancy rate downward from 8.8% at the end of 2005 to 8.5% at the end of the first quarter. In total, approximately 2.1 million square feet of space was absorbed in the first quarter throughout the Metropolitan area.

• Average asking rental rates increased throughout the region in the first quarter. The overall Metropolitan average asking rental rate shifted upward from $30.36 per square foot at year-end to $31.21 per square foot at the end of the first quarter, a 2.7% quarterly increase and a 7.6% year-over-year jump.

• In the next 12-24 months, we could see an increase in vacancies across the board as development activity ramps up. Nearly 15.8 million square feet of office space is under construction throughout Northern Virginia, Suburban Maryland and the District, with only 40% of the space preleased.

• The District's office market began 2006 with stellar activity. Once again, driven primarily by the private sector, the District experienced 695,925 square feet of positive net absorption. Only one significant government expansion occurred in the first quarter: the FBI taking another 57,000 square feet at 616 H Street, NW.

• Significant vacancy drops in the East End and Central Business District contributed to an overall decline in the District's vacancy rate. The vacancy rate decreased from 6.2% in the fourth quarter of 2005 to 6% at the end of the first quarter.

• Large blocks of contiguous space are almost non-existent within the CBD and East End. Only four blocks (2 Class A and 2 Class B) of contiguous space greater than 100,000 square feet are available for immediate occupancy. This undersupply of large blocks of space has lured several owners within the K Street, NW corridor to build upwards. Four buildings will commence construction this year in order to add floors to the buildings and upgrade existing building conditions.

• Rents in the District continue to escalate as demand remains strong, particularly in the Trophy and Class A market. The Class A average asking rental rate increased from $47.16 per square foot at the end of 2005 to $48.63 per square foot in the first quarter.

• Northern Virginia's office market experienced gains in all areas besides Alexandria, with Fairfax County once again accounting for the majority of growth. Net absorption totaled nearly 1.7 million square feet in the first quarter, with no deliveries to inflate that figure.

• Strong leasing activity to begin the year shifted the vacancy rate down from 9.9% to 9.4%. Vacancy remained 130 basis points below first quarter 2005's mark of 10.7%.

• Rental rates continue to establish record-highs as the average asking rental rate increased from $27.44 per square foot to $28.68 per square foot during the first quarter. Additionally, rental rates throughout Northern Virginia have increased 7.1% since the first quarter of 2005.

• While vacancies fall and rents rise, the amount of space currently under development threatens to pose a possible oversupply issue. 7.3 million square feet of office space is scheduled to deliver over the next 21 months. However, preleasing levels have decreased from historical norms in the 60% range to approximately 39% at the end of the first quarter.