Washington, DC Metropolitan Area market indicators describe a market that remains strong, despite some glimmers of a slowdown in activity. Although economic expansion in the Metro Area will occur at a more modest pace through the balance of 2007, Washington is still adding jobs at a steady pace and developers continue to move forward with speculative projects. The region anticipates further industry diversification, an expanding employment base and a continued increase in rental rates and office sales prices.

The region's unemployment rate is 3.0 percent, according to the U.S. Bureau of Labor Statistics. Though job growth has slowed slightly in recent months, Washington is still adding jobs at a steady pace. Decreased government spending could be one contributing factor to the gradual slowing in job growth. Overall, however, Washington's desirable location, low unemployment and job growth make for great fundamentals.

Green Design, and specifically LEED (Leadership in Energy and Environmental Design) is now at the forefront of revolutionary changes in the building industry and has certainly gained momentum in the Washington, DC region over the last few months. LEED is the nationally accepted benchmark for the design, construction, and operation of high performance green buildings. In recent months, many agencies have incorporated LEED as a requirement for new construction in the Washington, DC region.

Tenants are taking a stronger interest in contributing to the environment, by relocating to green buildings. Banks are beginning to consider LEED in the valuation and appraisal of properties, and insurance companies are considering lower premiums for companies that own green buildings. Federal mandates for LEED space are now changing standards from nice to have to need to have.

In general, the market remains healthy, the pace of the market remains strong, and although some developers may be nervous, given the high levels of development activity, it's tough to complain about a market, where vacancy rates are below equilibrium.

Rents have also increased through mid 2007, making it a good time for landlords and a challenging time for tenants looking for new space in Class "A" buildings in the District. Average rents in the District have increased to $44.97 per square foot from $42.74 per square foot, just twelve months ago. But, despite rising rates, the government continues to expand their office space and law firms are making no qualms about paying close to $70 per square foot for new office space.

Though the government and the law industry will always contribute to the largest percentage of leased space in the District, the tenant base has become more diverse in recent years, as companies like Parsons and the Bank-Fund Staff Federal Credit Union, who signed large transactions during the second quarter, are rapidly expanding in the downtown market. Tenants are also getting more creative with their leases and are increasingly looking to expand existing space in order to avoid the hassle of relocating.

While tenant demand will continue to center around the expansion of existing tenants, the District has seen a large increase in new leases signed over the last six months as well. It must also be noted that with the increased diversity among Washington, DC tenants, the demand for Class "B" space has picked up over the last year. Class "B" vacancy ended the second quarter at 5.7 percent as compared to the District's, Class "A" vacancy of 6.8 percent.

In the District, there are 5.6 million square feet under construction/renovation. Of this total, only 24.7 percent is preleased. The pace of development in the District of Columbia has picked up speed with such rapidity over the last several months that vacant land is becoming a rarity, particularly in the Central Business District. As a result, many owners have made the decision to build their buildings higher, by adding new floors. However, there is a "Height Act" in the District, which restricts all buildings to a height of 130 feet.

The lack of land for new office developments in the Central Business District and the East End has driven developers to reconsider each parcel as they search for the most profitable use. In the Central Business District, owners are adding floors to existing buildings. In the East End, parking lots and hotels not near the convention center are making way for new commercial space. Cost of land is higher in the East End and Central Business District, if you can find it. Sites have become a scarce resource. Accordingly, it is getting harder and harder to build products in these markets.

With land in short supply, there are some that believe the height limit should be raised. But, with the law in place, developers are now building in areas of the District where they might not have gone, such as NoMa, Southeast, and Southwest. Tenants who move across the river can expect to save $20 to $30 per square foot vs. options in the CBD. So, there is room to spread out, but it's not without some renovation and revitalization efforts planned to support new office buildings.

With the unemployment rate at 2.5 percent in Northern Virginia and the continued increase in job growth, the market fundamentals remain healthy and as a whole, the Northern Virginia office market continues to perform quite well. Demand slowed slightly in Northern Virginia over the last quarter, with vacancy rates hovering at 10.5 percent.

While vacancy rates have increased in Arlington over the last year to 11.1 percent, leasing activity has remained fairly steady. Among the five counties, Alexandria witnessed the largest decrease in vacancy during the second quarter, as vacancy rates dropped to a healthy 5.8 percent from 6.8 percent. Vacancy rates in Fairfax County remained relatively stable during the second quarter, increasing only slightly to 10.2 percent from a first quarter rate of 10.1 percent. Contributing to the slight increase in vacancy was the 550,591 square feet that delivered during the second quarter, only 24.1 percent of which was occupied by the end of the second quarter. Furthermore, 4.2 million square feet is under construction, only 13.9 percent of which has been pre-leased.

Vacancy rates in Loudoun County decreased slightly during the second quarter to 17.5 percent from a first quarter vacancy of 18.0 percent. Like the rest of the Northern Virginia region, development activity has also been high in Loudoun County. Although there weren't any second quarter deliveries to note, there is 604,855 square feet under construction with a pre-lease rate of only 26.5 percent.

In Prince William County, vacancy rates also decreased to 16.4 percent from a first quarter rate of 17.2 percent. When compared to the surrounding Northern Virginia counties, office development activity in Prince William County has been kept to a minimum.

Despite stabilized vacancy rates, leasing activity was very healthy during the second quarter with two large transactions signed by CapitalSource Inc. and Hewlett Packard.

With the consistent increase in vacancy over the last twelve months, it cannot be ignored that of the 275,000 square feet that delivered during the second quarter, both buildings delivered entirely vacant. Furthermore, 1.6 million square feet is under construction, with a pre-lease rate of only 23.3 percent.

In Prince George's County, the office market is exhibiting gradual signs of recovery as vacancy rates decreased to 16.1 percent from a first quarter vacancy rate of 17.2 percent. In accordance with decreasing vacancy rates, leasing activity picked up speed during the second quarter. In addition to the almost 600,000 square feet under construction in Prince George's County, there are also several projects in the planning stages. For example, in Fort Meade, 1.5 million to 2 million square feet of commercial space is planned. The Pentagon is reorganizing military bases around the country, hoping to use them more efficiently as it rolls out projects to generate cash by leasing federal land for private development. Fort Meade will help absorb some of the 22,000 federal and private-sector jobs that base reorganization is expected to bring to the area. The project will most likely break ground in 2008 and people will begin to move into the buildings in 2009. The project could take a decade to complete, depending on demands created by the BRAC process.