2007 Fourth Quarter Commercial Real Estate Market Report - GWCAR - Greater Washington Commercial Association of REALTORS(R)

Market Reports

2007 Fourth Quarter Market Overview

Washington, DC l Northern Virginia l Suburban Maryland

YEAR END SURGE POINTS TO ENCOURAGING 2008

The Washington, DC metropolitan region, totaling 278 million square feet, ended the year with over 1.4 million square feet of net absorption in the fourth quarter, bringing the cumulative annual absorption to 4.5 million square feet. The metropolitan area's strengths remain the presence of the federal government, job growth, which totaled 47,000 new jobs across the region, a surging delivery pipeline, low vacancy rates and rising rents across all building Classes. The Northern Virginia market led the region's quarterly growth with 856,447 square feet of net absorption, finishing the year with over 2.5 million square feet of net absorption. The District of Columbia witnessed another year of growth, posting 1.7 million square feet of annual net absorption. Suburban Maryland also absorbed 274,769 square feet, bringing year to date absorption into positive numbers for the year. Vacancy declined to 10.7%, a marked improvement from 11.6% at year-end 2006.

2007 presented unique opportunities and challenges for commercial real estate. Despite rising uncertainty about the state of the economy, the Washington, DC region experienced growth across most key market indicators, and while not growing at the same torrid pace of the past two years, maintained its position as one of the best performing and most desirable commercial real estate markets in the country.

Washington, DC

The District of Columbia's 97.4 million square foot inventory saw a flurry of activity to close the year in terms of both leasing and development. On the development side, several properties were vacated and began full renovations, leading to lower than average levels of absorption. Due to the past two years of rapid rental rate growth, many landlords have chosen to renovate buildings to Class A status in order to capture top of the market asking rates and re-tenant their holdings. The flight to quality that DC has experienced over the past three years was again apparent in the fourth quarter of 2007. The East End, which consists of a newer inventory than the CBD, benefited from the permeability that these two submarkets share, absorbing a majority of the tenants which left buildings now under renovation in the CBD. In total, the East End absorbed 521,249 square feet during fourth quarter, and 1.8 million square feet on the year, eclipsing the District total of 1.7 million square feet of absorption, as the CBD recorded 328,749 square feet of negative annual absorption. Over the course of 2007, firms such as Dewey Ballantine, DLA Piper, Cadwalader, Cooley Godward, Ernst and Young and Duane Morris represent some of the sizable tenants that migrated to the East End, many of these tenants occupied brand new buildings.

Fourth quarter deliveries consisted of two properties totaling just under 700,000 square feet, each with significant portions preleased. Vornado's full renovation of 2101 L Street, NW delivered with Greenberg Traurig as the lead tenant. Greenberg occupied roughly 115,000 square feet of the 373,000 square foot building. The other year-end delivery was 505 9th Street, NW, a 323,000 square foot building which was delivered 100% preleased by tenants such as the aforementioned DLA Piper and Duane Morris. Vacancy in the District, currently at 8.2%, improved dramatically when compared to the 10.5% rate posted at year-end 2006. This drop is due in part to the removal of the substantially vacant buildings undergoing renovation from the competitive inventory.

Leasing velocity in the fourth quarter was driven by large law firm activity, highlighted by Mayer Brown's prelease of the 243,000 square foot 1999 K Street, NW in its entirety and Bryan Cave's lease of 88,000 square feet at 1155 F Street, NW, both of which will deliver in 2009. The large preleases are further indication of the demand for new construction in the District.

Rental rates continue their climb, with a market wide average asking rate of $46.78 per square foot. Class A average asking rates were $52.37 per rentable square foot, up 7% from $48.93 at year-end 2006.

Northern Virginia

Northern Virginia closed 2007 with a strong performance, as a late surge in absorption bolstered overall market dynamics. Absorption in the fourth quarter topped 775,000 square feet, due in part to the Tysons Corner submarket where the FBI occupied 154,000 square feet at the Page Building; GSA occupied 81,000 square feet at the Culpeper Building; and SAIC renewed for 36,000 square feet at Courthouse Centre. Despite construction slated to commence in 2008 for the Metrorail to Dulles, demand has not waned in Tysons Corner, underlined by strong rental rate growth. In the fourth quarter of 2007, Tysons Corner had an average asking rate of $36.57 per square foot for Class A space, up from $36.07 in the third quarter. New buildings in the best locations will continue to command strong rental rates. Asking rental rates at two prime buildings currently under construction in Tysons Corner, Park Place II and Towers Crescent, are $45.00 and $52.00 per square foot, respectively.

The 123 million square foot Northern Virginia market absorbed 2.5 million square feet for the year, and had a vacancy rate of 12.3%, down from year end 2006's mark of 13.1%. 3.3 million square feet delivered in 2007; during fourth quarter alone, 884,000 square feet were delivered.

Northern Virginia is trending towards a tenant driven market in some submarkets, with owners offering larger leasing concessions to attract tenants. Overall, economic indicators remained strong for the market, as 42,000 jobs were created in 2007 and another 47,000 new jobs are expected in 2008. Industries of strength in the fourth quarter continued to be defense contractors, due to federal spending, and law firms, capitalizing on 2007's boom in mergers and acquisitions.

On the traffic front, the $2.4 billion Wilson Bridge replacement is in its final stages with the second span of the 12 lane bridge expected to open in the second quarter of 2008. High Occupancy Toll Lanes (HOT) construction will begin in early 2008, and will encompass a 14-mile segment of the Capital Beltway from Springfield to the Maryland border.

Suburban Maryland

Despite some softening, the Suburban Maryland office market's overall performance was stable in the fourth quarter of 2007. New deliveries, leasing, and speculative construction continued at a steady clip. Net absorption for the quarter was 274,769 square feet, up from 95,768 square feet one quarter ago.

MONTGOMERY COUNTY
At year-end, the 58.2 million square foot Suburban Maryland market recorded an overall vacancy rate of 11.8%, a slight improvement from the third quarter. The North Rockville submarket had the quarter's largest positive net absorption number at 165,965 square feet; more than one-third of this occurred when AARP occupied over 58,000 square feet at 15 West Gude Drive. Nearly 290,000 square feet were delivered in the fourth quarter. As some of this space came online with significant preleasing activity, the market's overall vacancy rate was virtually unchanged at 11.8%, compared to 11.9% last quarter. Suburban Maryland's rental rates also fared well in the fourth quarter of 2007. The overall average asking rate rose $.66 over last quarter to $27.80 per square foot. The fourth quarter Class A rate was $30.12 per square foot, up from $29.46 in the third quarter, and the average rate for Class B space increased over the last three months from $26.32 to $26.58 per square foot.

Bethesda remained the tightest submarket in Montgomery County in the fourth quarter of 2007, with an overall vacancy rate of 8.5% and a Class A vacancy rate of 6.7%; each of these rates represents a less-than-one-percent increase over last quarter. The submarket's 51,442 square feet of negative absorption for the quarter was a result of several smaller tenants moving out and does not reflect a large tenant contraction; year-to date net absorption stands at a healthy 263,647 square feet. Further stimulated by little available existing or new space, overall average rents and Class A rates rose to $34.67 and $40.33 per square foot, respectively. Bethesda's Class A prices are $5.62 per square foot above those of the second highest submarket, North Bethesda, where Class A space averaged $34.71 per square foot in the fourth quarter.

Several large leases defined the market's leasing activity for the fourth quarter. For the second quarter in a row, Prince George's County recorded the largest lease, with Comcast taking over 92,000 square feet at 1301 McCormick Drive in Largo. SGT also signed for approximately 41,500 square feet at 7515 Mission Drive in Lanham. In Montgomery County, JBS International committed to 50,000 square feet at 5515 Security Lane in North Bethesda, and The Travel Channel took more than 30,000 square feet at 5425 Wisconsin Avenue in Bethesda. At One Preserve Parkway in Rockville, Booz Allen Hamilton preleased nearly 31,000 square feet, and Merchant-Link took 25,000 square feet at 8401 Colesville Road in Silver Spring.

Suburban Maryland's construction starts remain strong. Several buildings broke ground in the fourth quarter of 2007, adding over 1.2 million square feet to the delivery pipeline. Market watchers are keeping careful track of the level of speculative construction occurring along the I-270 Corridor. Historically, Suburban Maryland has performed consistently but modestly and Grubb and Ellis anticipates some submarkets could see their vacancy levels climb over the next year.

FORECAST
Throughout the Washington, DC region overall rental rates are expected to level off in 2008. In 2008, expect to see both higher vacancy rates and strong leasing velocity in select submarkets with elevated levels of speculalative construction. While there has been a recent trend of relocations from the District to proximate submarkets in Arlington, there has been no appreciable increase in vacancy and the vacated space has been quickly reabsorbed.

Northern Virginia will be increasingly bifurcated in 2008 with sharp performance distinctions between close-in submarkets such as the Rosslyn-Ballston Corridor and outside the beltway submarkets. Closein Virginia markets will see ongoing interest from District tenants who can secure a Class A building for the District's Class B prices.

In Suburban Maryland, development and tenant demand will follow north along I-270, as closer-in submarkets, such as the supply constrained Bethesda, offer few economic opportunities for tenants. In Prince George's County, access is key. Buildings that will perform best in 2008 will feature access to Metrorail or major roadways or visibility from the Capital Beltway.

Courtesy of
Courtesy of Grubb & Ellis