The Metro area (District of Columbia, Northern Virginia, and Suburban Maryland) continues to perform, but not at the healthier pace of recent years. Tenant office transactions were dominated by renewals and movements in the market, by tenants shifting from one market/submarket to another, created minimal net gain in office occupancy. The Federal Government continued to help drive the local economy by leasing just over 1.2 million square feet of office space during the first quarter of 2008.

The Metro area sustained modest increases in direct vacancy over the first quarter. As a whole, the direct office market vacancy finished the quarter at 9.5% up from 8.9% at the end of the fourth quarter, and 8.5% year over year. Suburban Maryland was the only submarket in which direct vacancy increased by a full percentage point. The District posted the lowest increase, rising ten basis points to 8.0%.

Asking rents across the core and outlying markets remain asymmetrical. For example, asking rents in Washington's Downtown are, on average, 11.7% higher than those in non-core DC submarkets. In Virginia and Maryland, vacancy rates for submarkets inside the Capital Beltway are, on average, 5.5% lower than those on the outside. Northern Virginia was the only submarket to see a decrease in average asking rents, marking the first decrease since the second quarter of 2005. In the District the total average direct asking rent increased by 1.1%. Asking rents for Class B properties in the District, which have the lowest vacancies, were up 1.2% over the prior quarter.

With the delivery of vacant new office properties and several consolidations in the suburban office market, net absorption for the Metro area was negative during the first quarter. In Washington the Central Business District sustained the most significant negative net absorption at -423,762 SF.This can be attributed primarily to the Corporate Executive Board's move from several locations in the city to a new main headquarters building in Rosslyn, Virginia.

The Washington Metro area has been subject to significant new office development. With 16,300,143 SF under development right now and 2,130,833 SF delivered in the first quarter, the region has some of the greatest amount of commercial development in the country. The District has the largest share of new construction with 9,359,119 square feet in thirty four properties. Over the past year the Northern Virginia market has delivered the most office space to the market with 5,394,154 SF, of which 46.2% is still available for lease. With slowing national economic conditions, leveling job growth in the Metro area and the eventual delivery of these new properties, we expect that vacancy rates will increase, asking rental rates will level, and landlord concessions to tenants will increase.

TENANT VIEW
The Washington, DC metro area is presently poised to become an even more interesting and complicated real estate market than it has been in the past. With a dulling economy, projected (lack of) job growth and an abundance of space now under construction, all is not necessarily well if you are a landlord in the office space market. There is a growing segmentation to the market; based upon size, building classification and geographic location within the area, the numbers tell very different stories. Law firms continue to drive the District's market by taking new trophy buildings in prime locations. The balance of the market is working to pull itself toward the top despite an ample supply and lack of demand for other product types away from core markets. For tenants that do not require the newest, best building at a prime location, there are ample opportunities. A well-advised tenant willing to consider a range of opportunities, alternative operating structures and occupancy strategies should continue to have good leverage and fare well when compared to the market in general.

LANDLORD VIEW
Owners of real estate in the Washington, DC metropolitan area have begun to feel the pinch of the general economic malaise that exists throughout the country. As we close out the first quarter, the driving factors that have risen concerns about the slowing of demand are the increased pace of renewals (both short- and longterm), the uncertainty of the political landscape with the Presidential election on the horizon, and the continued fear of when the final shoe drops with the credit crunch. Overall, the high-end, trophyclass buildings and the Class B market continue to remain strong with continued rent growth; however, the commodity Class A market is experiencing the most difficulty under the current market conditions.

INVESTMENT SALES VIEW
Investment sales activity in the Washington Metro area has declined dramatically since the third quarter of 2007, although record breaking prices were achieved on a few recent trophy building sales. Ireland-based based private equity fund VICO Capital purchased 2099 Pennsylvania Avenue for $878/sf, followed by Ralph Dweck's purchase of 300 New Jersey and 51 Louisiana for $820/sf. However, many would be sellers are electing to take their buildings off the market or refinance instead as volatile credit markets and a sluggish economy have combined to greatly narrow the field of prospective purchasers. This impact is even more profound in suburban markets, where the barriers to entry for new construction are lower and lease up risk is greater. Look for continued slow activity through the balance of the year until capital markets readjust and the economy shows signs of strengthening.