GWCAR Quarterly: Fall 2002 - Third Quarter Market Wrap Up

CBQ >> Fall 2002 Issue

The Washington Metro Area Office Market: A Third Quarter 2002 Survey

by Mary Petersen, Senior Vice President, Cassidy & Pinkard

The Washington area office markets followed three different courses during the third quarter 2002, staying true to their usual performance. Leading the metro area - and all of the United States, for that matter - the downtown Washington, DC market saw a reduction in vacancy from 6.3% to 6% and positive absorption (defined as the net change in occupied space) of 667,223 square feet. Maryland maintained its "steady Eddie" role, posting a slight change in vacancy from 10.4% to 10.6% with positive net absorption of 582,000 square feet. And Virginia, traditionally the most volatile of the three markets, saw a jump in vacancy from 15.9% to 16.9%, along with negative absorption of 818,607 square feet.

In the investment sales market, Washington, DC continued to be a mecca for investors, who snapped up office buildings of all sizes and quality at rising prices throughout the year. Investors have dropped their return expectations by perhaps 100 basis points during the year, leading to capitalization rates in the 7% to 8% range for Class A buildings and prices of $300 to more than $400/square foot. In Virginia, despite the high vacancy rate, stabilized buildings inside the Beltway traded at cap rates in the 8% to 9% range and prices of from $200 to more than $300/square foot, while stabilized properties outside the Beltway commanded prices in the $200 to $275/square foot range.

The decline in the vacancy rate in downtown Washington reversed a nearly two-year trend of small but steady increases from the rock-bottom 3.6% vacancy rate registered in the third quarter of 2000. There was evidence of tenant demand, especially by smaller groups who took advantage of bargain sublets available in Class A buildings. In addition, the federal government indicated that it would be a major player in 2003, both in the District and in the close-in suburbs. At the same time, supply of new buildings during the third quarter was limited to just one building, a 352,000 square-foot build-to-suit at 500 5th Street NW for the National Academy of Sciences.

Other trends evident during the third quarter were:

* Continuing speculative development, though at a lower rate than in previous years. There were two third quarter construction starts: Douglas Development's speculative redevelopment of the old Woodie's department store at 1025 F Street, NW and Boston Properties' 537,454 square foot building at 901 New York Avenue, NW, which was two-thirds preleased to two law firms.

* A move up in quality as tenants took down small blocks of sublet space, resulting in a decline in the Class A vacancy rate from 7.1% to 6.2% during the quarter and a slight rise in the Class B vacancy rate from 6.1% to 6.6%. The amount of sublet space on the market dropped modestly from 1.8 to 1.7 million square feet.