Commercial Broker Quarterly: Fall 2003 - GWCAR, Greater Washington Commercial Association of REALTORS(R)

CBQ >> Fall 2003 Issue

Tenants Remain In Control Of Market

by Joan Sapienza, Manager of Research & Information
Studley

Tenants continued to capitalize on favorable market conditions as Washington-area landlords, particularly those outside the Beltway, awaited stronger demand for office space. In many cases, tenants took advantage of favorably priced leasing opportunities and traded up to higher quality space. Weak economic conditions, combined with a lack of new jobs, have prevented any type of meaningful recovery.

The overall availability rate for the Washington metro area dipped slightly to 13.1% from 13.3% in the third quarter. The region experienced a 15% decline in the amount of available sublease space to 11.5 msf from 13.6 msf. A portion of this space reverted back to landlords as leases expired. During this time, the direct availability rate increased to 9.5% from 9.1%.

DISTRICT OF COLUMBIA

In Washington, DC the overall availability rate fell to 6.7% in the third quarter from 7.0% in the previous quarter. The Class A rental rate in Washington was $42.16 psf in the third quarter, up modestly from the $41.36 psf in the second quarter. The submarket demanding the highest rent was East End, which had a Class A rental rate of $43.96 psf.

Law firms continue to play a major role in generating leasing activity. Kirkpatrick & Lockhart signed the largest lease of the quarter, for 155,000 sf at 1601 K Street NW. This deal is just one of a recent series of pre-leases signed by large lead tenants that has been spurring new development downtown. However, leasing activity for the balance of these new buildings has been more elusive. For instance, 575 7th Street NW remains only 52% leased after signing its lead tenant, Venable, more than two years ago.

The investment sales market remained active this quarter. Starwood Capital Group purchased 1801 K Street NW in the CBD for $182 million ($323 psf). Wachovia Corporation acquired PEPCO's building at 701 9th Street NW in the East End for $151 million ($433 psf).

SUBURBAN MARYLAND

Maryland was the only jurisdiction to see an increase in availability in the third quarter as the Bethesda and Germantown submarkets softened. The overall availability rate for Suburban Maryland inched up to 13.9% from 13.7% during the third quarter, while the overall rental rate for the region was $23.12 psf, a $0.13 increase over the previous quarter.

In Bethesda, large blocks of direct space, such as PG&E's at 7500 Old Georgetown Road and Discovery's former headquarters at 7700 Wisconsin Avenue, combined with over 400,000 sf of sublease space, resulted in an availability rate of 17.4%. Germantown's softening was also assisted, in part, by the newly added vacancy of the Acterna building at 12410 Milestone Center Drive.

NORTHERN VIRGINIA

In Northern Virginia, office buildings continued to trade hands. Corporate Office Properties Trust strengthened its presence in the market, snapping up six buildings in just over a month. The former MCI buildings at 601 & 701 S. 12th Street in Pentagon City sold to Commercial Net Lease Realty for over $171 million ($318 psf).

The leasing market in Northern Virginia is still favorable for tenants, despite falling availability. Rents held relatively steady, posting rates of $23.74 psf during the third quarter as the availability rate fell from its peak of 17.8% at the start of the year to 17.0%.

The decrease in vacant space is due primarily to the expansion of several government agencies and government contractors expecting to win security-related contracts. The largest lease of the quarter was signed for the vacated PRC space at 1500 Tysons-McLean Boulevard by a confidential government agency. Also in Tysons Corner, Booz Allen Hamilton expanded its Greensboro Drive campus by 118,000 sf by leasing the remaining available space in the E.J. Randolph Building. The lease brings the total square feet occupied by this consulting firm's headquarters to 689,000 sf.

It is unlikely that a sustained recovery will be seen in Northern Virginia until the market witnesses a broader mix of industries absorbing space. Transaction velocity is slowly picking up and many deals are currently under negotiation. The market anticipates a significant increase in leasing activity at the start of the fourth quarter.