Commercial Broker Quarterly: Spring 2002 - GWCAR, Greater Washington Commercial Association of REALTORS(R)

CBQ >> Spring 2003 Issue

Relief Seen on the Horizon
First Quarter Market Wrap-Up

by Scott R. Franklin, Research Associate
Cushman & Wakefield

Despite the uncertainty facing the local and national marketplace, parts of the Washington, DC metropolitan area remain strong while other office submarkets continue to struggle.

Fears of a double-dip recession, along with the ongoing Middle East conflict, have prevented many businesses from making any significant decisions regarding hiring or expansion plans. Demand for office space remains subdued as evident by rising vacancy rates and anemic leasing activity.

Metrowide, overall vacancy reached 15 percent in the first quarter, a slight increase from the prior quarter. Despite some negative indicators, there are a few bright spots in the metro region. Sublease space has declined for three consecutive quarters and has returned to 2001 levels. Furthermore, the DC region continues to be the nation's top market for investment sales. With low unemployment levels and positive job growth over the past year, the metropolitan DC region is well positioned to make a steady recovery once the fog of uncertainty has passed.

With many market indicators remaining stable, the first quarter was highlighted by several record transactions in Washington, DC. The law firm of Wilmer, Cutler & Pickering signed the largest private sector lease ever in the District and will occupy three adjacent buildings along Pennsylvania Avenue. In addition, the first quarter also marked the highest per square foot (psf) sale transaction for an office building: 1399 New York Avenue NW, which sold for $511 psf. Vacancy levels remained fairly steady over the past quarter, with overall vacancy decreasing slightly to 7.6 percent. The District continued its trend of positive net absorption, although only 49,104 sf were absorbed.

One important indicator of the future office market is construction activity, which is at its highest level in several years. There are currently 5.8 million square feet (msf) of buildings under construction or renovation in the District, of which 43 percent is pre-leased. Demand for Class A office space will certainly need to increase in the coming months in order to absorb the 3 msf set to deliver in 2003. Given the ongoing struggles of many CBDs nationwide, the Washington, DC office market has performed remarkably well.

In Northern Virginia, market fundamentals continue to deteriorate although at a much slower pace than a year ago. Over the past quarter, overall vacancy rates increased slightly from 19.3 percent to 20.5 percent, while direct vacancy rates rose from 13.9 percent to 15.3 percent. The submarkets located in Fairfax County have yet to rebound from the glut of office space returned to the market by technology and telecom companies. Available sublease space, however, has decreased substantially over the past few quarters and is down over 10 percent from a year ago. Tenants are taking advantage of aggressive sublease terms in which they can move into quality built-out space for significant discounts.

Looking forward, vacancy rates are expected to remain stable and may decline as there are few speculative buildings delivering over the next several quarters. Government agencies and contractors have made their presence felt and will help to keep leasing at moderate levels.

There is reason to believe that the Northern Virginia office market has seen its worst days, although recovery is expected to be a slow and gradual process, particularly for the farther out submarkets.

Suburban Maryland ended the first quarter with a slight increase in vacancy rates, with overall and direct vacancy at 15.2 and 12.1 percent, respectively. Net absorption was significant with 418,429 sf of space absorbed in the market. This was largely a result of Discovery Communications relocating to their new 600,000-sf headquarters in Silver Spring, which was the only building to deliver during the quarter. Construction activity has dropped off significantly and is limited almost entirely to build-to-suit projects. Demand for office space is beginning to show signs of improvement as leasing activity has increased substantially from the fourth quarter.

The Washington, DC metropolitan region is likely to remain fairly stable in the near-term and will begin a gradual recovery over the next few quarters. Tenants have an abundance of opportunities available for discounted office space.

Once companies regain confidence that an economic recovery is fully underway, look for many of them to begin taking advantage of these opportunities.