Quarterly: Spring 2004 - GWCAR - Greater Washington Commercial Association of REALTORS

CBQ >> Spring 2004 Issue

Virginia Makes Gains; DC Stable; MD Slipping

by Edwin Gotico, Assistant Director of Research, Cassidy & Pinkard

Overall, the Washington, DC region remains one of the healthiest office markets in the nation. As of the first quarter 2004, the region absorbed approximately 2.28 million square feet driving vacancy rates down from 12.4 percent in the fourth quarter of 2003 to 12.1 percent in the first quarter of 2004. Government agencies, government contractors and law firms remain the primary drivers of the Washington, DC region accounting for the majority of the leases signed. The region's growing economy, large federal government presence, highly educated workforce and population growth trends have all been contributing factors leading to the success of the Washington, DC region.

NORTHERN VIRGINIA

Northern Virginia is the largest office market comprised of more than 135 million square feet of office space. During 2001 and 2002, the impact of the economic recession combined with the tech/telecom collapse drove Northern Virginia's vacancy rate as high as 17.8% by the first quarter of 2003. Development has been limited over the past few years resulting in a low supply of new space. Large blocks of sublet space returning to the market from failing tech/telecom companies has also diminished. Since then, healthy market fundamentals have returned to the market as Northern Virginia experienced four quarters of positive net absorption as well as a decline in vacancy rates in 2003. For the first quarter 2004, net absorption logged in at over 2 million square feet pushing vacancy rates down from last quarter's level of 16.3 to 14.8 percent. Government contractors, financial and consulting firms were responsible for quarterly leasing activity. Most notably, seven of the top 10 lease transactions occurred outside the Beltway in Tysons Corner, Reston, Herndon and Route 28 South.

These submarkets featured the highest vacancy rates of the region for past two to three years as the tech/telecom companies went bust. Today, these submarkets are the most attractive because they feature large blocks of Class A space at cheaper rental rates. This condition has attracted tenants in bulk over the past four quarters. The largest lease transaction in Northern Virginia (as well as the Washington, DC region) was Booz Allen Hamilton's 242,000 sf lease at 13200 Woodland Park Road in Herndon. Freddie Mac signed the second largest lease (202,000 sf) at 8000 Jones Branch Drive followed by PriceWaterhouse Coopers (160,000 sf) at 1800 Tysons Boulevard both in the Tysons submarket. The Herndon submarket, enduring the highest vacancy rate over the past few years, experienced the highest net absorption of 567,994 sf bringing its vacancy rate down from 30.4 percent last quarter to 24.8 percent. The Tysons submarket also outperformed other submarkets absorbing 373,596 sf, which lowered the vacancy rate to 17.9 percent. Inside the Beltway, Arlington's strong leasing activity led by government contract firms, resulted in a net absorption of over 372,000 sf for the quarter leading to a vacancy rate of just 9.2 percent.

DISTRICT OF COLUMBIA

Over the past two to three years, Washington, DC was the only office market to defy nationwide trends achieving single digit vacancy rates, positive net absorption and strong leasing activity all throughout the economic downturn. Again, the Washington, DC office market maintained a stable vacancy rate of 7.1 percent (down from last quarter's vacancy rate of 7.2 percent), representing one of the lowest vacancy rates in the nation.

Federal government agencies and law firms accounted for the majority of leasing activity in the District. These tenants secured eight of the top 10 lease transactions, mainly in the East End submarket, contributing to the area's positive net absorption for the quarter. In the Capitol Hill submarket, the Department of Homeland Security signed the largest lease of 109,871 sf at 111 Massachusetts Ave. NW followed by Crowell & Moring (102,146 sf) and Thelen Reid & Priest (75,424 sf) both in the East End. DC's limited supply of large blocks of space has forced law firms to sign pre-lease commitments or renewals years ahead of their lease expirations exemplified by Crowell & Moring's renewal and expansion at 1001 Pennsylvania Ave. NW.

SUBURBAN MARYLAND

The Suburban Maryland office market experienced little leasing activity for the first quarter of 2004, but showed signs of improvement in certain submarkets. The supply of space returning to the market has slowed and new office development has decreased. However, tenant demand was weak, as the usual drivers of the market (NIH, health-related contractors and bio-tech firms) remained relatively quiet for the quarter. The majority of leases signed in Suburban Maryland ranged in sizes from 1,000 to 5,000 sf. Overall rental rates remained steady and vacancy rates decreased from 12.6 percent in the fourth quarter of 2003 to 12.0 percent in the first quarter of 2004. Net absorption for Suburban Maryland was also a positive 248,633 sf, a significant improvement over the previous quarter's level of just 66,850 sf. Several submarkets such as Bethesda/Chevy Chase, Gaithersburg/Germantown and Silver Spring reported an increase in leasing activity from a diverse range of companies. Leasing activity was the highest in Bethesda/Chevy Chase as the Mills Corporation signed the largest lease for the quarter taking 202,000 sf. Other top leases included ABT Associates (30,794 sf) at 4550 Montgomery Avenue in Bethesda/Chevy Chase; Corinthian Colleges, Inc. (30,752 sf) at 8757 Georgia Avenue in Silver Spring; and Rydex Funds, Inc. (25,000 sf) at 9601 Blackwell Road in North Rockville.