CBQ >> Summer 2003 Issue
Northern Va. Leads 2nd Quarter Office Markets The Northern Virginia office market outshone both the Washington, DC and Maryland markets by finishing the second quarter of 2003 with a full percentage point drop in the vacancy rate from 17.8% to 16.7% and positive net absorption of 1.6 million square feet.
Washington, DC's vacancy rate declined slightly from 6.2% to 6% with 128,496 sf of positive net absorption, while Maryland's vacancy rate rose from 11.1% to 11.5% accompanied by negative net absorption of 154,361 sf.
NORTHERN VIRGINIA Arlington County benefited from leasing by federal contractors, both in Crystal City and the Rosslyn/Ballston Corridor. The vacancy rate drop from 11.5% to 10.4% was accompanied by 310,123 sf in net absorption.
In the South 28 Corridor, where vacancy declined from 20.2% to 17.3%, leases by contractors to the National Reconnaissance Organization (NRO) drove the 238,999 sf in absorption. Similarly, the drop in vacancy in the Merrifield market from 22.7% to 20.6%, absorbing 150,000 sf, was due to federal agency and contractor requirements. In Loudoun County, the delivery of new space and smaller leases to locally-based tenants contributed to 159,856 sf of net absorption and a vacancy rate drop from 18.7% to 18%.
After nearly two years anticipating an upturn in the Northern Virginia economy and office market, based upon the region's role in the federal response to the international terrorist threat, the evidence of that activity came almost as a surprise in mid-2003. The list of signed leases during the second quarter was much longer than in the preceding three months. What was most encouraging was the size of the leases, several of them for entire buildings. Smaller leases also demonstrated economic vitality as a number of tenants, expressing their confidence in their business prospects, committed to expansion space near their existing office quarters.
While the demand side of the office market equation picked up, the supply side also showed signs of stability. Except for VeriSign's building at One Dulles Tower, where 200,000 sf will be available immediately and the total 400,000 sf available prospectively, few large blocks of space were placed on the relet/sublet market.
However, several buildings do not show up in the vacancy statistics at this time but are being marketed: The Time-Life headquarters in Alexandria, the Unisys space in Tysons Corner and the USPTO space in Crystal City are examples. These vacated buildings will be the "new buildings" of 2004-05.
DISTRICT OF COLUMBIA No new buildings delivered during the second quarter. However, seven buildings with a total of 2.4 million sf are scheduled for completion during the second half of the year. Since just 40 percent of the space is pre-leased, these new deliveries will likely add one or two points to the vacancy rate, at least in the short term.
At mid-year 2003, Washington, DC could be said to be a stable, but not a tight, office market, even with a 6% vacancy rate. Demand in the short term is fairly light from the federal government, law firms and other typical DC tenants. At the same time, supply will swell during the next six months as unleased new buildings deliver and second-generation space comes to the market from tenants relocating to new buildings.
Nonetheless, the market is close enough to balance that when demand picks up due to a rising national economy or to office leasing caused by increased federal spending. Rents will stabilize and eventually market conditions will return that are more favorable to landlords.
SUBURBAN MARYLAND Although Suburban Maryland continues to attract health-related companies, the influx of biodefense leasing activity that had been anticipated has yet to materialize. Consequently, the market was flat, reflecting national economic conditions.
Although leasing activity picked up during the second quarter, most transactions were in the 1,000-4,000 square foot range. With 8.4 million sf of available space mostly left behind by large tenants, it may take some time to chip away at the vacancy with smaller tenants. Suburban Maryland's typical larger tenants are almost all contractors, biomedical and pharmaceutical firms reliant on the National Institutes of Health (NIH) for funding. As NIH's future funding is currently up in the air these firms are on hold, unable to commit to new space. Federal government spending has recently shifted to defense.
With a few exceptions, Maryland does not attract the large defense contractors, which are the beneficiaries of this increased spending and are currently reviving the Northern Virginia market.
Federal Activity Spurs Recovery
by Cassidy & Pinkard Market Research Department
The startling decrease in vacancy in Northern Virginia -- the first since vacancy rates began to spiral upward early in 2001 -- was pervasive throughout its market. The biggest drop took place in Reston, where the midyear vacancy rate was 18.6% compared to 22.3% just three months before; net absorption was 587,969 sf.
The reasons for the overall vacancy rate decline in Washington, DC during the second quarter were the modest but steady leasing activity and the absence of newly-delivered vacant space. Vacancy rates remained stable in the East End, Southwest/Southeast and Uptown submarkets, and rose slightly in the CBD. Both the Capitol Hill/NoMa and West End/Georgetown submarkets experienced a one-point drop in their vacancy rates to 3.5% and 3.7%, respectively. On Capitol Hill, GSA leases of 100,000 sf for various federal agencies at 800 North Capitol Street were responsible for the decline. In the West End and Georgetown, tenants took advantage of below-market sublease space. All submarket vacancy rates were in the 3.5% to 7.5% range, a remarkable performance in today's market.
The Suburban Maryland market remained stable during the second quarter. While there was a healthy level of leasing, there were also several large blocks of space returned to the market by downsizing or relocating tenants. Unlike previous quarters in which newly delivered vacant space contributed to increased vacancy, the rise in vacancy in the second quarter of 2003 was entirely due to an increase in relet and sublet space. Tenants such as Discovery Communications, Acterna, PG&E and Allegiance Telecom left large blocks of space as they relocated or downsized.
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