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

CBQ >> Summer 2004 Issue

Market Shows Its Might

Strong Leasing Activity in Northern Virginia; Decreasing Vacancy Rates in the District; Growth Seen in Suburban Maryland

By Will Stern, Analyst, and Sandra Shu, Director of Research Jones Lang LaSalle

The Washington, DC region remains one of the healthiest office markets in the nation. As of the second quarter 2004, the District absorbed approximately 2 million square feet. Along with Northern Virginia's 3.8 million sf and Suburban Maryland's 1.9 million sf, vacancy rates are down in all three locations. 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 have all been contributing factors leading to the success of the Washington, DC metro region.

NORTHERN VIRGINIA

Northern Virginia's 141 million sf market is one of the most robust and diverse in the Washington metropolitan region. The range of tenant activity in Northern Virginia reflects the return of the real estate market and the economy.

During the second quarter, a wealth of activity throughout the market has occurred both inside and outside the Beltway. The vacancy rate in the Northern Virginia market dropped 2 percent during the second quarter to 12.1 percent. Sublease vacancy of 3.1 million sf in the region has decreased by 4 million sf since its peak at year-end 2001.

The majority of sublease reductions can be attributed to aggressive rental rates and negotiated buy outs. Construction continues to be measured as to limit oversupply.

During the second quarter, two buildings have broken ground: Washington Technology Park 2 located in Westfields, a development by Corporate Office Properties Trust, is a speculative construction site that broke ground July; and Potomac Yard, a development in Arlington, commenced construction on the residential portion during the first quarter and has now also started on the office component.

The office development construction is due to significant pre-leasing by the EPA, which will be relocating from their current Crystal City locations. The 405,000 sf lease will occupy 67 percent of the project.

Previous tenant demand was primarily from government and government contractors. Although this activity has not waned, the increase in demand can be seen throughout various industries. Second quarter completed deals included Watson Wyatt's pre-lease of 120,000 sf at Arlington Gateway in Ballston, Federal Supply Services lease of 254,000 sf at 2200 Crystal Drive in Crystal City (backfilling some of the recently vacated space of the U.S. Patent & Trademark Office), and Booz Allen Hamilton's expansion of 163,000 sf at 13200 Woodland Park Drive.

With strong second quarter tenant deals, there continues to be activity that will bring further growth in the market. Corporate Executive Board is currently negotiating a 600,000 sf lease to relocate from their downtown Washington, DC location to the close-in submarket of Rosslyn.

WASHINGTON, DC

Washington, DC over the past two to three years was the only office market to defy nationwide trends achieving single digit vacancy rates, positive net absorption and strong leasing activity throughout the economic downturn.

Again, the Washington, DC office market maintained a stable vacancy rate of 6.5 percent (down from last quarter's vacancy rate of 7.05 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 leasing 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 130,000 sf at 1900 Half Street SW. The District's limited supply of large blocks of Class A space has forced law firms to sign pre-lease commitments or renewals years ahead of their lease expiration.

SUBURBAN MARYLAND

The Suburban Maryland office market experienced much stronger leasing activity for the second quarter of 2004 than the first and showed signs of improvement in certain submarkets.

The supply of space returning to the market has slowed and new office development has decreased. Tenant demand was up, as the usual GSA drivers of the market (NIH, health-related contractors and bio-tech firms) showed signs of increased activity.

North Bethesda and North Rockville will see strong GSA renewal or relocation activity during 2004 and 2005. Overall rental rates remained steady while vacancy rates dropped slightly from 12.77 percent in the first quarter to 11.36 percent in the second quarter of 2004. Net absorption for Suburban Maryland was also a positive 1.9 million sf, a significant improvement over the previous quarter's level of negative 968,620 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 high in Bethesda/Chevy Chase as Lexis Nexis signed a lease for the quarter taking 49,000 sf.

Other top leases included CDM Group (19,000 sf) and Morgan Stanley (19,000 sf) both in Bethesda/Chevy Chase.