Quarterly: Winter 2003 - GWCAR - Greater Washington Commercial Association of REALTORS

CBQ >> Winter 2003 Issue

Area Market Wrap Up
Fourth Quarter 2002

by Jennifer Marcks,
Senior Research Manager, Spaulding & Slye Colliers International, Mid-Atlantic Research Group

WAITING ON DEMAND
The Metropolitan Washington market continues to wait for demand to materialize as vacancy rates continue to rise and net absorption declines. The Metropolitan Washington market posted a vacancy rate of 10.1% to close 2002 with net absorption totaling over 700,000 square feet. In addition to the 31.5 million square feet of vacant space, there is 12.1 million square feet of sublease space currently available. Despite these numbers, the District remained balanced as the government and law firms leased large blocks of space throughout the market mostly in new development projects. However, the suburbs of Northern Virginia and Suburban Maryland continue to wait for government funding to produce demand among government agencies and contractors.

WASHINGTON, DC
Washington, DC's vacancy and sublease rates both increased in the fourth quarter as vacant space grew by nearly 1.1 million square feet and sublease space increased by 101,386 square feet ending the quarter with a 5.0% vacancy rate and a 2.2% sublease rate.

The majority of significant transactions occurred in buildings currently under construction producing no change in current statistics. This, coupled with subsequent increases in sublease space has pushed the availability up to 7.2%, its highest level since 1998. In terms of vacancy, we are still seeing many of the same trends that have been discussed over the past 18 months; there is still a fairly significant divide between the availability of smaller blocks of space (5,000-30,000 square feet) and large blocks of space (greater than 100,000 square feet). Demand for larger blocks of space continues to be one of the most significant factors driving this market and smaller blocks of space are essentially commodities.

NORTHERN VIRGINIA
The limited leasing activity in the Northern Virginia office market in 2002 was unable to offset the vacating of space by existing tenants as vacancy rates rose to levels unseen since 1993. The discrepancy between markets located inside the Beltway close to Downtown Washington and those located outside the Beltway continued to grow.

Demand for space in Alexandria and Arlington County remained relatively stable as they experienced steady demand from defense contractors, government agencies and associations in the fourth quarter. Markets located in Fairfax and Loudoun Counties continue to experience little demand resulting in subsequently higher availability rates and lower rental rates.

MARYLAND
In Suburban Maryland, Montgomery County is currently enjoying an overall vacancy rate slightly below its 15-year historical average of 12%. There is about 4.9 million square feet of vacant space in Montgomery County, representing an 11.2% vacancy rate. This vacancy rate represents an increase of 5.2 percentage points over its low of 6% near the end of 2000. Much of this increase is attributable to the delivery of 20 speculative buildings since the beginning of 2001. Seventeen of these buildings currently account for 19% of Montgomery County's total supply of vacant space, or over 950,000 square feet of new vacant space.

OUTLOOK
The District of Columbia office market will remain balanced throughout 2003 due to the Congressional budget being passed, which will free up the government to complete a number of transactions along with the significant amount of potential demand from the professional service firms. These strong points will counter the potential increase in second generation Class A space, which will erode pricing as this space competes with Class B space and sublease space for a small pool of active tenants in the market.

The suburbs will rely heavily on the government to keep vacancy rates from continuing to grow.

Much of the growth in Suburban Maryland is expected to stem from the heavily funded NIH along with the rapidly expanding biotechnology-related industry that feeds off of it, while the Northern Virginia office market has begun to see the long anticipated government leasing activity as a result of allocation of budgeted funds. Government leases and those from contractors will not result in improved market conditions, but will offset the continued vacating of space by large corporate tenants.

It is probable that the bottom of the market may not be marked until the third quarter of 2003 and it will most likely remain at this low level until there is a recovery in the national economy.